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Our Bureau

Savings on procuring foodgrains for PDS seen at Rs 13,000 cr

Chennai June 19 The Centre can save Rs 13,000 crore in food subsidy if the commodity exchanges are used in procurement of foodgrains for supply into public distribution system, Mr P.H. Ravikumar, Managing Director & CEO, National Commodity & Derivatives Exchange Ltd (NCDEX), said on Tuesday.

Physical handling

Today, Food Corporation of India (FCI) procures agricultural commodities, handling the commodities physically, incurring transportation and holding costs.

Instead, FCI could tell NCDEX, "we want this quantity of this commodity (say, rice) delivered at this point." The farmers then deliver the goods on specified dates at the agreed centres.

At a press conference here, Mr Ravikumar said FCI's procurement operations were meant to serve two purposes - to provide fair price to the farmers through the "minimum support price" mechanism and to create a buffer for food security.

`Relook at MSP'

FCI should separate the two functions. It should take physical delivery only for the purpose of building a buffer — or better, the buffer should be created out of imports. Providing minimum support prices to the farmers is a concept that needs to be looked at afresh, Mr Ravikumar said. After the Green Revolution in the 1960s, there was surplus agricultural production and hence farmers needed to be protected against a sharp fall in prices. Today, India is moving towards a situation of shortage, and the prices are firm. Farmers could get fair prices by participating in the futures market that is enabled by the commodity exchanges.

By using the exchanges, FCI could avoid buying only at the harvest time and holding the stock in its godowns if it buys sufficient stocks for, say, one quarter. Farmers will benefit because they do not have to sell all their produce soon after the harvest, when the prices are typically the lowest. FCI will benefit by elimination of transportation and holding costs.

Answering a question, Mr Ravikumar said the estimate that food subsidy would come down by Rs 13,000 crore, or by 50 per cent, was arrived at after detailed calculations.

Commodity exchanges guarantee delivery and payment to the buyer and seller. What gives NCDEX the confidence that the delivery will be made to FCI?

Delivery failure

Mr Ravikumar said while there was no certainty that the farmer would deliver, which would happen if the spot prices were higher than the contracted prices, the exchange would protect itself by collecting mark-to-market margins from the farmers, through the banking system.

If there was a delivery failure, the exchange would ask the buyer to buy from the open market and reimburse the difference between the contracted price and the spot price. For this, NCDEX runs a "settlement guarantee fund" of Rs 1,400 crore, funded mainly from margins collected.

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