THE HLC REPORT BUSTS FCI MYTHS--FINANCIAL EXPRESS 28TH JAN 2015

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HLC REPORT ON FCI—WELL DIAGNOSED, STILL NEEDS BETTER PRESCRIPTION.

OVERHAULING NFSA WILL ALSO RESOLVE WTO SUBSIDY CONTROVERSIES

TEJINDER NARANG

The report of High Level Committee (HLC) for restructuring of FCI, demolishes some of the myths that have perpetuated in the national psyche.  The common perception that farmers are enormously benefitting by MSP procurement of wheat and rice by Government agencies is negated by the HLC observation (determined basis 70^th NSSO--National Sample Survey Office) that only 5.8% agricultural households are currently beneficiary from this system. It inter-alia implies that FCI has outlived its procurement related utility and requires resurrection.

 

Operational efficiency of FCI is “diseconomy of scales” -- that with rising volumes of procurement and distribution, costs are ascending and not descending.  Cost of handling wheat is 61% and rice is 40% of MSP in 2014-15 (average about 50%) as against 48% and 28% (average 38%) respectively in 2009-10.   The leakage percentage of grains of about 47% through PDS is again evidenced.

The constraints in the quantum and quality of storage are well high- lighted.  Hoarding of the grains far in excess of buffer norms (graphic) either due to imprudent policies or inaction or missing export opportunities has blocked thousands of crores every year, leading to wastage and high inflation. These conclusions are supported by robust data. HLC’s advice in some cases is extremely critical, others cosmetic and some are missing.

CRITICAL VIEWS

HLC recommends shelving of the National Food Security Act (NFSA) of 2013 in States where its implementation has yet to commence; reduce coverage to 40% of population to stem the tide of climbing subsidies (see graphic) and introduce income transfer mode through Jan Dhan Yojna. Mr Shanta Kumar, Chairman HLC briefed media that BJP’s endorsement to NFSA in UPA’s regime was driven by politics of “vote convenience” prior to General Elections.  90% subsidy on 5kg grains per person per month for 67% of population under NFSA, will amplify PDS diversions (beyond 47%), for which FCI will continue to be blamed. If NFSA is allowed to continue, FCI will become a bottomless pit of subsidies because MSP will be revised upward annually and release price will remain unchanged at Rs3/2/1 formula.

The report profoundly provokes NDA to overhaul frame work of NFSA. Savings in handling cost combined with reduction in mandi taxes etc. can significantly reduce subsidies. Contentious WTO subventions can be set right by reinventing NFSA.

                  

Concern of HLC on high statutory and arbitrary levies (mandi- taxes etc.) by the states, ranging 3.6% (Rajasthan) to 14.5% (Panjab) is also crucial for levelling out market prices and for active participation of private sector. This is extremely challenging for the Union government till such time GST issue remains unresolved.  How state Governments/ Panjab Government and BJP ally SAD (Shrimoni Akali Dal) will react at political level need to be watched.

COSMETIC SUGGESTIONS.

Another view of HLC is to let the Indian states, which are adept in wheat and paddy procurement –like Punjab Haryana, Madhya Pradesh, Andhra Pradesh, Chhattisgarh and Odisha undertake purchasing operation through their own nominated agencies. In 2014-15, FCI share in wheat and paddy procurement is respectively 12.61% and 1.41% (FCI website). The rest of the acquisition is done by State Government Agencies (SGAs).  FCI has, thus, substantially exited itself out of direct procurement and moved over to procurement by SGAs. The committee thus endorses the direction already in practice and gives a cosmetic touch to the existing policy profile.   

Furthermore, HLC suggests that FCI may activate itself in states like Eastern Uttar Pradesh, Bihar, and West-Bengal, Assam etc. that is contrary to the process of mitigation of FCI’s direct engagement.  When the report maintains that FCI’s procurement system has outlived its utility, then to replicate the same scheme for marginal farmers in such areas is contradiction to the conclusion that MSP benefits to a minuscule percentage of farmers.   

Food policies and politics are intimately interlinked. The idea of abandoning FCI’s procurement from the two most productive states of India—Panjab and Haryana –can have discordant overtones especially from the Jat community who owe allegiance to SAD. Its implementation, though cosmetic, may be controversial.

