Root of corruption at FCI is procurement, but revamp panel’s suggestion is no solution

Imagine a company that is the largest distributor of a product in a country. Its cost of inputs and the price at which it sells the product are fixed by the government. The company, all of a sudden, undergoes a change and now has to stop procuring. In short, this is the Food Corporation of India's (FCI) predicament that has been posed by the committee set up by the government in its final report.

The committee has suggested that the problem of procurement can only be solved if FCI stops procuring in some of the major states.

The objective behind setting up this committee established in August 2014 was 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.

I had written earlier about the problem that plagues FCI and how it can be solved. Some of those issues have been addressed, particularly the ones on price control, storage and global play.

But the most important recommendation by the committee is to get FCI out of procurement in major states such as Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab. These are are the highest procurement areas for wheat and rice. The corporation will continue procurement only in Eastern Uttar Pradesh, Bihar, West Bengal and Assam.

 Root of corruption at FCI is procurement, but revamp panel’s suggestion is no solution


The biggest criticism in the recent past of the procurement and even of the green revolution has been that it has forced these states into crops that are not natural. Even in Punjab the use of diesel pumps for cultivating rice has led to degradation of aquifers and created ‘dark zones’ of water shortages.

To understand the recommendations of the committee we need to revisit the three objectives for which FCI was set up:

1) To provide effective price support to farmers

2) To procure and supply grains to PDS for distributing subsidised staples to economically vulnerable sections of society

3) To keep a strategic reserve to stabilise markets for basic food grains

Citing data on procurement, the committee says that FCI has not been able to meet all the objectives. 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.

While procurement figures might be low, it does not mean that price support has not been achieved. As FCI is able to influence prices at least during the harvest period, they may not be able to set a floor all the time, but influence they do.

The reason why they are not able to give full price support is because they do not have the resources and storage space to procure all production.

Therefore, the maximum corruption takes place in the first step of the procurement, with farmers greasing officials’ palms in order to facilitate procurement of their produce. The committee recommends that as storage cannot be created overnight and as MSP has become such a political tool, the state governments should procure directly in the states mentioned above instead of FCI. But this does not solve the problem because it just passes on the responsibility from the central government-owned FCI to the state governments.

On the second objective which is to act as a supplier to PDS, the committee report says that 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). At the same time the country had huge surplus grain stocks, much above the buffer stock norms, even when cereal inflation was hovering between 8 percent and 12 percent in the last few years.

This situation existed even after exporting more than 42 million tonne of cereals during 2012-13 and 2013-14 combined, which India has presumably never done in its recorded history. This means that while the leaky PDS is a problem FCI has not been able to bring down, the overall prices by releasing stocks into the market at the right time.

In sum, it says, the benefits of procurement have not gone to larger number of farmers beyond a few states, and leakages in TPDS remain unacceptably high.

To address this issue, the committee recommends that the Centre should enter into an agreement with states before every procurement season regarding costing norms and basic rules for procurement.

The committee feels that three issues are critical to bring rationality in procurement operations and bringing back the private sector in competition with state agencies in grain procurement:

(1) The Centre should make it clear to states that in case of any bonus being given by them on top of MSP, it will not accept grains under the central pool beyond the quantity needed by the state for its own PDS and other welfare schemes. This recommendation is obviously geared towards reducing the burden on FCI to procure.

(2) The statutory levies including commission need to be brought down uniformly to 3 percent, or at the most 4 percent, of the MSP, and this should be included in the MSP itself. This is a major issue and a contentious one as these commissions.

(3) Quality checks in procurement have to be adhered to, and anything below the specified quality will not be acceptable under central pool. HLC also recommends that levy on rice millers be done away with. This means the overall quantity of procurement will go down and the state will be saddled by poor quality stocks.

The shift of procurement to eastern states is not an issue that will be easily accepted by states. Reduction in commission which is a source of revenues for high procurement states like Haryana and Punjab, will also be opposed.

While the committee has completely deconstructed the role of FCI as a procurement agency or the first objective that the corporation was set up for. It has also suggested reforms in areas that do not fall under the realm of restructuring of FCI.

It has suggested that the fertiliser subsidy be given directly to farmers. When the problem on the ground for the farmers is not the subsidy but the availability of fertilizers, states are fighting with each other to get a quota of rakes and supply of fertilizers.

It has also recommended that even food subsidy be transferred in cash and limit food entitlement under the National Food Security Act to 40 per cent as against the current 67 per cent.

Limiting food entitlement and others will effectively mean that FCI does not need to supply to PDS. These are not reforms that can easily happen so it is unlikely that the report is the one that will get implemented in a jiffy.

K Yatish Rajawat is a senior journalist based in New Delhi. He tweets @yatishrajawat

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Updated Date: Feb 05, 2015 19:43:38 IST