Food subsidy, FCI and PDS – Some Thoughts

Food subsidy, FCI  and PDS – Some Thoughts

As I complete the milestone of almost 4 months in the Food Corporation of India, one thought that has been in my mind all these days is ways and means to bring about efficiency in the operations of the organization. It hurts when analyst and after analyst brands you inefficient and responsible for the rising bills on food subsidy. It is true that we have a mammoth food subsidy program which is largely perceived to be leakage prone and run by corrupt officials. The question is how much of the inefficiencies and corruption can be ascribed to FCI? Is FCI responsible for the mess or the problem lies in the last mile delivery channels which is largely run by the network of Fair Price Shops under the command and control of State Government Officials?

Food subsidy in 2013-14 has been estimated to be Rs 93445 Cr which is almost 33 times the food subsidy of Rs 2850 Cr, 22 years ago, in 1991-92. Ten years back the food subsidy was Rs 25181 Cr in 2003-04. As percentage of agricultural GDP, the food subsidy has risen from being about 2.2% in the 1990s to over 5% now. There is a need to analyze the components of the food subsidy.

As has been analysed by Prof Vijay Paul Sharma of IIM Ahmadabad, in his paper on Food Subsidy in India : Trends, Causes and Policy Reform Options, the key components that add to the food subsidy include : Procurement Price of Food Grains, Procurement Volume of Food Grains, Procurement Costs, Central Issue Price and the Distribution Costs. The procurement price of the food grains or the policy of buying all food grains at minimum support price (MSP) is the single biggest contributor to food subsidy. It is compounded by the fact that Government commits to buy all food grains at MSP that is brought by the farmers to the Mandis. In 2013-14, MSP for Wheat was Rs 1350 per Quintal and for Common Rice it was Rs 1310 per Quintal. The procurement in 2013-14 was 250.92 LMT for Wheat and 313.77 LMT for Rice. The Central Issue Price has remained fixed from 2002 and has varied between Rs 2 per kg for wheat and Rs 3 per kg for Rice to Rs 7.95 per kg for Rice and Rs 6.10 per kg for Wheat. Under National Food Security Act, the entire out go will be at Rs 2 per kg for wheat and Rs 3 per kg for Rice. Just on account of MSP, if we calculate the food subsidy required at NFSA rates for the procurement done in 2013-14, the subsidy amount comes to Rs  11.50 per kg for Wheat and Rs 10.10 per kg for Rice. Thus the total subsidy on this count would have been Rs 60546 Cr including Rs 28855 Cr for Wheat and Rs 31691 Cr for Rice. Thus MSP itself contributes to almost 70% of the Food Subsidy.

However, the above is only part of the story. There are other costs involved. These include statutory charges such as market fees, rural development cess and VAT and non-statutory charges such as arhatia commission, mandi labour charges, cost of gunny bags, handling charges, internal transport and interest charges. The taxes and levies are as high as 14.5% in Punjab and 11.5% in Haryana. Given the fact that the bulk of paddy and wheat procurements are in Punjab and Haryana, the outgo on account of taxes and levies is huge. The objective of procurements at MSP is to help farmers get remunerative prices for their produce, however higher taxes by certain States has made it a means for getting more revenues in the State at the cost of FCI and Government of India. This adds to the economy cost for FCI and also to the food subsidy bill. The only way to resolve this is to declare the MSP as inclusive of taxes so that States which have high rates of taxes will imply that their farmers will get less money and hence will be a disincentive for higher taxes. Higher taxes also impacts private trade in food grains. Over an above, the practice of announcing bonuses by certain States distorts the food grain market.

The economy cost of FCI is also impacted by the interests FCI has to pay. The interest burden is itself Rs 7000 Cr as FCI is forced to take short term loans at a high cost on account of outstanding subsidy payments of almost Rs 50,000 Cr.