Food Ministry has already reduced levy rice obligation from 75% to 25% and HLC view of zero levies is a further progression to that very prescription. Likewise refusing/limiting procurement from the states gifting bonuses too is in line with the policy adopted by Food Ministry.

Giving 6 months ration to beneficiaries at the end of each procurement season is debatable. Upfront onetime payment may be difficult for consumers. Percentage of leakages in the market will also escalate much beyond 47%.

MISSING POINTS

Page 21 of the report reveals that FCI will buy rice only from the state governments. Millers will be totally excluded. The onus of any mismanagement of conversion of paddy into rice through millers devolves upon SGAs. FCI may be out of the noose of negligence—but it amounts to shifting the problem from the FCI to SGAs. Financing of paddy operation by the Government agencies should have been dispensed and direct rice procurement would have been the right step forward. There could be procedural issues in arriving at the rice price---but that is what is missing in the report.

 The report does mention of lack of alertness and bureaucratic dithering in undertaking grain exports from FCI stocks. However it could have given some guidance on the trigger points on this issue. Just as essentiality of imports is activated once stocks fall below buffer norms, what should be the “excess”- when stocks exceed the buffer limits for initiating exports on the basis of MSP plus freight costs and handling expenses at ports or any other formula? Of course such an “excess” would have accounted for the domestic necessities.  This could have strengthened hands of the Food and Commerce Ministry for exploiting the niche opportunities in international trade with extremely short time horizons.   

HLC has not commented upon the trifurcation of FCI in three distinct agencies—procurement, distribution and storage companies as suggested by the Prime Minister during election campaign. Another step that will transform FCI functioning will be the least or minimal usage of gunny or PP bags so that modern silo/hopper wagons system is introduced  and handling shifts to “machine back” from “human back” to which HLC has referred. Now let us watch to what extent Food Ministry/ PMO /states accept the wisdom of HLC.         

 

MANAGING TRADE RISKS --FINANCIAL EXPRESS 16.01.2014

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ADHOCRACY IS THE NEW GAME OF DOING BUSINESS.

COMMONLY HELD BELIEFS IN TRADING TRANSACTIONS TRASHED.

Tejinder Narang

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All trade transactions are conceived with precautionary measures to minimize market risk and maximize profits. For risk mitigation, traders use governments’ policies, services of banks, hedge in future exchanges, appoint surveyors for quality assurance and cover unforeseen events through insurance companies. There is also a financial supervision of the corporates with which many aggressive traders are uncomfortable. If a trader scores 7/10—that means if he conducts 7 profitable deals out of 10 he could be rated excellent. Still loss in one or two deals can wipe out profits earned in seven deals and negligence is attributed to the trader because success has many fathers while failure is an orphan!!

This article trashes commonly held belief that above mentioned intermediaries are nearly foolproof arrangements of success in trade and gives indication of emerging trends.

GOVERNMENTS --

The biggest risk comes from “acts of Governments” or from various Governments who themselves are staunch votaries of stable and transparent trading regimes. They defy their own professed principles. Recent examples —Are USA and Saudi Arabia not manipulating crude oil prices beyond supply demand equilibrium to hit West Asia and Russia thus destabilizing world’s financial markets? Is USA’s quantitative easing (QE) at zero interest rate not prompting flight of their capital to stock markets of emerging economies in preference to developmental needs to its own economy. With trend reversal, that may spook the emerging economies. Currencies can go into tailspin leading to price volatility and abandonment of agreements.

At national level, has not India’s 80:20 schemes of gold import and export faked CAD, encouraged smuggling and distorted bullion trade?  Having perpetual peace clause at WTO on grain subsidies means an indeterminate time to reform leaky PDS and antiquated MSP mechanism. Will that not be inflationary as usual? Is fixing State Advisory Prices  (SAP) of Sugarcane irrespective of market realization of the sugar and its by products is not fundamentally flawed? Are we still not fiddling with import duties of edible oil? There could be umpteen judicial interventions that might rattle trade. Governments thus are the most potent known risk factors of unknown nature.

