Govt caught in no man's land as foodgrain mountains keep growing taller

A few days ago, local papers in Haryana published reports of paddy farmers being turned away from mandis because government agencies had stopped procurement saying quotas had been reached. Mandis  in Karnal, Panipat and Yamunagar all reportedly downed their shutters for six days, causing a long line-up of trucks and tractor-trolleys. It was only after the newly-formed Manohar Lal government clarified that no decision to stop procurement had been taken that the Haryana mandis re-opened.

The incident highlights again the challenges the Centre and state governments face when it comes to ending the open-ended procurement of wheat and rice by Food Corporation of India (FCI) and state agencies on its behalf. “I have never seen mandi authorities denying paddy purchases in my lifetime,” said a farmer from Karnal. “It seems some ulterior motive is at play,” he added.

Soon after the Haryana incident, the 2020-21 rabi report of the Commission for Agriculture Costs and Prices (CACP) 2020-21 highlighted the pitfalls of open-ended procurement of wheat and rice. The CACP, which is the main body that determines the Minimum Support Price (MSP) for a host of crops, has often urged the need to review the open-ended procurement mechanism under which the government buys whatever wheat and rice a farmer brings to the mandi within a stipulated time and based on a pre-determined quality parameter.

CACP and the beleaguered FCI blames this open-ended procurement for mounting foodgrain stocks, which, as on October 1, 2019, stood at an estimated 64.23 million tonnes, more than double the required buffer and strategic reserve norms.

“Against a requirement of around 50-56 million tonnes of foodgrain to run the National Food Security Act (NFSA) and other welfare schemes, the Centre ends up buying almost 80 million tonnes of wheat and rice. There has to be a mismatch somewhere, which is showing up,” a senior FCI official said.

Given that India’s foodgrain stocks have reached unmanageable levels — the image of rats feasting on stocks in FCI godowns has become famous — does the government has viable options to liquidate the current inventory without incurring a heavy additional financial burden?

The short answer is no.

The stock burden along with inadequate Budget allocations for the food subsidy and the Centre’s zeal to check the fiscal deficit has worsened FCI’s financial position. Officials say even if the Centre releases all its allocated subsidy for 2019-20, the agency would still have outstanding unpaid subsidy dues of Rs 174,000 crore, plus Rs 145,000 crore as outstanding loans from National Small Savings Funds (NSSF) by the end of that financial year, totalling over Rs 319,000 crore. At the start of the current fiscal, this figure was Rs 191,000 crore. In short, FCI is incurring crippling debt to create extra food stocks that the country doesn’t really need.  

So what can Centre do about its grain mountains? 

Open market sale to private players:

The problem here, say FCI officials, is low appetite from allied industries such as biscuit manufacturers, a result of the economic slowdown. The government did make a start of sorts by selling wheat and rice at an MSP-linked reserve price, but as the CACP noted in its latest report, the offtake of wheat till September 2019 has been only 0.51 million tonnes against 2.29 million tonnes offered for sale during 2019-20. The target is to sell around 10 million tonnes in open market. 

Extra allocation for Antodaya Anna Yojana (AAY) beneficiaries and families below the poverty line:

Assuming an additional allocation of 5 kg of rice and wheat for AAY beneficiaries, and 1 kg of rice or wheat to those in the Priority Households (PHH) category, a back-of-the-envelope calculation shows that government will have bear an extra financial burden of about Rs 29,000 crore over the current subsidy of over Rs 184,000 crore (Budget Estimate, 2019-20).

AAY allocations are made on a per-family basis, which comes to around 35 kg per month, while each identified individual under the PHH category gets 3 kg of rice and 2 kg of wheat a month. The rates for both AAY and PHH have been unchanged at Rs 3 per kg for rice and Rs 2 per kg for wheat since 2013, when the National Food Security Act was enacted.

Export wheat and rice from the Central pool:

This has long been considered the key to liquidating the grain mountain. Unrestricted wheat exports have been allowed under Open General Licence (OGL) since 2012. But India has rarely managed to make any serious attempt to dent global wheat markets because constant increases in MSP have priced out Indian wheat. 

Stiff competition from Australia and Ukraine is another key reason for the poor performance of Indian wheat exports. Making things worse, global prices, too, dropped from about $350 metric tonne in November 2012 to below $200 tonne in September 2019 owing to a glut in producing countries.

“Despite consecutive record harvests and high stocks, wheat exports have not increased as Indian wheat exports are not competitive due to higher domestic prices compared to world prices,” CACP said. 

In sum, given the complications and challenges associated with all the economic options to liquidate grain stocks, the Centre has few viable choices. Reconsidering the entire MSP-based procurement system is the only remaining option but that is a politically sensitive decision involving farmer interests that few governments in the past have dared to even consider.