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Friday, May 23, 2003

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Time to review FCI funding norms

P. Devarajan

THE first moves to alter the style and substance of bankrolling the Food Corporation of India have been made with the Reserve Bank of India and the Finance Ministry setting up teams to look into details. Perhaps, the best way to trim the financial load on banks is to get over the habit of a yearly mark-up in minimum support prices for rice and wheat. This has distorted price trends; but bankers know it will not happen as politicians have to keep farmers in good humour.

The alternative, which can be made to work, could be to go for differential pricing of funds given to FCI for conducting food security operations. Banks could be told by RBI to price funds at around 10 per cent for FCI to run a minimum buffer stock operation. For holding stocks anything above the minimum, banks could be given the freedom to mark up the price of money, which could force FCI to turn a bit more efficient. Reluctant banks could be given the freedom to opt out.

The idea is similar to the one worked out a few years ago by Dr C. Rangarajan to fix automatic monetisation by putting in place a ways and means system for Government borrowings. Dr Rangarajan first came up with the idea in his Presidential Address on "Issues in monetary management", at the 71st annual conference of the Indian Economic Association at Calcutta in December 1988. It took some years before the Finance Ministry got round to accepting the suggestion.

At present, banks are forced to lend funds at 11 per cent to FCI and it is assumed the food credit is backed by fully paid-up stocks valued at the issue price. As of December-end 2002, the uncovered margin has shot up to Rs 15,000 crore forcing the RBI and Finance Ministry to at least look at making some changes. At no point is it being suggested banks should get out of providing cash to food security operations nor are bankers saying so, even in private; rather, it should be made less burdensome for the financial system.

For the moment, bankers on Mint Street are quite content to leave New Delhi to set benchmarks to arrive at buffer stocks needed to operate the food security system. The Fifth Technical Group is working out a buffer stocking policy for the 10th Plan and it could be examining minimum and maximum food stock numbers.

The concept of buffer stocking was introduced in the Fourth Plan (1969-74) and just before the Sixth Plan, the Food Ministry set up a technical group to estimate the appropriate level of buffer for the Plan period.

Most of the time, the buffer had three components: base level stocks, food security and operational stocks. Base level stocks refer to grain stocks lying in storage, over various depots in small quantities or in transit, and hence, not available for issue. Food security stocks fill the gap between procurement and distribution in a bad year and operational stocks meant that required for monthly distribution during a year.

Coming to the present, FCI can easily lower buffer stocks held by it as the country has enough dollars to access foreign grain markets, a factor which was absent from earlier calculations. Easy liquidity and forex inflows could be the best time to revise the norms for funding FCI.

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