The other component of costs is the Distribution Costs of Rs 18230 Cr in 2013-14 which includes Rs 6640 Cr for Freight, Rs 3096 Cr for Handling, Rs 1968 Cr for Storage, Rs 4708 Cr for Interest and Rs 1222 Cr as Admin overheads. FCI has little control over freight and interest charges and only possibility of cost reduction is in the handling, storage and administrative expenses.

When we look at FCI, we also observe that the manpower in FCI has reduced from 62430 in the year 2000 to around 22480 in 2014. This is a reduction of almost 64%. In the same period the stock holding in the Central Pool has gone up from 429 LMT to 698 LMT. This is an increase of almost 63%. Inspite of the general perception, the storage losses in FCI has come down from 0.42% in the year 2000 to 0.22% in 2013. In storage losses, if we look at the breakup, the actual storage losses in Godowns owned by FCI is only 0.11 % whereas that for the Godowns hired from State warehousing Corporations (SWC) is 0.48% and for CWC is 0.23%. And these losses are recovered by FCI from SWC and CWC. Similarly the transit losses of FCI are down from 0.84% in 2000 to 0.46% in 2013.

The key challenges for FCI are in labour reforms. The provisions of Contract Labour Act make it difficult for FCI to replace the Departmental Labour with Contract Labour. The Departmental labour is seven times as expensive than the Contract Labour and if FCI Depots are freed from the regulations of Contract Labour Act, a great deal of cost savings can result.

The above analysis makes it clear as to there is little that FCI can do to reduce food subsidies. However, this does not mean that there is nothing that FCI needs to do to improve operational efficiency. There is an urgent need to move in for modern storage facilities in the form of Silos and bulk movement of foodgrains from procuring to consuming areas in modern wagons with top loading bottom discharging systems. Most of the conventional godowns of FCI are almost 40-50 years old and there is a need to upgrade them to more efficient modern systems. The movement and transportation plan also needs to be optimized and made more efficient.

Other options include limiting the stocks that FCI holds. Open ended procurement results in FCI carrying more stocks than what it should. The stock position today is still more than twice of the buffer norms, even though it has been brought down by more than 100 LMT in the last two years. With deft planning, FCI today has no stocks that are more than two years old. Storage in Covered and Plinth systems is less than 10% and strict monitoring and supervision has brought down the storage and transit losses. Computerisation of accounting and stocks management has brought in improvements.

However, what is needed is much more radical improvements and structural changes in the whole food supply chain management. There is a lot of talk about conditional cash transfers which on the face of it seems to be the most logical and practical solution to all the leakages and inefficiencies in the present system. However, what we miss is that the leakages are the maximum in the last mile and the prime reason is diffusion of accountability when food grains move from the FCI system to the State Government network for last mile delivery.

Transfer of grains from FCI depots to those of the State agencies and onwards to PDS shop owners means multiple levels of handling and transportation and the associated leakages and inefficiency. One way in which it can be resolved is enabling direct delivery of food grains to households.

The way I visualize efficient delivery of foodgrains will involve direct delivery of food grains to home by FCI. This backed by an efficient, modern and scientific storage of foodgrains with bulk movement of grains to points of distribution will bring in operational efficiencies in the supply chain system of FCI. The idea is to build up a network of Silos on a Hub and Spoke model by identifying locations that can service a cluster of 6-7 districts. This would require approximately 100 Silos at identified locations. The Silos can be built in existing FCI Godowns which have railway sidings. In procurement areas the capacity of the Silos can be bigger. In consuming areas, the capacity of Silos will be based on the actual requirement of the food grains. The average capacity of each Silo in procuring areas can be around 700,000 MT and in consuming areas around 200,000 MT. Depending on the regions and consumption patterns, we can have a combination of wheat and rice Silos. After procurement, food grains will move from Silos in procurement regions to those in consuming areas through special wagons with provisions of top loading and bottom discharging. There won’t be any gunny bags and storage, handling and transit losses will be minimized. In the consuming areas the Silos will also function as bagging units.

