Wednesday, July 16, 2014



Tejinder Narang

Primary mandate of Food Corporation of India (FCI) acting under directions of Food Ministry is to service PDS requirements in association with State Government agencies (SGAs). But over the years FCI is also called upon to play interventionist role for managing market prices, albeit with little success.  FCI efficiently procures wheat, paddy/ milled rice but finds it at odds when sale of surplus grains is to be made in market. Likewise it lacks expertise in export marketing, which is outsourced for contracting and shipping operations to trading PSUs.

In less than three months from the time of harvest, about 28 million tons (mts) of wheat and 31 mts of rice are inventoried by FCI and SGAs.  No eyebrows are raised when these agencies incur expenditure of thousands of crores in a short span. Efficient purchasing operations are attributed to MSP (Minimum Support Price) decreed by the Government on the recommendation of an expert body like CACP (Commission for Agricultural Cost & Prices).  MSP is premised on rational criteria and national priorities, while political considerations are generally minimal.   

However for disposal of surplus grains generated through excessive procurement in last 4-5 years there is a professional vacuum.  For example, Government on 17th June 2014 decided to off-load 5 (mts) rice to cool food inflation. Surprisingly, a week thereafter, policymakers simply allocated this tonnage to BPL/APL families at a price of Rs.6-8/- per Kg. The right way forward was to stream extra rice in marketing outlets to suppress inflationary pressures. But the predicament is how to discover market price and how to sell? Discovering “right” price cannot be a convenience of financial and accounting adjustments but demands professionalism to target matrix of supply and demand.

At current economic cost of rice of about Rs 28/kg, additional releases to APL/BPL entail a loss of about Rs 20/kg or Rs 10000 crores (Rs20000pmt x5mill tons).  However, if these very 5 mts is released in the market, where the Government can fetch around Rs.18/- to 20/- per kg, direct debit will be Rs 10/kg or about Rs 5000 crores or 50% of what is actually foreseen under APL/BPL.   Incredible indeed it is that higher implied loss figure is acceptable to the Ministry than lower ones.

Notifying additional allocation to APL / BPL families, whose stomachs or pangs of hunger cannot be inflated-- is just an eye wash, wherein, Government is projecting a mirage of marketing devoid of real objective of inflation control. On the contrary this incentivizes round tripping and pilferage that will generate black economy of Rs 5-6000 crores and higher inflation while it is the black money and black economy that this government is fighting for.

Media reports indicate that Food Ministry has initiated consultation within the Government for injecting 10 mts of wheat in open market from September 2014 onwards for price stabilization.   Authorities need to take a realistic call by not repeating additional allocations/releases to BPL/APL families at Rs 4-5/kg.   Disposal prices in market could be based upon MSP of Rs 13.50 or 14/kg plus freight rather than Rs 15 –Rs 15.50 plus freight.  Savings in freight can be done, through logistical optimization to the extent possible, for southern states, by transporting wheat from MP/Bihar or other central states rather than from Punjab/Haryana.  

Considering inherent complexity and volatility in grain markets, selling price has to be responsive especially when objective is to restrain higher prices. Surely there is a need for complimenting the system of discovering the selling price in open market through expertise of an agency like CACP or a formal committee of reputed agricultural economists, FCI and traders, who like MSP, assess real time dynamics of domestic and overseas markets and decide the modalities of intervention-- including exports strategies whenever deemed necessary.  Even the differential pricing for old/new/damaged crop can also be recommended for intervention or exports. The Cabinet/CCEA can endorse such recommendations for implementation by Food Ministry.

This will not only tame the inflation but also reduce overall inventory and make available additional storage space.  It is a win-win situation for all.

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