(Note: The following post attempts to explain the food management structure in India. It does not dwell deeper into food security policy reforms needed. That will perhaps be topic of my next post on food policy.)
In the 21st Century, a civilised society cannot allow any of its citizens to die of starvation or go hungry (Article 21 of Indian Constitution enshrines Right to Life) for prolonged periods. Less than 15% of India’s National income comes from Agriculture and close to 60% of India’s labour force lives off Agriculture. No wonder, India’s rural population leads impoverished lives.
Hence there is an increased focus in the 12th Five Year Plan (2012-17) around the implementation of the proposed National Food Security Bill (NFSB) 2011 which provides for food and nutritional security, in human life cycle approach, by ensuring access to adequate quantity of quality food at affordable prices, for people to live a life with dignity.
The principle of common but differentiated entitlements is proposed in the food security law.
The National Advisory Council (NAC) has finalized its basic framework of the proposed National Food Security Bill.
The framework consists of four parts:
1. Legal entitlements to subsidized food grains for atleast 75% of the total population
2. Legal entitlements for child and maternal nutrition, destitute and other vulnerable groups;
3. Enabling provisions to strengthen food security and
4. Public Distribution System (PDS) reforms.
The NFSB has been approved by the Empowered Group of Ministers (EGoM) on food security.
NAC has recommended that subsidized food grains should be available to atleast 75% of Indian population and suggests classifying households into various categories. Please see the diagram below.
Providing legal entitlement to food to people throughout length and breadth of a vast country like India is a challenging task. Moreover, enshrining as a legal right, what is impossible to fulfill, would mock the very idea of a right and promotes lawlessness.
Hence apart from such legal entitlements there is a need to design an effective and efficient food grains policy.
Food Management in India
Unprecedented consecutive severe droughts in 1965-66 and 1966-67 led GOI to attain and maintain self-sufficiency in food grains to achieve food security. As a corollary, Food Corporation of India (FCI) was formed and it took its monopoly over food management in India, control over imports and mandatory levies on rice. GOI pampered it with preferential access to credit (@ low interest rate from RBI) and transportation access. Such kind of policies dovetailed with the ongoing wave of Green revolution, throughout the eighties and nineties. All of these led to significant improvement in food production and thereby satisfactory food security situation in India today.
Although over the years the supply of food grains improved and the country turned self-sufficient, the aggregate demand for food grains did not grow in the same proportion. This can be attributed to two factors, namely decline in population growth rate (17.64% during 2001-11 as against 21.15% during 1991-2001) and dietary diversification towards non-grain food items e.g. milk, meat, vegetables, fruits (expected with rising income levels).
Over the years there has been a significant change in the overall economic policy environment, both domestic and international. Following the Uruguay Round of trade negotiations and the setting up of the World Trade Organisation (WTO) the global trade regime is far more liberal today.
India too has liberalised its trade policies significantly, both as part of the international commitments and also more due to the overall economic reforms that the country embarked upon since 1991. While trade policies became liberal, domestic food grains management continues to be dominated by public intervention. Over time, the costs of the stabilization policies and the institutions (FCI, state agencies) implementing the policies have risen and the benefits have declined. Increasing budget demands for price stabilization are leading to increased fiscal deficits and crowding out investments in areas of higher economic return.
1. MSP – Minimum Support Price
This is the rate at which GOI purchases the agricultural produce from farmers.
GOI consults Commission for Agricultural Costs and Prices (CACP) & state governments and after considering other factors, arrives at the MSP for major agricultural commodities (rice/wheat/paddy). It then announces the MSP before the beginning of each season (Kharif/Rabi).
Procurement of food grains at MSP is carried out by Food Corporation of India (FCI) along with other state agencies, but this happens only in selected states and districts which had surplus of food grains.
