Panel suggests FCI handing over grain procurement to states

The Shanta Kumar Committee set up to find ways of restructuring state-run grain procurement agency, Food Corporation of India, has recommended that FCI hand over all procurement operations of wheat, paddy and rice to states that have gained sufficient experience in this regard and have created reasonable infrastructure for procurement.

These states include Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab. FCI will accept only the surplus (after deducting the needs of the states under NFSA) from these state governments (not millers) to be moved to deficit states.

FCI should move on to help those states where farmers suffer from distress sales at prices much below MSP, and which are dominated by small holdings, like Eastern Uttar Pradesh, Bihar, West Bengal, Assam etc. This is the belt from where second green revolution is expected, and where FCI needs to be pro-active, mobilising state and other agencies to provide benefits of MSP and procurement to larger number of farmers, especially small and marginal ones.

The committee has also recommended a scaling down of NFSA coverage from 67 per cent of population to around 40 per cent and scaling up of grains supplied to priority households under TPDS from 5 kg per person to 7kg per person

These measures will help the government save Rs30,000 to Rs40,000 crore food subsidy annually, Shata Kumar told reporters after submitting the report.

The eight-member panel, headed by member of Parliament from Himachal Pradesh, Shanta Kumar, submitted its report to Prime Minister Narendra Modi on Wednesday. The committee was set up on 20 August 2014.The committee has been tasked with the job of making the entire food grain management system more efficient by reorienting the role of FCI in MSP operations, procurement, storage and distribution of grains under Targeted Public Distribution System (TPDS).

The Department of Food and Public Distribution (DFPD)/FCI at the centre should enter into an agreement with states before every procurement season regarding costing norms and basic rules for procurement, issues that are critical to be streamlined to bring rationality in procurement operations and bringing back private sector in competition with state agencies in grain procurement, the committee said. It has recommended that:

  • 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 OWS.
  • The statutory levies, including commissions, which vary from less than 2 per cent in Gujarat and West Bengal to 14.5 per cent in Punjab, need to be brought down uniformly to 3 per cent, or at most 4 per cent of MSP, and this should be included in MSP itself (states losing revenue due to this rationalisation of levies can be compensated through a diversification package for the next 3-5 years).
  • Quality checks in procurement have has to be adhered to, and anything below the specified quality will not be acceptable under central pool. Quality checks can be done either by FCI and/or any third party accredited agency in a transparent manner with the help of mechanised processes of quality checking.
  • The committee also recommended that levy on rice millers be done away with. The committee notes that some steps have been taken recently by DFPD in this direction, but they should be institutionalised for their logical conclusion.
  • Negotiable warehouse receipt system (NWRs) should be taken up on priority and scaled up quickly. Under this system, farmers can deposit their produce to the registered warehouses, and get, say 80 per cent, advance from banks against their produce valued at MSP. They can sell later when they feel prices are good for them. This will bring back the private sector, reduce massively the costs of storage to the government, and be more compatible with a market economy. GoI (through FCI and Warehousing Development Regulatory Authority (WDRA)) can encourage building of these warehouses with better technology, and keep an on-line track of grain stocks with them on daily/weekly basis. In due course, GoI can explore whether this system can be used to compensate the farmers in case of market prices falling below MSP without physically handling large quantities of grain.
  • Government needs to revisit its MSP policy. Currently, MSPs are announced for 23 commodities, but effectively price support operates primarily in wheat and rice and that too in selected states. This creates highly skewed incentive structures in favour of wheat and rice. While the country is short of pulses and oilseeds (edible oils), their prices often go below MSP without any effective price support. Further, trade policy works independently of MSP policy, and many a time, imports of pulses come at prices much below their MSP. This hampers diversification. The committee recommends that pulses and oilseeds deserve priority and GoI must provide better price support operations for them, and dovetail their MSP policy with trade policy so that their landed costs are not below their MSP.

Scale down PDS under NFSA
On PDS and National Food Security Act (NFSA) related issues, the committee has recommended that GoI has a second look at NFSA, its commitments and implementation. Given that leakages in PDS range from 40 to 50 per cent, and in some states go as high as 60 to 70 per cent, GoI should defer implementation of NFSA in states that have not done end- to-end computerisation; have not put the list of beneficiaries online for anyone to verify, and have not set up vigilance committees to check pilferage from PDS.

The committee also recommended a relook at the current coverage of 67 per cent of population; priority households getting only 5 kgs/person as allocation and central issue prices being frozen for three years at Rs3/2/1/kg for rice/wheat/coarse cereals respectively.

The committee's examination of these issue reveals that 67 per cent coverage of population is on much higher side, and should be brought down to around 40 per cent, which will comfortably cover BPL families and some even above that; 5kg grain per person to priority households is actually making BPL households worse off, who used to get 7kg/person under the TPDS. So, the committee recommends that they be given 7kg/person. On central issue prices, it recommends while Antyodya households can be given grains at Rs3/2/1/kg for the time being, pricing for priority households must be linked to MSP, say 50 per cent of MSP. Else, the committee feels that this NFSA will put undue financial burden on the exchequer, and investments in agriculture and food space may suffer. It also recommended greater investments in agriculture for stabilising production and building efficient value chains to help the poor as well as farmers.