The next stage of food grain distribution will be direct to home and this would mean eliminating the need of moving grains from FCI depots to godowns of the State agencies and thereafter to PDS shops. Under NFSA, per person allocation is 5 kgs of grains per month and the cost of the same is Rs 10 for wheat and Rs 15 for Rice. For a family of 5, the allocation is 25 kgs per month and costs are Rs 50 for wheat and Rs 75 for Rice. For an individual to come to the PDS shop, every month, with the uncertainty of getting or not getting the grains is not economically viable as the cost of grains is less than a days wages under NREGA. So the idea is to give grains for 4 months or 6 months to a family at one go, direct to home. 6 months of grains will mean a 30 kg of bag for each person at a cost of Rs 60 for wheat and Rs 90 for Rice. For a family of 5, it will mean 5 thirty kg bags and the costs will be Rs 300 for wheat and Rs 450 for Rice. This is actually affordable and since the idea is to deliver food grains, direct to home, once in six months, it is actually feasible also. Handling and Transport agencies will take the 30 kg bags, on a designated route and deliver to home once a month. The authentication of actual delivery can be done through biometrics as almost all beneficiaries will be covered by Aadhaar. The specially 30 kg bags will be numbered and bar coded and information with regard to which bag has been delivered to which household and when can be made available in the public domain. The actual payments to the handling and Transport agencies will be based on actual deliveries done. Thus it will be an accountable system with minimal leakage and losses.

 The only question that some people may raise is if all families will have provisions of storing almost 150 kgs of grains given at one go. People living in flood prone areas and kutchha houses may face challenges, but this can be resolved by making a one time provision of a 100 kg steel storage bin to each household. Delivering grains for 6 months at one go will also reduce the stock holdings of FCI and will bring down the storage losses and costs which will be sufficient to provide for the steel storage bins.

Thus this model will not only bring in efficiency in the operations of FCI but will also improve the last mile delivery in public distribution system.

(Views are Personal)

Tryst with Governance

It’s almost 4 days since I heard Prime Minister Modi address the nation from Red Fort on 15^th August 2014. I must confess that as a Government servant, for the first time, I am feeling enthused and excited that I am working for a Government that is headed by a leader who has a vision and  a roadmap for the nation. It’s not that this was the first speech that I was listening to an Independence Day – though this was the first time I had gone to attend the 15^th August function at Red Fort. One reason for this was obviously the buzz that it was mandatory for us to attend. However, the more compelling reason was my Dad, who was very keen to attend and had asked me almost a month back if it was possible to get passes. I have seen my Dad transforming from an online enrolled AAP member to a die-hard Modi Fan. Many a dinner conversations we have had regarding the strengths and weaknesses of the leaders we have and over a period of time, I have found myself getting to agree more with his beliefs in the new leader.

So we went, early morning and were lucky enough to get seats which gave us a view of the podium as well as the feel of the surrounding ambience. What impressed me most was the tone of the speech. It was so very different from the Lalan College, Bhuj speech that he delivered last year. That was of course an election mode speech but the tone was too adversarial. As compared to that, this year there were no negative sentiments. He began by acknowledging previous Prime Ministers and thanking the opposition for the support in getting important legislation passed. This was a changed Prime Minister – it appeared as if a true leader and a statesman is in the making.

However what made me his fan was the simple ideas. The thoughts on Bureaucracy, Sanitation, Women, Manufacturing, Skills and E Governance were music to my ears. The icing on the cake was the decision on Planning Commission. I have myself endured the tyranny of the Commission which has caused delays of at least 9 to 12 months for the EFC and Cabinet proposals mooted by my Department. The problem with Planning Commission has been that it gets into an executive role and starts taking decisions for the Departments which is totally a transgression of authority as Departments must be free to conceptualize their schemes within their planned and budgetary outlays. Role of Planning Commission needs to be to bring in synergies between Departments and come up with long term vision and plans rather than tinkering with the day to day functioning of the Departments. It would have been wonderful had the ideas regarding merger of Departments like Steel-Mines-Coal and Power-New and Renewable Energy et al came from the Planning Commission. Even the experts on PPP in Planning Commission are so convinced of their own points of view that they would refuse to entertain any alternate perspective and would even refuse to share soft copies of documents. The institution had become truly archaic and if what has been announced is implemented it would cut the internal red tape of the Government by a great deal.

