RESTRUCTURING FCI OPERATIONS

LET FCI PROCURE RICE ONLY (AND NOT PADDY)


BUSINESS LINE 

6TH JUNE 2014

Massive systemic abuse emanating out of  FCI procurement policy  can be checked by farmers dealing directly with rice millers  for sale of paddy. Rice reform will mean 50% restructuring of FCI operations.

TEJINDER NARANG

The Food Corporation of India (FCI) and State Government Agencies (SGA) under current dispensation first procure paddy and then get it custom milled from rice millers by paying fixed tolling charges. This system is exposed to massive abuse that needs correction by the new Government without affecting farmers’ interests.

Total paddy (un-milled rice) production in the country is about 160 million tons, including 16 million tons of Basmati paddy. Currently all official agencies procure each year about 49-53 million tons of non- basmati paddy eq to 32-35 million tons of milled rice. More than 107 million ton of paddy of Non –basmati and Basmati rice is annually traded between farmers and millers privately.

India’s grains/oilseeds/sugarcane/fruits/ vegetables/spices/cotton output is about 800 million tons. Barring 53 million tons of paddy and 25 million tons of wheat --total 78 million tons (10%) -- rest of 90% trade is transacted by farmers privately. Farmers are apt in dealing with trade in open market.

GROSS MISAPPROPRIATION IN PADDY 

Presently, FCI/official agencies make payment to farmers for the procurement of paddy at MSP while stocks are stored with rice millers under Custom Milling of Rice (CMR) agreement. As of 1.04.2014, about 15 million ton of paddy is held by millers alone, that costs Rs. 20000 crores @  MSP of Rs 13450pmt.   

Millers act as Bailees of state agencies —having possession but not ownership of paddy. Since long term stocking of paddy is challenging--they generally dispose of paddy or milled rice in market and replenish FCI when demanded, by purchasing it back from the market. Commercially the transaction may be squared up on ton- to- ton basis and not on grain- to grain- basis—that means paddy supplied by FCI may not milled for FCI, but rice bought from the market is finally lodged with FCI.This amounts to unchecked misuse of official funding and leakages.

In decade of 1995-2005, Punjab, Haryana and Andhra Pradesh were prime producers of surplus rice. FCI/agencies procured paddy and then despatch milled rice to deficient regions.

Since 2005, there is a remarkable turnaround. Paddy is harvested by more than 10 States with West Bengal, Uttar Pradesh and Andhra Pradesh being three leading provinces. Rice production has scaled up from 85 million tons to 103 million tons during 2005-13.  In last 25 years India has not imported any rice on Government account. For  last three years we are the world’s largest exporter of rice. Sufficiency of paddy/rice is thus affirmed.

Paddy is a water guzzler commodity and  results  into depletion of water table. Its state sponsored over production is unreasonable specially when need and necessity of procuring and storing large volumes in north and then moving it elsewhere, is diminished.

REMEDY

FCI may limit itself to procurement of “milled rice” and dispense dealing with paddy purchases, which should be left to millers. Procedurally FCI may need to work out a fresh/revised Custom Milling of Rice agreement (CMR-REV) in which responsibility of paddy procurement at MSP will be of millers. Obligation of FCI will be to source predetermined tonnage of milled rice at a price notified and based upon MSP of paddy. Financing for the paddy to “approved” millers can be provided by banks, based upon letter of comfort from FCI.  Present procedure of distribution and subsidization to beneficiaries will continue.

SELECTIVE INTERVENTION

Vested groups will cry wolf—saying that farmers will realize below MSP from millers under the proposed arrangement. To offset such a fear, Government can vest itself with power of price intervention to raise price to MSP, as in the case of Maize. This may be necessitated initially for 2-3 years to keep millers in check and farmers to plan alternatives. If farmers can trade 720 million tons of agro items privately, paddy cannot be an exception.  China, Indonesia, Philippines-- dealing with subsidised distribution of grains-- source rice and not paddy.

