It can radically transform the foodgrain market

The Prime Minister in his recent address in Parliament highlighted the need to “unbundle FCI operations into procurement, storage and distribution for greater efficiency.” Can this bold agenda get translated into something that is meaningful, realistic and doable?

The FCI is a peculiar animal – neither a public sector company nor a Government department. Strangely, the Food Corporations of India Act, 1964 lays down that all its operations will be financed by the Government of India. FCI does not have a profit and loss account. While a company is answerable to its shareholders and a Government department accountable to Parliament, the FCI is accountable in its present form to no one!

FCI’s operations have become inefficient with operating costs significantly higher than those in the private sector. Its monolithic and monopolistic character has stifled private trade in food grains. Can changing the way FCI works fundamentally significantly alter the grain markets?

A 10 point roadmap for reform that does not alter either the minimum support price (MSP) or public distribution system (PDS) policies and yet radically transforms the grain market is outlined below.

* Break up FCI into two commercial public sector companies – the National Grain Procurement Corporation (NGPC), and the Logistics and Distribution Corporation of India (LDC).

* Each of these agencies would have extensive engagement of the private sector.

* Storage capacities of the FCI would either be handed over to the Central Warehousing Corporation (CWC) or leased to credible private sector providers on a competitive basis.

* NGPC, the new procurement entity would be a company under the Companies Act with annual profit and loss accounts. The procurement cost of foodgrains would be determined by an expert body which would benchmark costs based on efficient market norms.

*The NGPC would discharge its role in a competitive framework and both State Agencies as well as the private sector will be treated equally.

*Once stocks required for meeting the needs of the PDS and buffer stocks are procured, the central pool MSP operations will cease. The private sector would, however, continue to procure on commercial lines at market prices and farmers reimbursed the difference between the market prices and MSP through direct cash transfer.

*Procured stocks will be stored with the CWC, State Warehousing Companies (SWCs) as well as private warehousing companies with storage rates and preservation services being the main determinant for taking decisions on the allocation among the three categories of warehouse service providers.

*NGPC and the LDC would enter into a commercial contract each year fixing the quantity to be procured and handed over to the LDC as well as the cost that would be charged. LDC will have the freedom to explore alternate sources for the grain if the costs charged by the procurement entity are not competitive.

*The LDC would be reimbursed the difference between the procurement cost and the central issue price.

*Both the NGPC and the LDC would become very lean and efficient commercial entities and outsource activities to efficient agencies in the private sector or to State Government agencies who will be allotted these activities in a transparent, competitive framework.

It is expected that the above reform measure that can be introduced within 24 months would without dismantling the basic MSP regime or the PDS issue prices be able to streamline the procurement and distribution system and cut down the overall food subsidy by 15 per cent, i.e. cut down the overall food subsidy bill annually by ₹10,000 crore. These set of reforms would also break the monopoly of the State in the foodgrains market and introduce the much needed efficiencies.

(The writer is MD & CEO, National Collateral Management Services Ltd)

(This article was published on June 19, 2014)
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