Disciplining states on bonus good, do same for taxes
The government has done well to try and stop the games various state governments play with the food procurement system, but the move needs to be extended further. The way it works is that, on top of the minimum support price (MSP) announced by the Centre, several states would announce a bonus. During the 2013-14 kharif marketing season, for instance, on top of the R1,310 MSP, Chhattisgarh offered a bonus of R270 per quintal. The strategy has worked well for the state since, while 80-85% of the cost paid to the farmer is borne by the Centre, farmers have been grateful to the local government—both Chhattisgarh and Madhya Pradesh have utilised this strategy well. What the government has now done is to announce a cap on the bonus. Total procurement from the state will no longer be open-ended as it was in the past, but will be restricted to the amount of grain the state requires for its own ration shop requirements—so, if Madhya Pradesh requires 100 units of wheat for its ration requirements, the state will not be allowed to procure 1,000 units and force FCI to pay for it as well as its storage. Between 2010-11 and 2013-14, paddy procurement from Chhattisgarh rose from 5 million tonnes (mt) to 6.4 and wheat in Madhya Pradesh from 3.5 mt to 6.4. As FE has reported today, Rajasthan has already fallen in line and agreed to the Centre’s proposal—Rajasthan had offered a R150 per quintal bonus in the 2014-15 rabi marketing season. This will take care of part of FCI’s bulging stocks that, at 71 mt in June, were 2.2 times the required buffer stock norm—at R25,000 per tonne for procurement and carrying costs, that’s an extra expenditure of R88,000 crore that FCI is incurring.
The government now needs to tackle the second leg of the same issue if it genuinely wants to stop FCI from haemorrhaging. While states like Punjab and Haryana do not typically announce bonuses on top of the MSP, they benefit by levying large mandi taxes on FCI’s purchases—this added up to R7,700 crore in FY13, of which R5,085 crore went to Punjab and Haryana alone. When you combine the high bonus with a high mandi tax, it means the Centre ends up subsidising the state government’s attempt to curry favour with farmers. So, just as the Centre has come out with a directive on bonuses, it needs to say it will either not participate in MSP operations in states that levy mandi taxes or will not leave the procurements open-ended—this is what ensures FCI has excess stocks of the order of magnitude that it does. Restructuring FCI may be a great idea, but won’t yield much unless ways are found to ensure FCI is not carrying the kind of excess stocks it is.