MSP is viewed as a form of market intervention by GOI and as one of the supportive measures (safety nets) to the agricultural producers and has following objectives:
- To insulate the farmers against the unwarranted fluctuations in prices and ensures them a minimum price
- To create an incentive structure for the farmers in order to direct the allocation of resources towards desired crops. We will discuss later why over the years, this objective has becomes more of a problem, because it leads to lack of diversification of crops.
- To insulate consumers against sharp price rise, can be due to monsoon failure or a vested interest of some traders/wholesalers through creation of artificial scarcity.
So the focus is to create value addition for the cultivators as well as the consumers.
2. Economic Cost of Produce
This cost will be for GOI and includes the total cost of MSP, any procurement incidentals (food decay, pilferage) and the cost of distribution.
3. CIP – Central Issue Price (Also called Uniform Central Issue Price)
Usually for major agricultural commodities like wheat and rice, GOI issues a uniform central issue prices (CIPs) for states and Union Territories (UTs). It is at this price that the States and UTs lift the stocks from FCI godowns and send it to Fair Price Shops (FPS) for distribution under TPDS or other major food security schemes.
Differentiated CIPs are issued for various types of households, like BPL, AAY and APL.
CIP will always be less than MSP (remember the price at which GOI (through FCI) purchased the food grains from farmers) and there comes the huge bills of food subsidy.
CIP for food grains has not changed since 2002!!!
4. Food Subsidy:
The difference between the Economic Cost and Central Issue Price of food-grains is reimbursed to the FCI by the Central Government in the form of ‘food subsidy’.
Food Subsidy = Economic Cost – CIP
The food subsidy bill for the year 2011-12 was to the tune of Rs 98,000 crore.
So, if we take the proposal of NFSB and project it with increase in population, MSP and the economic cost of food grains and with CIPs for priority households (BPL and AAY) remaining unchanged, the food grains requirements and food subsidy are expected to increase to about 66 million tons and Rs 1, 81,229 crore respectively by the end of 12th Plan.
GOI’s policy of procurement of Food grains has the broad objectives of ensuring MSP to the farmers and also ensuring availability of food grains to the weaker sections at affordable prices. It also acts like price stabilization and also adding to the overall food security of the country.
After consultation with various agencies GOI decides upon the MSP and announces it in newspaper or radio.
FCI along with other State Agencies undertakes procurement of wheat, paddy, rice and coarse grains. They establish a large number of purchase centres at various mandis and key points. Farmers usually visit these mandis to sell their stock, which are then checked by FCI officials for GOI’s specifications (like clean, no smell, no dirt etc) and are then purchased at MSP.
Following is the graph of production and procurement in India.
As we see, the combined production of wheat and rice has been more than 170 million tonnes since 2007. Procurement was less than 40 million tonnes till 2006, but has increased since then to the range of 52-55 million tonnes. As a result procurement now is about 30% of production and has been increasing. This is mainly on account of highly attractive MSP and announcement of additional bonus on MSP by certain State Governments. Farmers thus find it attractive to sell to Government agencies at MSP.
High procurement of wheat and rice are restricted to a select group of states. The table below shows an abysmal low level of procurement in the Hindi Heartland of UP and Bihar.
In my opinion it is due to following two reasons:
1. Farmers keep some %age of food for their own self consumption. Due to the size of landholdings of small & marginal farmers and agriculture labourers in these areas, the overall quantity kept for self-consumption is relatively high than in other states.
2. High food grains procurement tax levied by state governments.
Almost all states in India levy tax on procurement of food grains. These tax are in form of market fee (or mandi tax), rural development tax, infrastructure development tax and VAT. Together they take the total tax levied on food grains to as high as 13-15% (of MSP) in some of the North Indian states (Punjab/Haryana), but states like Bihar, Jharkhand have very low tax rate (around 3-4%). Then there is an added cost of transport and storage.
As a result, traders and other operators in private market have little incentive to buy from the high tax states (Punjab/Haryana) and instead prefer States which have nil or very low levels of taxes on agriculture produce. As a result the State procuring machinery (FCI) gets highly active in States with high taxes and hence the procurement (% of production) is higher in these States.
