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)