FCI inefficiency negates large part of subsidies
While the government has done well to finally try and reduce its excessive food stocks by offloading some as well as by trying to put a cap on open-ended procurement from states that offer a bonus over the minimum support price (MSP)—in comparison with last year, the government says its subsidy will be lower by R23,400 crore due to this alone—a new study points to how government policy is probably negating the very food subsidy it seeks to provide. Indeed, the study’s findings also shed new light on the $56 billion India has reported to the WTO as its food subsidy payments. That the Food Corporation of India (FCI) has stocks of 2-3 times what is required under the norm is well known; what the ICRIER working paper by Shweta Saini and Marta Kozicka does is to add these costs and juxtapose them with the distortions they create in the open market and conclude the FCI operations end up ‘neutralising much of the consumer benefits that the subsidy provides ... such levies also adversely affect the price competitiveness of Indian grain in the international market’. The latter means India is not subsidising agriculture exports as the USFDA suggests, it may actually be taxing them by FCI driving up open market prices considerably.
The way things are, with the government cornering around 75% of the marketable surplus in the grain market, FCI’s counter-cyclical policies—procure more when prices are high and withhold stock during a bad year due to expectations of higher PDS offtake—only serve to hike market prices, though the exact amount is impossible to predict. Add to this distortion of the market, the fact that FCI is also an inefficient procurer—in the case of paddy, for instance, while the MSP is R1,310 per quintal, FCI’s costs end up at somewhere between R2,210 and R2,396 per quintal. While this is a huge cost, largely due to FCI holding excessive stock of both wheat and rice, its impact on the consumer come from the inefficient ration shop system. Based on data from the National Sample Survey results, the authors point out that, of the states with a poverty ratio of more than 30%, less than 20% of the total consumption is met through the PDS. In other words, while the population of these states benefits from the lower PDS offtake price, it pays a higher price for the remaining 80% of its consumption due to the distortions caused by FCI’s operations. So, when the panel under former food minister Shanta Kumar is examining how to restructure FCI, it needs to look at the distortions caused by FCI and by how much consumers are benefitting from even having FCI around. Whatever solution is found for FCI—private sector firms have been asked to make presentations on international best practices in grain handling and storage—the impact of procurement on free market prices has to be kept to the minimum. This is also required if India is to be a big player in export markets, something to be encouraged given the competitiveness of Indian agriculture.