BENEFITS

This systemic change means that official agencies will remain insulated from the paddy operations/ bungling/ diversion in market; double handling will cease. Transportation cost will be economised. Greed for growing water guzzler paddy will decline. Instead, alternate cropping pattern will be incentivized.   Rice reform will mean 50% restructuring of FCI operations.

HAPPINESS IN UNHAPPINESS-THE ECONOMIC TIMES 31ST MAY 2014

http://epaperbeta.timesofindia.com/Article.aspx?eid=31816&articlexml=Spiritual-Atheist-Happiness-in-Unhappiness-31052014014103#

Happiness in Unhappiness

Tejinder Narang

In moments of happiness, a doubt flashes whether this joy will survive. “Ácche din ayenge” is a whiff of happiness, but —what, if they do not? Efforts, worries, fears in pursuit of happiness make life uneasy. A healthy person may not be wealthy and cheerfulness is diminished. Furthermore, “Sukh” soon changes into “Dukh” and vice-versa, and life swings as a pendulum in two extremes. These are some inferences of happiness in unhappiness.

Divine design configured through karmic principle mandates that human body be an abode of both pleasure and pain. Out of sheer necessity these must prevail.  Thus, expectation of lifelong bliss is a hyper delusion, because life is not designed that way. For example, an automobile can run slow or fast but cannot fly—because it is not structured to be air borne.  

 People chase God men or perform austerities for riddance of disease, acquisition of wealth, position, comforts and relationships etc. Even if such goodies are blessed, they may soon degenerate into ego, jealousy, losses, betrayal, disputes etc.  Is an obsession for happiness wrong? Certainly, Not.  However, non-acceptance of unhappiness is “the wrong” and painful.  

Neither the purpose of God men or religiosity is to make this world a heaven. Nor this world has or can be a paradise despite presence of spiritual saints, sermons of scriptures and through prayers. They merely make this existence a tolerable habitat.

Nanak Dukhiya sab sansar, so sukhiya jo nam adhaar—says Guru Nanak---all in this world are unhappy except those who have abiding faith in His Word.   Man has to accept fait-accompli of His inscrutable Will with firm conviction so that adversity is borne with relative ease. Unhappiness shadows happiness all time. In utter helplessness, Man survives just by “acceptance” alone.

MORE GLITTER THAN GOLD --INDIAN GOLD IMPORT BY STC/MMTC/PEC NOT PROFITABLE -FINANCIAL EXPRESS

MORE GLITTER THAN GOLD--FINANCIAL EXPRESS 29TH MAY 2014


http://epaper.financialexpress.com/c/2909597

SUGGESTION--ON  MINIMUM  GOVERNMENT AND MAXIMUM GOVERNANCE ( for finance and commerce ministries)

BRIEFLY-- Let gold be imported by private entities freely and be re-liberalized. Public sector undertakings like MMTC, STC, Banks should not be the promoter of gold import by” fronting” for private parties at a loss and high risk.

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REVIEW GOLD IMPORTS BY PSUs / BANKS WHILE LIBERALIZING

Tejinder Narang

In 2012-13, bullion Imports climbed to $54 billion and CAD (current account deficit) to about 4.7% of GDP. To cap CAD within tolerable limit of 3% in 2013-14, policy pundits attempted to trim imports of precious metal by raising import duty to 10% from 2% and imposing 20% jewelry export obligation. Only 80% is permitted for domestic usage.

These measures curtailed CAD to $29 billion in FY14 (1.7%% of GDP) but hiked premium on Indian prices by $120- 150 dollars per troy ounce (or per 31 gram approximately) making shady transactions / illicit channels very lucrative.    

Ascension of CAD in FY13 is attributable to multiple constraints and not bullion alone--e.g. lack of FDI and FII inflows; banning iron ore exports / prohibition in wheat/rice exports till 2011/slowdown in other exports. Briefly—dollar inflows declined.

Simultaneously, import of precious metals through nominated PSUs and banks intensified forex outflows. Former Finance Minister was the first to advise official agencies to halt precious metal imports.