(i) GOI pays tax to procure food grains and then sells it at an exorbitantly low rate through TPDS. This causes the huge food subsidy bills. Remember, states always have an incentive for high MSP, as they then collect taxes on it. Hence recently they had pushed for higher MSP on food grains, citing it would benefit farmers get a good price, but actually they have their own interest as well (in form of higher tax revenues).
(ii) With the proposed Goods and Services Tax (GST), taxes of all states would go up. At the moment many states do not levy VAT, but with GST, it will become compulsory. This will increase the food grain price and thereby increasing the food bill of GOI. Hence finance ministry held talks recently to see if food grains can be exempted from GST.
So, we see that traders and private operators are major players in the States which have lower taxes such as UP & Bihar and hence the official procurement machinery is completely slackened (how convenient?). Because of these, not only the State Government loses out on crucial revenue mobilization but more importantly, the farmers are deprived of the MSP as traders/private operators exploit the absence of official procurement machinery and offer rates which are lower than MSP (farmers doing distress selling).
Food storage requirement & capacity for any State is determined on the basis of how well were the production in last 3 years and TPDS requirements for the next 4 months. Based on these information then FCI creates storage centres across India.
The overall storage requirement in the country at the present levels is about 60 Million tonne, whereas the present capacity in the country is about 42 million tonnes – Covered (27 million tonnes) and Cover and Plinth (15 million tonnes).
While the procurement has been continuously increasing since 2007-08 onwards, there hasn’t been a corresponding increase in the storage capacity. Result has been severe pressure on the existing storage space and to offload the existing stocks in order to create additional space to store the ensuing crop every season. As a result many crops are left outside in the field, subject to climatic changes and pest infestations. (Remember those news reports in recent years around Food Rotting)
There are two major proposals around better storage management in India:
(a) Creating large storage points /silos each with a capacity of at least 0.5 million tonnes
(b) Creating smaller decentralized locally managed storage points at a District level with a capacity ranging from 5,000-100,000 tones which will be used both as a procurement point and also to meet the requirement under Food Security locally.
Public distribution of essential commodities has been in existence in India since the inter-war period.
Public Distribution System (PDS) is a major State intervention in the country aimed at ensuring food security to all the people, especially the poor. PDS operates through a large distribution network of fair price shops (FPS) and is supplemental in nature. The Targeted Public Distribution System (TPDS) was introduced in 1997, in which Wheat, Rice, Sugar & Kerosene from are being allocated to the States/UTs for distribution to the eligible ration cardholders.
Below picture shows categories of Social Security Nets in India.
There have been many studies which showed the deficiencies in TPDS program.
(a) Exclusion and inclusion errors – Many BPL household certificates are owned by better off households or corrupts intermediaries.
(b) Non-viability of FPS – Requirements of large number of FPS shops
(c) Diversion/ leakages – Tendency of FPS owners to make some easy money by selling off some of this subsidized grain on the open market where the price is higher and turning away some of the deserving poor households or adulterating the grain that is to be sold to those households.
A recent study showed that 67% of the wheat meant to reach the poor end up missing the target, being pilfered or sold on the open market en route.
Typical Food Grains Distribution Supply Chain in India:
Recommendations for effective food grains policy in India:
1. We need to have a ready set of rules of how and when to release food grains, a kind of Standard Operating Procedure (SOP). There should be no need to have special cabinet committees to take the decision. If prices are rising, there has to be a rule about the automatic release of food.
While we have steadily procured food grains, especially wheat and rice, we have not done equally well in releasing the grain when the need arises. Doing the former and not the latter has meant that the net effect has been to raise the average price of food.
2. GOI needs to vary its procurement, taking in more when the weather is good, supply plentiful and prices low and less (and may be nothing) when the weather is bad and prices high. To have a successful food management system it is equally important to have a method of food disbursement during times of food shortage.
3. Direct Cash transfer to poor (BPL/APL), instead of the quantitative entitlements.