DCP system faces challenges over late payments, MSP bonuses, surplus stock

The latest large grain producing state to choose centralised grain procurement has claimed high-interest loans and non-repayment from the Centre as a reason

Early in November, Madhya Pradesh Chief Minister Mohan Yadav wrote to the Union government with an unusual request: the state wanted to opt out of the decentralised procurement (DCP) system for foodgrains on account of mounting financial challenges.

 

In his letter, the chief minister claimed the state government had been suffering significant financial losses due to delay in clearing the foodgrain stocks it had purchased for distribution through ration shops for free under the DCP system.

 

As it turned out, the state government had borrowed heavily from banks to make payments to farmers, an amount that stood at Rs 72,177 crore at the time of the letter, and which was taking time to be settled.

 

As a consequence of the financial squeeze, the state, which is a major foodgrains producing as well as procuring one, wanted out of the DCP and instead revert to the old system of centralised procurement by Food Corporation of India (FCI), Yadav said.

 

Not the first to opt out

 

In fact, MP is not the first time a major foodgrain producing state has wanted to leave the DCP system due to financial challenges. Earlier, Uttar Pradesh, too, had expressed its desire to opt out of the programme.

  

What is the DCP scheme, and what are its aims?

 

For starters, it is important to keep in mind that the DCP system is different from centralised procurement.

 

Under the Centralised Procurement System (CPS), the procurement of foodgrains for the central pool is undertaken either by the FCI directly or state government agencies who then hands over the stocks to FCI for storage and subsequent issue against Central allocations in the same state or for movement of surplus stocks to other states.

 

Under the DCP system, however, that responsibility falls to the state government, which undertakes direct purchase of paddy or rice and wheat and also stores and distributes these foodgrains under National Food Security Act (NFSA) and other welfare schemes.

 

There is a catch, though: If the purchased stocks of the rice or wheat procured by the state government exceeds its allocation under the NFSA and other welfare schemes, excess stocks must be handed over to the FCI.

 

Why was the DCP introduced?

 

The DCP is one the earliest reform initiatives in food subsidy management introduced by the central government, having been introduced in 1997. The system, apart from helping cover more farmers under the union government’s Minimum Support Price (MSP) scheme, also helps control transport and administrative costs of procurement and distribution.

 

Additionally, it helps reduce states’ dependence on the FCI for PDS requirements, thus reducing complaints about quality, since consuming states themselves are custodians of the foodgrains.

 

The difference between the financial cost to the states (which includes procurement price, storage incidentals, etc) and the Central Issue Price (which is the rate at which grains are finally sold to the beneficiaries) is passed on to state governments as a subsidy.

 

Not only that, officials say if surplus grains procured by the state is not lifted on time by the FCI, the latter must also pay for the carryover costs.

 

However, state agencies are held responsible for any damage to grain stocks.

Tussle over surplus grains management

 

According to some officials, it is the management of surplus foodgrains procured by DCP states that is typically a major bone of contention between the Centre and the state.

  

The reason for the delay in clearing of foodgrain purchased through the DCP system is that there is simply no space for storing huge volumes of grains that have accumulated over the years due to open-ended procurement and limited avenues to export.

 

For example, as of October 16, 2025, India is sitting on a stockpile of around 66.64 MT of wheat and rice, more than twice the buffer requirement of 30.77 MT. With the new paddy sowing season having started from October 1, this number is expected to swell further in the next harvest season.

 

Not surprisingly, given the large production volumes of wheat and rice, as well as an open-ended procurement system, clearing surplus stocks from producing states to consuming ones takes time, adding to the financial burden of states.

 

The politics behind procurement and surplus stocks

 

When it comes to surplus, states as well as the politics behind foodgrains procurement must shoulder part of the blame. Multiple states, including those ruled by Bharatiya Janata Party (BJP), have been announcing a bonus over the MSP fixed by the Centre as a political tool ahead of elections.

 

Madhya Pradesh itself is guilty of announcing a hefty bonus of Rs 125 per quintal for the 2024-25 wheat procurement season over the Centre’s fixed MSP because it had been in the BJP’s pre-poll manifesto. The bonus was further raised to Rs 175 per quintal in the next season.

 

What states forget is that such bonuses not only outprice the grains from the market rates, they also saddle state inventories with surpluses as the government becomes the sole buyer in the absence of private players. This also has subsidy implications, and encourages farmers to produce more grains, creating a vicious cycle.

 

Recognising the problem, the Centre had in 2014 warned DCP states through a directive that it wouldn’t pay for any surplus over the PDS requirement if the state government declared a bonus over MSP.

 

However, with a friendly Central government in place that has been seldom followed in most BJP-rule states.

 

Why quitting DCP system hurts subsidy reform

 

One of the major objectives behind the launch of the DCP system years back – besides giving states operational freedom to manage food grains for the ration system – was also to bring down the subsidy burden on the central exchequer, and to reduce handling and incidental costs.

 

“That is the reason why the Centre always encourages states to opt for the DCP system as it brings down operational costs, leads to avoidance of double expenditure (one on procurement of the grains and then again on moving the same grains for distribution), and is reform in subsidy,” another official explained.

 

However, with MP also opting for centralised procurement, the whole goal of subsidy reform could get neutralised.

 

The fiscal gap facing states

 

The biggest problem, however, is one of overburdening state finances, thanks to higher interest rates payable on loans taken to procure grains.

 

Senior officials said that when it comes to bank loans taken to manage day-to-day procurement and storage finances, states have to borrow at rates that are typically 1-1.5 per cent higher than FCI.

 

“FCI loans are backed by the Central government which has a higher financial muscle than the state which is why they are cheaper than loans availed by the state which also leads to additional financial burden on them,” a senior official explained.

 

States also complain that let alone finances for surplus grains, the Centre sometimes does not even release the principal subsidy on time, thus forcing them to rely on borrowed funds.

 

For DCP states, the Centre releases the subsidy amount only after a full cost sheet is sent, and in case of surplus grains, only after the total quantity is evacuated.

 

In its defence, the Union government claims that while there has been a significant improvement over time, saying the states themselves are at fault for the predicament they find themselves in. Often, an official said, cost sheets and other documents for getting the subsidy on time are not properly maintained, resulting in delays from the states themselves.

 

There are other challenges as well.

 

“Many times, we have seen that states do not follow the fixed quality parameters while procuring grains under the DCP system which also makes acceptance and movement of the surplus stocks difficult for us,” the official pointed out.