PSUs and Indian banks provide significant financial comfort to overseas sellers especially when import is undertaken on “consignment basis”.  Normally private trade should be importing directly without “fronting” PSUs and banks, by establishing letters of credits on sellers abroad. By routing trade via Government agencies, private entities shift their risk profile from international contracts to domestic agreements which can be managed with relative ease in case of defaults due to laxity in enforcement and systemic flaws in Indian legal framework.    

Bullion bloats turnover  

MMTC/STC /PEC/ authorized banks are government’s nominated channels for import of precious metal. In FY13—“sales turnover” vs “bullion import” (ratio) of these three trading parastatals was—MMTC, Rs.28600 crores vs Rs.13675 crores (60%); STC, 18700 vs 11250(60%); PEC, 11650 crores vs 1275 (11%) crores. In FY12, MMTC imported about Rs.51000 crores of precious metal vs total business of 66000 crores—about 77% of this company’s trading volume.

Import is undertaken for private trade on back to back basis agreements on consignment basis with some margin money (advance payment of 10%-15% apprx)-- which insulates PSUs from price volatility and dollar/rupee fluctuations. PSUs earning are generally a meagre 0.1% or even less. Trader’s profits or losses depend upon speculative positions. Gold import gives PSUs and banks the benefit of bloated turnover but almost nil profitability. (However PSUs earned 4%-5% in 2013-14 through “special quota” allocation for import of gold by DGFT in November- December 2013- as an exceptional and rare year.)

Thanks to the Modi wave, RBI restored imports through select trading houses and jewelry manufacturers on 21^st May 2014. Insistence of import/export ratio of 80:20 still remains. Even this irritant may be lifted soon.  With likely re-liberalization in the very future and higher GDP growth, these three organizations are likely to push imports to Rs.65-75000 crores ($11-$13 billion) or more in FY15 from Rs 25000 crore ($0.42billion) in FY14, at nominal service charge of maximum 0.10% versus operating cost of 0.5%-1%. This also amounts to subsidization for bullion traders. The same may be the case for banks as well for service charges.

High Risk and losses

In the event of loss making situations, bullion traders deftly breach back to back agreements.   MMTC has transparently recorded transactional loss of Rs 244 crores ($42 million) on bullion trade in their FY13 balance sheet, that wiped out profits of last three years import of Rs.1,14,000 crores ($20 billion) from 2010 to 2013 and pushed it into net loss of Rs 70 crores last year. There could be many cases in other PSUs and nominated banks of under recoveries/losses or litigation pending for final conclusion which may be unreported. Government has to view as a policy whether such an enormous value of exposure, with inbuilt risk, is borne by PSUs and banks for the privates at almost next to nothing return or to build some additional safeguards.   

 Primary areas neglected

Neglect of primary areas of trade stands fully exposed by major PSUs, reflecting lack of international trading activities in commodities except precious metals.  The new Government will do well to lay stress on their primary mandate. Principle of cost-benefit-risk- reward may be weighed viz-a viz commodity trading and bullion imports, and applied accordingly. Ideally the performance of these PSUs should be evaluated on non- bullion business.

For ensuring quality of metal imports by privates, all the government has to do is to stipulate that bars should be of “London Bullion Market Association (LBMA) Good Delivery List” which represents de facto standard for the quality. Let business deal with business and not the Government.  Recall —minimum Government, maximum governance!!

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BITTERNESS OF INDIAN SUGAR SUBSIDY AND ITS LEGALITIES

20TH MAY 2014
Tejinder Narang

Government notification of 7th May 2014 on raw sugar exports has curtailed the incentive by 31% from Rs. 3330/metric ton (mt) to Rs 2277/mt for April/May 2014 shipments. Incentive of Rs.3330/mt was notified on 28.02.2014 for February/March 2014 period.

Sugar industry is right in calling this action “not as per the law” when the February’s order was specific about the methodology of calculation of the incentive/ subsidy for future months. Incentive amount was to be scaled up or down depending upon the average exchange rate of Rupee vs US Dollar during the last week of March, 2014.Based upon the appreciation of the rupee in end March 2014, subsidy amount should have been logically calibrated upwards. Exports made on the basis of anticipated disbursement of higher subsidy amount or even on the assumption that Rs 3330/mt are exposed to losses or loss of profit.