BANKS--

The commonly held perception that a letter of credit (LC) by a first class bank is the safest mode of payment is misplaced. LC is only an assurance from the bank (and not a binding commitment of performance) that the buyer is solvent enough to pay. It simply implies that given stable market conditions and compliance with defined documentation specified under the LC, only then payment of the seller secured.

If prices fall vertically, the probability of buyer finding technical reasons or an alibi for non-compliance with terms of credit is high. In that event seller is at grave risk. At the same time, if prices sky rocket and despite having workable LC – the seller, may, invent pretexts to renege to maximize market driven gains elsewhere. Sellers spend sleepless night when LC is under negotiation due to fear of documentary discrepancies and delayed payments. In FOB business, buyers’ blood pressures rise when their boats are waiting at ports for want of cargos from sellers. If counterparties elect to abandon agreed performance, LC or even “confirmed” LC of millions of dollars becomes a piece of paper.

FUTURE EXCHANGES--

Future exchanges daily discover prices of a commodity. Profits and losses can be hedged. In India, delivery based exchanges have limitation of volumes and lack of reliable warehousing.  Thus quality/ quantities of the commodity always remain a suspect in insect infested insanitary storages. Indian banks do not accept warehouse receipt as a formal negotiable instrument. Indian exchanges need greater depth before they can be fully relied upon for hedging purposes. The recent episode of NCSL has exposed infirmities in warehousing of commodities, which is critical for the working of such delivery-based exchanges.

SURVEYORS--

Contracts generally stipulate quality-quantity final at the load port as evidenced by the surveyor or the inspection agency. Can surveyors be hauled up with damages for any misconduct or wrongdoing if the quality at discharge port is different from the one certified? Far from the truth it is. In fine print of the reports it is clearly stated that they (reports) are based upon the samples collected from the warehouse or at pre-loading stage. What is actually loaded in the ship’s hatches is not in their control or liability. Surveyors fee varies from 50c-70c per ton and thus risk reward ratio does not justify claims of millions of dollars on them. They are enabling agencies and not determining agencies for the morality of the contract or breach of trust between buyer and seller, unless criminal negligence is proven against them.

INSURANCE--

Insuring goods is a brilliant idea. But claiming losses from insurance is the wretchedness of the worst kind. What the insurance companies write in small prints about the quantum of indemnity when insurance is brokered, none can figure out. The type of documentation, deductibles, exclusions, waiting period, third party liabilities etc. that are to be grappled is a nightmare. Retired insurance officers hired by private trade for insuring cargos and claiming the insured amount find themselves foxed not by the rules alone but by the suspicion on the genuineness of claim.  Even if one en-cashes the insured amount, the procedural agony can create sickness in mind of any right thinking individual.

The way forward is the following-

DECISION MAKING

Trading is getting increasingly complex because of rapidity of introduction of newer technologies, including real time based information systems around the world. Nothing can be kept hidden from the counterparty, which was the case before. Finance departments/controllers of trading companies can be “penny wise pound foolish” if they remain inflexible. Unless corporates are speedily decisive, high-risk profile of trade cannot be tamed.

It is also true that opportunities do not knock at one’s door daily. Once missed, they are lost forever and next opportunity cannot be timed. Conventional trading transactions supported by factors indicated above have to re-invent into creative deals for risk management.  Alertness and adhocracy is the new game of doing business to which bureaucracies of the governments and corporates are inimical. That must change.

RECENT DEVELOPMENTS--

Some of the recent variations are — Traders increasingly taking “positional” deals rather than back to back bargains; optional origin trading instead of only India-centric approach; establishing subsidiaries overseas for stock and sale or forming JVs for risk aversion and for development of brands; suppliers’ or buyers’ credits of 180/365 days for export or import through banking channels; buyers covering demand 4-5 months in advance for price advantage; hedging in future exchanges abroad through offshore companies, barters backed by escrow account arrangements etc. Likewise Indo-Iran rupee payment agreement, from which India has derived tremendous benefit, is another creative mechanism to sustain bilateral trade despite international sanctions.

Traders who undertake risk though certain assumptions that failed to materialize or innovate deals, are far superior and go long way, than those who un-risked themselves by doing nothing. Mistakes, if not repeated, can be a great learning experience, add value to the company, society and the country.