Shanta Kumar Committee on restructuring of Food Corporation of India (FCI)

Government of India (GoI) set up a High Level Committee (HLC) in August 2014 with Shri Shanta Kumar as the Chairman to suggest restructuring or unbundling of FCI with a view to improve its operational efficiency and financial management.

GoI also asked HLC to suggest measures for overall improvement in management of foodgrains by FCI; to suggest reorienting the role and functions of FCI in MSP operations, storage and distribution of foodgrains and food security systems of the country; and to suggest cost effective models for storage and movement of grains and integration of supply chain of foodgrains in the country.

Backdrop

In order to conceive reorienting the role of FCI and its consequent restructuring, one has to revisit the basic objectives with which FCI was created, and what was the background of food situation at that time. It is against that backdrop, one has to see how far FCI has achieved its objectives, what is the current situation on foodgrain front, what are the new challenges with regard to food security, and how best these challenges can be met with a reoriented or restructured institution like FCI.

FCI was set up in 1965 (under the Food Corporation Act, 1964) against the backdrop of major shortage of grains, especially wheat, in the country. Imports of wheat under PL- 480 were as high as 6-7 MMT, when country’s wheat production hovered around 10-12 MMT, and country did not have enough foreign exchange to buy that much quantity of wheat from global markets. Self-sufficiency in grains was the most pressing objective, and keeping that in mind high yielding seeds of wheat were imported from Mexico.

Agricultural Prices Commission was created in 1965 to recommend remunerative prices to farmers, and FCI was mandated with three basic objectives: (1) to provide effective price support to farmers; (2) to procure and supply grains to PDS for distributing subsidized staples to economically vulnerable sections of society; and (3) keep a strategic reserve to stabilize markets for basic foodgrains.

How far FCI has achieved these objectives and how far the nation has moved on food security front?

The NSSO’s (70th round) data for 2012-13 reveals that of all the paddy farmers who reported sale of paddy during July-December 2012, only 13.5 percent farmers sold it to any procurement agency (during January-June 2013, this ratio for paddy farmers is only 10 percent), and in case of wheat farmers (January-June, 2013), only 16.2 percent farmers sold to any procurement agency. Together, they account for only 6 percent of total farmers in the country, who have gained from selling wheat and paddy directly to any procurement agency.

Diversions of grains from PDS amounted to 46.7 percent in 2011-12 (based on calculations of offtake from central pool and NSSO’s (68th round) consumption data from PDS); and that country had hugely surplus grain stocks, much above the buffer stock norms, even when cereal inflation was hovering between 8-12 percent in the last few years. This situation existed even after exporting more than 42 MMT of cereals during 2012-13 and 2013-14 combined, which India has presumably never done in its recorded history.

What all this indicates?

It indicates that India has moved far away from the shortages of 1960s, into surpluses of cereals in post-2010 period, but somehow the food management system, of which FCI is an integral part, has not been able to deliver on its objectives very efficiently. The benefits of procurement have not gone to larger number of farmers beyond a few states, and leakages in TPDS remain unacceptably high. Needless to say, this necessitates a re-look at the very role and functions of FCI within the ambit of overall food management systems, and concerns of food security.

Major Recommendations of HLC

Below is a summary of major recommendations of HLC keeping in mind how procurement benefits can reach larger number of farmers; how PDS system can be re-oriented to give better deal to economically vulnerable consumers at a lower cost and in a financially sustainable manner; and finally how stocking and movement operations can be made more efficient and cost effective in not only feeding PDS but also in stabilizing grain markets.

I. On procurement related issues

HLC recommends that FCI hand over all procurement operations of wheat, paddy and rice to states that have gained sufficient experience in this regard and have created reasonable infrastructure for procurement. These states are Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab . FCI will accept only the surplus (after deducting the needs of the states under NFSA) from these state governments (not millers) to be moved to deficit states.

FCI should move on to help those states where farmers suffer from distress sales at prices much below MSP, and which are dominated by small holdings, like Eastern Uttar Pradesh, Bihar, West Bengal, Assam etc. This is the belt from where second green revolution is expected, and where FCI needs to be pro-active, mobilizing state and other agencies to provide benefits of MSP and procurement to larger number of farmers, especially small and marginal ones.DFPD/FCI at the Centre should enter into an agreement with states before every procurement season regarding costing norms and basic rules for procurement.