But there is a catch here. Incentive of Rs 3330/mt calculated by method of “viability funding gap” was approved by CCEA in mid- February 2014 under severely depressed international prices. While the computation of the viability gap accounted for international price of raw sugar based on futures quoted on the Intercontinental exchange, the methodology prescribed for revision ignored market volatility. It should have allowed higher subsidy if prices slump further, and should they rise, incentive could be pruned. CCEA applied only exchange rate variations; ignored incentive’s calibration with market trend and the order was notified on 28^th February 2014.

Dealing through Governments or doing business with their assistance always carries more risks, and industry knows it well. Even Reliance is facing the antics of the Government. Sugar sector deregulation, especially in its marketing sector was done in April 2013 by UPA2—but still the industry preferred to deal through Central Government for profitability by citing huge stocks, plunging international prices and irrationality of State Advisory Price (SAP) for sugarcane.

Markets are dynamic and volatile. A vigilant Ministry will definitely monitor market movements. The probable logic of lowering incentive could be substantive escalation in international and domestic prices of sugar by 10% or about $45-50pmt (about Rs 3000/mt) and Rs 4000/mt respectively in mid April2014. This has shrunk“viability funding gap” and therefore trimming the said incentive may be justifiable though it  violates February2014 notification.

 Subsidy involves accountability for disbursement of public funds by official agencies for private parties.  Industry may believe that authorities have erred but that may not be the case when a comprehensive assessment is made.

During NDA’s grain exports campaign of 2000—05 from FCI stockpiles, there were frequent changes in the notified release price of wheat/ rice without any prior intimation, based upon trading values abroad. Release from FCI’s stocks of a highly subsidized wheat variety called “lustre loss wheat” for exports was treminated without notice, though millions of tons of exports were outstanding against contracts entered into by the exporters. The reason-- FCI/Government is dealing with subsidized grains and that the loss of revenue needed to be contained if market conditions are supportive to check ‘undue enrichment’ of private entities. Somewhat similar situation exists in the case of raw sugar incentive.

Can the order of 7^th May 2014 setting a lower level of incentive for export of raw sugar be challenged in court? Certainly it can be. Will the court provide any relief? It is difficult to comment.  Any   judicial intervention implies much deeper analysis than done by the then CCEA prior to elections. The court will examine the very appropriateness of the marketing incentive out of Sugar Development Fund; whether it was rightly calculated/ applied; its future correlation to market prices overseas and pierce through political--bureaucratic –corporate veil.

Other issues that Court may examine — how a Government can abet in domestic inflation of sugar; why subsidy on finished product that is refined sugar was denied; why compliance to WTO is ignored exposing  country to huge liabilities through WTO dispute resolution process. If unreasonable SAP is the causative problem, can the Centre bail the wrongs of states in a deregulated environment in a federal set up?  Can any court ignore   undue enrichment of private entities through public funds?

The route to court may be cumbersome and dilatory. If sugar industry considers order of 7^th May 2014 arbitrary, then notification of 28^th February 2014 can also be deemed incomplete and inappropriate. Both the orders then become null and void. The best way is to “settle/accept” than to argue with the establishment.

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NCDEX--INDIAN SUGAR PRICES

NY ICE PRICES

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BUSINESS LINE 10TH JUNE 2014

PRESSURE FOR SUBSIDY CONTINUES BY THE INDUSTRY --PERHAPS WITH MAHARASHTRA STATE ELECTIONS IN MIND.TO WHAT EXTENT OBJECTIVITY IS RETAINED  IN THE NEW GOVERNMENT SET UP WILL EMERGE SOON.

Comment--over the years it is noted that if sugar industry makes profits --they are corportised.If sugar mills make losses, the government is forced to must step in to assist them or bail them out--otherwise mills will not pay to the farmers and sugarcane payment arrears will continue to addup. 

Succumbing to prssure of mills when sugar marketing is decontrolled is illogical.Privatization of profits and socialisation of losses cannot be a long term sugar policy--becasue vote bank of farmers is involved. By short term and adhoc solutions--long term reform of irrational state advisory price is deffered indefinitely.