Another notable feature of the Speech was that it was not presented as a certificate for the greatness that we normally bestow upon ourselves. There was no mention of our rockets and missiles, our super power status, our potential economic might or how we stalled an agreement at WTO. There was no thumping of chests for the Gujarat model or what all the Parliament just achieved in the Monsoon session. The Speech had elements which read like the To Do list of a serious CEO of the nation. The issues identified and the ideas espoused are so very relevant. The take on rape and crime against women was so very different than the ‘Boys would be Boys’ mindsets. The target of all schools with toilets for girls is so very achievable. Similarly the model village concept gave an action plan for all the elected MPs and will definitely have a trickle-down effect if the Rural Development Ministry works out the minor details. The ideas on Financial Inclusion and insurance for the poor are similar. I doubt if any previous Independence Day speech had so many time bound quantifiable targets.

The focus on Manufacturing and Entrepreneurship are key to take India back to the growth cycle. The Mantra of Come, Make in India will of course require much more action on infrastructure and regulatory issues – but the idea is that once the goal is defined, efforts can be made to resolve the roadblocks. This will be the biggest challenge as the retro tax measures and the New Land Acquisition Act will require a lot of tweaking if the Made in India tag is to become a reality.

The ideas on Skills, Digital India and E Governance are so very critical for us to reap the benefits of our demographic dividend. All this was like the things that we always talked about with friends becoming the priorities of the Government. I am happy to be part of this change. Am willing to do my bit to make India a better place. This hour on the 15^th was a true Tryst with Governance moment.

A treasure I found - My hand written assignment I wrote in 1996!!!

What do I feel proud of about India?

What do I feel proud of about India?

Over last few months Whatsapp chats have made communication with friends easier and more convenient – much better than emails or the social media tools. So we have now school groups and college groups which allows us to be friends with old friends again and share jokes, thoughts and ideas.

In one of such chats, last night, one of my IIT friends, whom I have not met for years asked  me : Having seen America, what do I feel proud of about India?

That led me to think. Yes, I am proud of my country. But what is it specifically?

When I thought deep, I felt that even though most of us despise our politicians and polity a lot, it’s our democratic values and the Constitution that we adopted some 64 years ago, that has stood by us. We are not a simple nation. We are actually a commonwealth of nationalities – more akin to the European Union – than to the US. We have distinctions of castes, religion, regions, languages and cultures. Yet, we do survive as a nation with a strong Centre, like we have never done in history. Every region – Every State is represented in our polity and that gives us the strength to survive. Regional aspirations have led to growth of regional political parties and fall in strength and influence of national parties – but then, it’s fair. And come to think of it. The countries in our neighborhood - Pakistan, Bangladesh, Sri Lanka, Nepal, Myanmar - are all struggling. Given that, we have done pretty fine.

I am truly proud of our democracy and polity.

The other thing that comes to my mind is our family system and the focus on hard work and honesty. Even though, we don’t rank very high on corruption indices, there is a great deal of focus on honesty, integrity and hard work in our day to day lives. We have a strong family system which teaches children to respect elders and to speak the truth. Parents want their children to be hardworking and sincere. That has led to the growth of a very dominant and strong middle class in India which will help guide our future growth. It’s one of the key strengths that we have.

I am proud of our family values and focus on hard work and sincerity.

The other key feature of our nation is our youthful population. Last week a friend shared some insights into our census data. As per the census data almost 39% of our 1.21 billion population is below 18 years of age and that’s a huge 472 million people.  Another key feature is that almost 25% of our population lives in UP and Bihar. The proportion of population below 18 is around 45% in UP and 48% in Bihar. These two States have been slow to grow. However, the youthful population is expected to drive growth in Uttar Pradesh and Bihar and that will help us grow faster in the years to come. Such a youthful population, full of energy and enterprise is unique to us and holds a great potential for us in future.

