Why FCI needs professionals to sell its foodgrains

Tejinder Narang | Updated on August 27, 2014


The primary mandate of the Food Corporation of India (FCI) acting under directions of Food Ministry is to service requirements of the public distribution system (PDS) in association with State Government Agencies (SGAs).

But over the years, FCI has also been called upon to intervene in managing market prices, albeit with little success. FCI efficiently procures wheat, paddy/milled rice but faces odds while selling surplus grains in the market.

Similarly, it lacks expertise in export marketing, which is outsourced for contracting and shipping operations to trading PSUs.

In less than three months from the time of harvest, an inventory of some 28 million tonnes (mt) of wheat and 31 mt of rice are built up by FCI and SGAs. No eyebrows are raised when these agencies incur thousands of crores as expenditure in a short span.

Efficient purchasing operations are attributed to MSP (Minimum Support Price) decreed by the Government on the recommendation of an expert body such as CACP (Commission for Agricultural Cost & Prices). MSP is premised on rational criteria and national priorities, while political considerations are generally minimal.

However, for disposal of surplus grains generated through excessive procurement in last 4-5 years there is a lack of professionalism. For example, the Government on June 17 decided to offload five mt of rice to cool food inflation. Surprisingly, a week thereafter, policymakers simply allocated this tonnage to families below and above poverty line (APL/BPL) at a price of ₹6-8/kg.

The right way forward was to sell the extra rice in marketing outlets to suppress inflationary pressures. But the predicament is how to discover market price and how to sell? Discovering “right” price cannot be a convenience of financial and accounting adjustments but demands professionalism to target matrix of supply and demand.

At current economic cost of rice of about ₹28/kg, additional releases to APL/BPL entail a loss of about ₹20/kg or ₹10,000 crore.

However, if these very 5 mt is released in the market, where the Government can fetch around ₹18-20 a kg, direct debit will be ₹10/kg or about ₹5,000 crore or 50 per cent of what is actually foreseen under APL/BPL. Incredible indeed it is that higher implied loss figure is acceptable to the Ministry than lower ones.

Notifying additional allocation to APL/BPL families is just an eye wash, wherein, the Government is projecting a mirage of marketing devoid of real objective of inflation control. On the contrary, this incentivizes round tripping and pilferage that will generate black economy of ₹5,000-6,000 crore and higher inflation while it is the black money and black economy that this Government is fighting for.

Media reports indicate that Food Ministry has initiated consultation within the Government for injecting 10 mt of wheat in open market from September 2014 onwards for price stabilisation.

Authorities need to take a realistic call by not repeating additional allocations/releases to BPL/APL families at ₹4-5/kg. Disposal prices in market could be based upon MSP of ₹13.50 or 14/kg plus freight rather than ₹15-15.50 plus freight. Savings in freight can be done, through logistical optimisation to the extent possible, for southern States, by transporting wheat from MP/Bihar or other central States rather than from Punjab/Haryana.

Considering inherent complexity and volatility in grain markets, selling price has to be responsive especially when objective is to restrain higher prices.

Surely there is a need for complimenting the system of discovering the selling price in open market through expertise of an agency such as CACP or a formal committee of reputed agricultural economists, FCI and traders, who like MSP, assess real time dynamics of domestic and overseas markets and decide the modalities of intervention – including exports strategies whenever deemed necessary.

Even the differential pricing for old/new/damaged crop can also be recommended for intervention or exports. The Cabinet/CCEA can endorse such recommendations for implementation by Food Ministry.

This will not only tame the inflation but also reduce overall inventory and make available additional storage space. It is a win-win situation for all.

The writer is a trade analyst

Published on July 15, 2014

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