Three issues are critical to be streamlined to bring rationality in procurement operations and bringing back private sector in competition with state agencies in grain procurement:

(1) Centre should make it clear to states that in case of any bonus being given by them on top of MSP, Centre will not accept grains under the central pool beyond the quantity needed by the state for its own PDS and OWS;

(2) the statutory levies including commissions, which vary from less than 2 percent in Gujarat and West Bengal to 14.5 percent in Punjab, need to be brought down uniformly to 3 percent, or at most 4 percent of MSP, and this should be included in MSP itself (states losing revenue due to this rationalization of levies can be compensated through a diversification package for the next 3-5 years);

(3) quality checks in procurement have to be adhered to, and anything below the specified quality will not be acceptable under central pool. Quality checks can be done either by FCI and/or any third party accredited agency in a transparent manner with the help of mechanized processes of quality checking.

HLC also recommends that levy on rice millers be done away with. HLC notes and commends that some steps have been taken recently by DFPD in this direction, but they should be institutionalized for their logical conclusion.

Negotiable warehouse receipt system (NWRs) should be taken up on priority and scaled up quickly. Under this system, farmers can deposit their produce to the registered warehouses, and get say 80 percent advance from banks against their produce valued at MSP. They can sell later when they feel prices are good for them. This will bring back the private sector, reduce massively the costs of storage to the government, and be more compatible with a market economy.

GoI (through FCI and Warehousing Development Regulatory Authority (WDRA)) can encourage building of these warehouses with better technology, and keep an on-line track of grain stocks with them on daily/weekly basis. In due course, GoI can explore whether this system can be used to compensate the farmers in case of market prices falling below MSP without physically handling large quantities of grain.

GoI needs to revisit its MSP policy. Currently, MSPs are announced for 23 commodities, but effectively price support operates primarily in wheat and rice and that too in selected states. This creates highly skewed incentive structures in favour of wheat and rice. While country is short of pulses and oilseeds (edible oils), their prices often go below MSP without any effective price support.

Further, trade policy works independently of MSP policy, and many a times, imports of pulses come at prices much below their MSP. This hampers diversification. HLC recommends that pulses and oilseeds deserve priority and GoI must provide better price support operations for them, and dovetail their MSP policy with trade policy so that their landed costs are not below their MSP.

II. On PDS and NFSA related issues

HLC recommends that GoI has a second look at NFSA, its commitments and implementation. Given that leakages in PDS range from 40 to 50 percent, and in some states go as high as 60 to 70 percent, GoI should defer implementation of NFSA in states that have not done end to end computerization; have not put the list of beneficiaries online for anyone to verify, and have not set up vigilance committees to check pilferage from PDS.

HLC also recommends to have a relook at the current coverage of 67 percent of population; priority households getting only 5 kgs/person as allocation; and central issue prices being frozen for three years at Rs 3/2/1/kg for rice/wheat/coarse cereals respectively. HLC’s examination of these issue reveals that 67 percent coverage of population is on much higher side, and should be brought down to around 40 percent, which will comfortably cover BPL families and some even above that; 5kg grain per person to priority households is actually making BPL households worse off, who used to get 7kg/person under the TPDS. So, HLC recommends that they be given 7kg/person.

On central issue prices, HLC recommends while Antyodya households can be given grains at Rs 3/2/1/kg for the time being, but pricing for priority households must be linked to MSP, say 50 percent of MSP. Else, HLC feels that this NFSA will put undue financial burden on the exchequer, and investments in agriculture and food space may suffer. HLC recommended greater investments in agriculture in stabilizing production and building efficient value chains to help the poor as well as farmers.

HLC recommends that targeted beneficiaries under NFSA or TPDS are given 6 months ration immediately after the procurement season ends. This will save the consumers from various hassles of monthly arrivals at FPS and also save on the storage costs of agencies. Consumers can be given well designed bins at highly subsidized rates to keep the rations safely in their homes.

HLC recommends gradual introduction of cash transfers in PDS, starting with large cities with more than 1 million population; extending it to grain surplus states, and then giving option to deficit states to opt for cash or physical grain distribution. This will be much more cost effective way to help the poor, without much distortion in the production basket, and in line with best international practices.HLC’s calculations reveal that it can save the exchequer more than Rs 30,000 crores annually, and still giving better deal to consumers.

Cash transfers can be indexed with overall price level to protect the amount of real income transfers, given in the name of lady of the house, and routed through Prime Minister’s Jan-Dhan Yojana (PMJDY) and dovetailing Aadhaar and Unique Identification (UID) number. This will empower the consumers, plug high leakages in PDS, save resources, and it can be rolled out over the next 2-3 years.

III. On stocking and movement related issues

HLC recommends that FCI should outsource its stocking operations to various agencies such as Central Warehousing Corporation, State Warehousing Corporation, Private Sector under Private Entrepreneur Guarantee (PEG) scheme, and even state governments that are building silos through private sector on state lands (as in Madhya Pradesh). It should be done on competitive bidding basis, inviting various stakeholders and creating competition to bring down costs of storage.

