Saturday, December 13, 2014



(FCI should shun “paddy” procurement, instead procure “rice” from millers for PDS)
Tejinder Narang
The disappearance of rice worth Rs 10000 crores  ($1.6 billion)–approx. 6million tons—from four eastern states, Bihar, Odisha, Jharkhand, and Chhattisgarh reported in FE of 1.12.2014 suggests the apparent criminality of conduct of the manipulators in a string. It is symptomatic of the inherent malaise of PDS--Public Distribution System—undertaken through FCI and State Government Agencies (SGAs).  The PDS system in which purchase is made at MSP (Minimum Support Price)—above the market price—and sale is made below bazaar price (termed subsidized price), naturally warrants leakages. In this specific instance which is the tip of an iceberg, merely “visible and known” losses can be inferred. What about disappearances that have remained mysterious or gone unreported since PDS’s inception in 1965?

There are also “invisible” losses which cannot be readily detected during bulk procurement and distribution. For example over- weighing of bags with impermissible foreign matter (stones, grass, dust, mud, threads, rags, pins)-which means 50kg bag may contain net grains of 48-49kg or less; sacks of grains of non –conforming quality parameters like higher broken percentage for rice or damaged discoloured cereals; packages reflecting excess weight when “moisture weight” is injected by spraying water on bags. There are thousands of Arthiyas and commission agents, surveyors involved as intermediaries in this system. 
When bulk cargos are moved by rail or road, shortages due to torn or missing bags can be amplified for justifying illegal diversion. Three million tons grains stacked in CAP (cover and plinth) storages are “roofless ware housings”—with plinth below, and plastic sheets above. A pictorial view of state of affairs of CAP storage published by CAG in its report on FCI date 7th May 2013 is reproduced here.  Chapter 5 of CAG report on “internal controls” mentions that actual audit coverage against planned was between 67 to 85 percent during 2006 to 2012. (Para 5.3.1.)  
 There is no single point accountability regarding availability of grains due to involvement of multiple agencies (Para 2.2.3). Since official procurement has far exceeded the requirements under PDS, wastage/ losses/ disappearance have also expanded. Thus existence of “more” phantom stocks, that is, difference between paper stocks and physical stocks cannot be ruled out.
 PDS bucket has leakage of 40%-45%.  Thus nominal efficiency of this model in quantitative terms is 55%-60% but when adjusted to handling/carrying cost and other administrative expenses economic efficiency may be 30%. Against average economic cost of Rs 24000/mt ($387) of wheat and rice and about 60 million tons of annual procurement, the budgeted estimates are 1,44,0000 crores ($23 billion) while expenses and losses are (100-30) = 70% or one lakh crores ($16 billion).
The Government order of 20th August 2014 on High Level committee (HLC) for restructuring of FCI reads --“FCI is plagued today with several functional and cost inefficiencies, which need to be removed for efficient management of food grains and saving costs”. That is a very candid admission of the messy situation of food grains management. The concept of PDS conceived in 1960s has run out of its utility. If farmers and consumers after 50 years of “price support” are not deemed well off, then definitely a new arrengement, has to be put in place in a phased manner before “income support”  system can be fully operationalised.
What needs to be done for rice now?
The commonly held view that farmers will be deprived of MSP if PDS model is disbanded is devoid of facts. The chart below reveals that only 8% of the farmers are the beneficiaries of this system. If 92% of India’s farmers can dispose of their produce in open market what is the rationale of retention of such a discriminatory arrangement.
National Food Authority--NFA (Philippines) and Bulog (Indonesia) also undertake procurement, storage and distribution of “rice” in their respective countries, but they do not deal with purchase and processing of paddy. They deal in “rice” alone. Thailand dealt with “paddy” in last three years and has landed itself in irretrievable mess. 
FCI & SGAs have dual policy of rice procurement – 25% levy rice for all states, except Punjab and Haryana wherein FCI/official agencies make payment to farmers for procurement of paddy at MSP and stocks are stored with rice millers under Custom Milling of Rice (CMR) agreement. As of 1.01.2014, about 23 million ton of paddy (eq. to 15 mill tons of milled rice) was held by millers alone, that costs Rs. 31000 crores ($5 billion) @ MSP of Rs 13450pmt ($217). There is an extended lifting period of rice from the millers (see chart).  

(Source –FCI)
Millers act as Bailee of state agencies —having possession but not ownership of paddy. Since long term stocking of paddy is challenging—they dispose of paddy or milled rice in market and replenish FCI when demanded, by purchasing it back from the market. This amounts to unchecked misuse of official funding / leakages/ breach of trust and unreasonable enrichment.  
The remedy is that FCI may limit itself to procurement of “milled rice” and dispense dealing with paddy purchases, which should be left to millers. There may be fresh/revised Custom Milling of Rice agreement with approved millers in which funding and responsibility of paddy procurement will be of millers.  Present procedure of distribution and subsidization to beneficiaries will continue. Thus official agencies will remain insulated from the paddy operations/ bungling/ diversion in market; double handling will cease, transportation cost will be economised. Rice reform will mean 50% restructuring of FCI operations.
Vested groups will cry wolf—saying that farmers will realize below MSP from millers under new CMR arrangement. To offset such rare situations, Government can vest itself with power of intervention as in the case of Maize & Cotton.
Unless concept of polypropylene or gunny bags is dispensed and bulk handling with seamless rail connectivity linked to steel silos is thought of, there cannot be any real reform in wheat in respect of pilferages and shortages. For lower procurement by FCI & SGAs, Government may upgrade some selective specifications, so that general purpose wheat is automatically diverted to the market. But that may be a bitter pill to swallow politically.


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