Grain stocks: Is it a problem of storage capacity?

Since 2010, the problem of insufficient foodgrain storage capacity in India has attracted both political and media attention. Commentators in the media bemoan that India lets grains rot when there are people who go to bed hungry. Similar comments have echoed in Parliament. In September 2010, hearing the right to food public interest petition, the Supreme Court asked the government to distribute to the poor the foodgrains that would otherwise rot. Since then, the mismatch between stocks and capacity has, if anything, worsened. Peak stocks in 2012 went beyond 80 million tonnes (mt). In 2013, the early projections are that stocks will cross 90 mt.

add_main_imageIt is useful to break up the issue into two questions: how much storage capacity is required for public stocks, and second, what policies will bring capacity in line with grain purchases.

How much storage capacity is required?NextMAds

Crop harvests occur at particular points in time (rabi, or spring, in the case of wheat and predominantly kharif, or autumn, in the case of rice) while consumption is continuous through the year. Hence, crops need to be carried from the harvest months to the other months when there is no harvest. This constitutes the demand for seasonal storage. As there is no seasonal pattern in the consumption of either rice or wheat, the demand for seasonal storage (both public and private) can be worked out from the timing of crop harvests and the principle that grain must be allocated equally over time.

To estimate the storage capacity for seasonal public stocks, we suppose that grains are not carried over from one marketing year to another. Of course, total storage also includes stocks that are carried over years. The needs of such annual storage can be separately computed and added to the seasonal storage. So to assume zero storage over crop marketing years is to simply focus on the seasonal storage issue.

Thus, in the case of rice, we suppose public stocks are zero on 1 October (the beginning of the kharif marketing year). Say, the amount of rice procured for subsidised distribution is x. One-fourth of x is used in the quarter of the calendar year (October-December) and the carry-over is three-fourths of x on 1 January, which is then progressively reduced to half and one-fourth of x in the succeeding quarters. A similar scheme can be worked out for wheat. Storage requirements taper off at the end of the marketing years for rice (September) and for wheat (March) respectively.

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Gap between required and existing storage capacity

The Food Corporation of India (FCI)—the Central government agency responsible for procurement and storage of grain for the public distribution system (PDS)—has a storage capacity of 32 mt, of which about half is hired. Hence, assuming that the FCI has hired all the capacity that is possible, then the gap between FCI’s existing capacity and the required capacity (46 mt) is about 14 mt. Incidentally, in the 11th Five Year Plan, the FCI identified a gap of 16 mt of capacity that needed to be created.sixthMAds

But the government buys far in excess of what it distributes. Going by the recent experience of peak stocks exceeding 80 mt, additional capacity required is nearly 50 mt. So why are our calculations off the mark? That’s because our computation are based on government’s commitments to the PDS. However, what the government buys from farmers (procurement) does not match the PDS requirements. This can be seen from Figure 1, which plots the annual figures for procurement and PDS sales. Since the early 1990s, procurement has consistently exceeded PDS sales. This is why there have been recurrent crises of excess stocks and consequently, of storage capacity. An earlier manifestation was in the early 2000s. In August 2001, the government stashed away 65 mt in warehouses, school buildings or simply under tarpaulins in open fields.

From the figure, it is clear that the difference between procurement and distribution is too large to be explained by the need for emergency reserves. Nor can excess procurement be explained by an intent to stabilise consumption and prices. If that was the case, distribution ought to exceed procurement in years of low availability. Stabilization re-orders supplies over time but does not alter the total supplies over a long enough period of time. One implication is that the averaged difference between procurement and subsidised distribution ought to be zero. Indeed, this is what obtained in the period prior to 1989-1990 (Ramaswami, 2002). This has clearly not happened in the last two decades.

The pressure to hoard

The explanation lies in the procurement process and the fixation of the procurement price. While the politics around the procurement price is a proximate reason, an even more fundamental reason is the unwillingness to tolerate even small possibilities of under-supply to the PDS. At the higher levels of the government, there is immense paranoia about food shortages affecting the PDS. Politicians and bureaucrats perceive the costs of insufficient supplies but nobody is held accountable for excessive stocks and high prices.

Predictably, the errors are in one direction. High procurement prices and large government stocks displace private trade and, therefore, bumper procurement and stocks continue until the momentum is broken by an exceptional event such as a drought or by ad-hoc dumping of grain in the domestic (open market sales) or international market (exports).

India does not have an announced protocol for stock depletion by way of sales to the domestic or to the international market because of the bureaucratic and political caution that lead to excessive stocks in the first place. In addition, high procurement prices typically mean that stocks have to be sold at a loss. As this would show up immediately as an increase in food subsidy, the finance ministry is typically unenthusiastic. Even when the government ultimately sees reason, the financial implications mean that the chain of decision-making is long and subject to frequent review. Speedy response to excess stocks is not part of the government DNA.

The implication is that as long as the key structure of the procurement system is unreformed, there will always be a tendency to accumulate excess stocks. Indeed, it is likely, that an expanded PDS (consistent with the National Food Security Bill) will reinforce this tendency. With a Food Security Act, the government has an explicit legal obligation to meet the requirements of the PDS. A failure, here, would not only be politically costly but could also result in legal sanctions for the officials concerned. For this reason, a food security act will amplify the tendency to play it safe.

Reforming the procurement process: Closed-ended procurement

One way out is to have a systematic policy of open market sales. Economist Kaushik Basu proposed a mechanism of selling grain in small batches to many traders and consumers to maximise the impact of open market sales on prices (Basu, 2011). His proposal was made in the context of market stabilising interventions wherein procurement varies according to available supplies. But as we have seen, the foodgrain intervention has been systematically biased towards excess procurement. Hence, the socially beneficial, first best policy here would be to reduce procurement rather than to have open market sales.

The ideal reform would be to move procurement from being open-ended to being closed-ended so that it meshes better with the PDS. Currently, the procurement system is open-ended in the sense that the government is committed to buy whatever farmers wish to sell. A closed-ended procurement process would be one where the government buys only that much grain as to meet its distribution requirement.

Such reform of the procurement process will be hard. States that gain from open-ended procurement will oppose such a move. While a closed-ended procurement process would meet political difficulties, incremental reform may be possible. First, if the expanded obligations under the Food Security Act are met by a mix of transfers in-kind and in cash, it will restrain the pressures on procurement. Of course, the problem vanishes in a world where cash transfers completely replace the transfers in-kind.

Second, it is important to unbundle the procurement for PDS from the procurement for buffer stocks. This can be done by creating a new agency called, say, the Risk Management Agency (RMA). The FCI’s liability will remain limited to the grain purchased for distribution requirements. The stocks in excess of this requirement should be transferred to the books of the RMA. Such an arrangement will make excess stocks visible in financial accounts and therefore garner attention from economic and political observers. This might, therefore, force the government to take excess stocks into account when deciding procurement prices.

This column has been reprinted with permission from Ideas for India www.ideasforindia.in