India needs more bulk handling facilities than it currently has. Many of FCI’s old conventional storages that have existed for long number of years can be converted to silos with the help of private sector and other stocking agencies. Better mechanization is needed in all silos as well as conventional storages.

Covered and plinth (CAP) storage should be gradually phased out with no grain stocks remaining in CAP for more than 3 months. Silo bag technology and conventional storages where ever possible should replace CAP.

Movement of grains needs to be gradually containerized which will help reduce transit losses, and have faster turn-around-time by having more mechanized facilities at railway sidings.

IV. On Buffer Stocking Operations and Liquidation Policy

One of the key challenges for FCI has been to carry buffer stocks way in excess of buffer stocking norms. During the last five years, on an average, buffer stocks with FCI have been more than double the buffer stocking norms costing the nation thousands of crores of rupees loss without any worthwhile purpose being served.

The underlying reasons for this situation are many, starting with export bans to open ended procurement with distortions (through bonuses and high statutory levies), but the key factor is that there is no pro-active liquidation policy. DFPD/FCI have to work in tandem to liquidate stocks in OMSS or in export markets, whenever stocks go beyond the buffer stock norms.

The current system is extremely ad-hoc, slow and costs the nation heavily. A transparent liquidation policy is the need of hour, which should automatically kick-in when FCI is faced with surplus stocks than buffer norms. Greater flexibility to FCI with business orientation to operate in OMSS and export markets is needed.

V. On Labour Related Issues

FCI engages large number of workers (loaders) to get the job of loading/unloading done smoothly and in time. Currently there are roughly 16,000 departmental workers, about 26,000 workers that operate under Direct Payment System (DPS), some under no work no pay, and about one lakh contract workers.

A departmental worker (loader) costs FCI about Rs 79,500/per month (April-Nov 2014 data) vis-a-vis DPS worker at Rs 26,000/per month and contract labour costs about Rs 10,000/per month. Some of the departmental labours (more than 300) have received wages (including arrears) even more than Rs 4 lakhs/per month in August 2014. This happens because of the incentive system in notified depots, and widely used proxy labour. This is a major aberration and must be fixed, either by de-notifying these depots, or handing them over to states or private sector on service contracts, and by fixing a maximum limit on the incentives per person that will not allow him to work for more than say 1.25 times the work agreed with him.

These depots should be put on priority for mechanization so that reliance on departmental labour reduces. If need be, FCI should be allowed to hire people under DPS/NWNP system. Further, HLC recommends that the condition of contract labour, which works the hardest and are the largest in number, should be improved by giving them better facilities.

VI. On direct subsidy to farmers

Since the whole system of food management operates within the ambit of providing food security at a national as well as at household level, it must be realized that farmers need due incentives to raise productivity and overall food production in the country.

Most of the OECD countries as well as large emerging economies do support their farmers. India also gives large subsidy on fertilizers (more than Rs 72,000 crores in budget of FY 2015 plus pending bills of about Rs 30,000-35,000 crores). Urea prices are administered at a very low level compared to prices of DAP and MOP, creating highly imbalanced use of N, P and K.

HLC recommends that farmers be given direct cash subsidy (of about Rs 7000/ha) and fertilizer sector can then be deregulated. This would help plug diversion of urea to non-agricultural uses as well as to neighbouring countries, and help raise the efficiency of fertilizer use.

It may be noted that this type of direct cash subsidy to farmers will go a long way to help those who take loans from money lenders at exorbitant interest rates to buy fertilizers or other inputs, thus relieving some distress in the agrarian sector.

VII.On end to end computerization

HLC recommends total end to end computerization of the entire food management system, starting from procurement from farmers, to stocking, movement and finally distribution through TPDS. It can be done on real time basis, and some states have done a commendable job on computerizing the procurement operations. But its dovetailing with movement and distribution in TPDS has been a weak link, and that is where much of the diversions take place.

VIII. On the new face of FCI

The new face of FCI will be akin to an agency for innovations in Food Management System with a primary focus to create competition in every segment of foograin supply chain, from procurement to stocking to movement and finally distribution in TPDS, so that overall costs of the system are substantially reduced, leakages plugged, and it serves larger number of farmers and consumers.

In this endeavour it will make itself much leaner and nimble (with scaled down/abolished zonal offices), focus on eastern states for procurement, upgrade the entire grain supply chain towards bulk handling and end to end computerization by bringing in investments, and technical and managerial expertise from the private sector.

It will be more business oriented with a pro-active liquidation policy to liquidate stocks in OMSS/export markets, whenever actual buffer stocks exceed the norms. This would be challenging, but HLC hopes that FCI can rise to this challenge and once again play its commendable role as it did during late 1960s and early 1970s.