I am proud of our youthful population and its energy.

So I would list these three as the top three things that I am truly proud of India.

A Day with Teach for India

A Day with Teach for India

I was delighted when my friend Tarun asked me if I would like to volunteer for teaching a class in a MCD school in Delhi as part of the Teach For India week that is being observed from 27^th to 31^st Jan 2014. Teach for India is a project of Teach to Lead, a not for profit organization,  launched in 2008, with a mission to create leaders to make education more equitable.

Teach for India selects college graduates and young professionals as TFI professionals who commit to teach full time in selected under staffed teachers. Presently Teach for India has more than 700 fellows across Mumbai, Pune, Delhi, Hyderabad and Chennai. Delhi has around 180 fellows and I had the opportunity to talk to this group regarding the work that I do earlier this month.

Today, as part of the Teach for India week, I was taken to Nigam Pratibha Primary School in Tughlaqabad Extension. The school has a nice building with huge compound with around 1200 students and 22 teachers. However, the complex is running 5 schools presently as some of the nearby school buildings are under renovation. Two schools with almost 2200 children were running when I was there. Other schools function in afternoon shift.

Well, I was taken to the class that is run by Hemant Bhalla, who is a Teaching Fellow for almost a year and plans to write Civil Services Examination. Night before, I has thought that I will be talking to the Grade 3 students in Hindi and was mentally preparing myself for the same. This class had almost 35 girl students and I was surprised to observe that all of them greeted me in English, very enthusiastically.  Hemant also had given the structure of my class on the Blackboard, all in English and it helped me to structure my thoughts and go along.

I was impressed by the awareness levels and the questions put up to me. Two girls asked me about how one can become a Cardiologist! A few others wanted to know of the ways to become Engineers, Doctors, Teachers, IAS officers, Police officers, Scientists and more. 8-9 year olds asking such questions was really interesting. I was flummoxed when a girl asked me as to what I wanted to become when I was a 8 year old. I remembered my days when a Pilots profession appeared too fascinating to me, and told her about that. Next question was then why did I join IAS and not chase my dream!!

However, what really made me speechless when I was asked by a girl as to why do Boys use bad words with girls? She then asked me as to why is it that Boys have more power? I explained to them about how girls today are at forefront in all professions. She was quick to ask me, what if a boy hits them? I told her to hit back and not to take things lying down.

Seems a workshop against sexual abuse was conducted by some local police officers, a few days back, in the school.  The girls were advised not to accept chocolates or gifts from strangers. A girl asks me, why should we not accept such things? I told them it is not safe. Next question was what if someone known to them gives them something? Given the fact that most cases of abuse are by people known to kids, I told them that they should tell their parents or teachers about it. Secondly, one should never accept something which is not earned. Another girl asks me, Why do people try to lure them? I had no answers.

It’s such a sorry state of affairs when 8 year olds have to be told against this menace that exists in our society? Whom do we blame? Our social structures, films or the way we bring up our boys?

Anyways, the questions continued and I explained to them about various arms of the Government and how it functions. I also told them one of my favourite stories – that of the Rabbit and Turtle – albeit the extended version. The kids seemed to enjoy the story. I ended my talk with lessons that one can earn from a humble pencil. We could have continued longer, but I was told that it was time for the mid-day meal.

Overall, it was a very satisfying experience. It changed my perception of MCD Schools. The schools have good infrastructure and the quality of education being imparted is decent. The children are from poor backgrounds but are no less compared to any public school kid. The questions about abuse and the problems girl students face made me see the underbelly of our society. It’s sad and shocking. However, the saving grace was that the girls are not shy to ask questions and generally appeared to be alert and aware. It was obvious that the Teach for India fellows have made a mark.

A truly satisfying and enriching day.