The committee's recommends that targeted beneficiaries under NFSA or TPDS are given 6 months ration immediately after the procurement season ends. This will save the consumers from various hassles of monthly arrivals at FPS and also save on the storage costs of agencies. Consumers can be given well designed bins at highly subsidised rates to keep the rations safely in their homes.

The committee has recommended a gradual introduction of cash transfers in PDS, starting with large cities with more than 1 million population; extending it to grain surplus states, and then giving option to deficit states to opt for cash or physical grain distribution. This will be much more cost effective way to help the poor, without much distortion in the production basket, and in line with best international practices. HLC's calculations reveal that it can save the exchequer more than Rs30,000 crore annually, and still give better deal to consumers. Cash transfers can be indexed with overall price level to protect the amount of real income transfers, given in the name of lady of the house, and routed through Prime Minister's Jan-Dhan Yojana (PMJDY) and dovetailing Aadhaar and Unique Identification (UID) number. This will empower the consumers, plug high leakages in PDS, save resources, and it can be rolled out over the next 2-3 years.

Stocking and grain movement
On stocking and movement of grains, the committee has recommended that FCI should outsource its stocking operations to various agencies such as Central Warehousing Corporation, State Warehousing Corporation, private sector under Private Entrepreneur Guarantee (PEG) scheme, and even state governments that are building silos through private sector on state lands (as in Madhya Pradesh). It should be done on competitive bidding basis, inviting various stakeholders and creating competition to bring down costs of storage.

India needs more bulk handling facilities than it currently has. Many of FCI's conventional storages that have existed for a number of years can be converted to silos with the help of private sector and other stocking agencies. Better mechanisation is needed in all silos as well as conventional storages.

Covered and plinth (CAP) storage should be gradually phased out with no grain stocks remaining in CAP for more than 3 months. Silo bag technology and conventional storages where ever possible should replace CAP.

Movement of grains needs to be gradually containerized which will help reduce transit losses, and have faster turn-around-time by having more mechanized facilities at railway sidings. 

Buffer stocking and liquidation
One of the key challenges for FCI has been carrying buffer stocks way in excess of buffer stocking norms. During the last five years, on an average, buffer stocks with FCI have been more than double the buffer stocking norms costing the nation thousands of crores of rupees loss without any worthwhile purpose being served. This has been due to several reasons, varying from ban on export to open ended procurement with distortions (through bonuses and high statutory levies). But, according to the committee, the key factor is that there has been no pro-active liquidation policy.

DFPD and FCI should to work in tandem to liquidate stocks in OMSS or in export markets, whenever stocks go beyond the buffer stock norms. The current system is extremely ad-hoc, slow and costs the nation heavily. A transparent liquidation policy is the need of hour, which should automatically kick-in when FCI is faced with surplus stocks than buffer norms. Greater flexibility to FCI with business orientation to operate in OMSS and export markets is needed.

Labour issues
FCI engages large number of workers (loaders) to get the job of loading/unloading done smoothly and in time. Currently there are roughly 16,000 departmental workers, about 26,000 workers that operate under Direct Payment System (DPS), some under no work no pay, and about one lakh contract workers. A departmental worker (loader) costs FCI about Rs79,500 per month (April-Nov 2014 data) vis-a-vis DPS worker at Rs26,000 per month and contract labour costs about Rs10,000 per month. Some of the departmental labourers (more than 300) have received wages (including arrears) even more than Rs4 lakh per month in August 2014. This happens because of the incentive system in notified depots, and widely used proxy labour.

This is a major aberration and must be fixed, either by de-notifying these depots, or handing them over to states or private sector on service contracts, and by fixing a maximum limit on the incentives per person that will not allow him to work for more than say 1.25 times the work agreed with him. These depots should be mechanized on a priority basis so that reliance on departmental labour reduces.

Further, the committee recommends that the condition of contract labour, which works the hardest and are the largest in number, should be improved by giving them better facilities. 

On direct subsidy to farmers
Food security at a national as well as at household level is also dependent on incentives to farmers to raise productivity and overall food production in the country.  Most of the OECD countries as well as large emerging economies support their farmers. India also gives large subsidy on fertilizers (more than Rs72,000 crore in FY 2015 budget plus pending bills of about Rs30,000-35,000 crores).  Urea prices are administered at a very low level compared to prices of DAP and MOP, creating highly imbalanced use of N, P and K. The committee recommends that farmers be given direct cash subsidy (of about Rs7000/ha) and fertilizer sector can then be deregulated. This would help plug diversion of urea to non-agricultural uses as well as to neighbouring countries, and help raise the efficiency of fertilizer use. It may be noted that this type of direct cash subsidy to farmers will go a long way to help those who take loans from money lenders at exorbitant interest rates to buy fertilizers or other inputs, thus relieving some distress in the agrarian sector.

End-to-end computerization
The committee has recommended total end-to-end computerization of the entire food management system, starting from procurement from farmers, to stocking, movement and finally distribution through TPDS. It can be done on real time basis, and some states have done a commendable job on computerizing the procurement operations. But its dovetailing with movement and distribution in TPDS has been a weak link, and that is where much of the diversions take place.

The new face of FCI will be akin to an agency for innovations in food management system with a primary focus on creating competition in every segment of foograin supply chain, from procurement to stocking to movement and finally distribution in TPDS, so that overall costs of the system are substantially reduced, leakages plugged, and it serves larger number of farmers and consumers.