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Business News/ Opinion / Unbundling the Food Corporation of India
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Unbundling the Food Corporation of India

It is high time that India's foodgrain management is decentralized

Illustration: Shyamal BanerjeePremium
Illustration: Shyamal Banerjee

In the euphoria surrounding the enactment of the National Food Security Act (NFSA) in 2013, its champions forgot to pay attention to a key ingredient for making it successful: the state of the food supply chain in India. As in much else, the existing setup was sufficient. From the procurement system run by the Food Corporation of India (FCI) to the fair price shops distributing foodgrains, the system was expected to run smoothly. Shortcomings such as leakages from the Public Distribution System (PDS) and the high cost of buying wheat and rice from farmers and distributing them were ignored in the ideological drumming up of support for the NFSA.

Some of these flaws that are sufficiently severe to call into doubt the effective running of NFSA have now been laid threadbare by the report of the High Level Committee (HLC) to recommend the restructuring of the Food Corporation of India (FCI), the government agency that manages the country-wide system of foodgrain purchase and distribution.

Some of FCI’s problems are obvious. Its ability to carry out operations cost effectively is doubtful. In the span of three years—from 2010-11 to 2013-14, the last year for which data is available—the freight cost incurred by it doubled from 3,245 crore to 6,640 crore. Worse, the organization now spends a very considerable amount of money on payment of interest. In the same three years, its interest payments tripled from 1,560 crore to 4,708 crore. These two costs alone account for more than half of its expenditure on distributing foodgrains across India.

These figures are not outliers. They are the result of FCI expanding its operations to the point where diseconomies of scale have crept in. As the amount of wheat and rice bought by FCI from farmers has risen, so has the economic cost of these commodities. Any theory of the firm says it should be the other way round: as the organization expands, its costs should fall as it reaps the advantages of scale which lead to a reduction in its costs. FCI passed that point a long ago.

To be fair to it, these problems are not solely of its own making. Many states, especially Punjab, now fleece it by charging it high overheads. This is as much as 14.5% over the minimum support price per quintal of wheat and rice. Further, FCI now largely moves grain from the northern region to grain deficit parts of the country. It does not buy from other, potentially grain surplus, parts of India. This has defeated one of its originating purposes: providing remunerative prices for foodgrains to farmers in all parts of India.

The recommendations of the HLC should be seen in this light. Two of its important recommendations are: One, handing over of all procurement operations of wheat and rice to states that have gained sufficient experience and have a reasonable infrastructure for procurement. These states are Punjab and Haryana in the north. Two, the cost of buying foodgrains by the agencies of these, and other, governments should be settled well in advance of the procurement season. This is the nub of the problem. The Union government pays for all the foodgrains bought in these states. It is time the states shouldered this burden or if they cannot, they should let markets determine the prices of wheat and rice. There should be no reason for panic about distress sale. The demand for wheat and rice is so robust that very often shortfalls lead to inflation in their prices.

The HLC also recommended that FCI be a leaner and more nimble organization. This can happen, if it reduces the scale of its operations in northern India and focuses on the eastern part of the country.

How these recommendations will be implemented will be tricky. There will be political problems: the Bharatiya Janata Party’s (BJP) ally in Punjab, the Shiromani Akali Dal, will resist these changes. The BJP is in power in Haryana. Implementing these recommendations will prove costly. Then, there will be transition problems. In eastern states—Bihar and West Bengal notably—the size of landholdings is so small that the surplus that can be mopped from the farmers will be relatively low. How will the demand for wheat and rice from other parts be met until these farmers can deliver? A system that has been in place since the 1970s will require care in dismantling. That, however, should not be a reason not to take the right steps.

Should FCI be dismantled? Tell us at views@livemint.com

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Published: 25 Jan 2015, 09:42 PM IST
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