Financing the food bill

While interest rates have dropped substantially in recent years, the debt servicing cost of the huge amount of food credit, met through the exchequer by way of the food subsidy, has not fallen at all.

The reason is that the Food Corporation of India (FCI) is contractually bound to borrow the entire money needed for its mammoth food management operation from a consortium of 54 banks led by the State Bank of India (SBI), and the banks are unwilling to cut the interest rate on such credit.

The average interest charged by the five major lending banks comes to 10.95 per cent, when bond yields are barely half that level.

Under the circumstances, FCI's move to float government-guaranteed bonds for raising part of its resources is only logical.

But despite Reserve Bank approval, the move remains a non-starter because of the banking consortium's reluctance to let FCI off the hook and allow it to borrow elsewhere.

This may be within the consortium's contractual rights, but the government, as the affected party which also owns the banks in the consortium, should step in.

There are, of course, many other ways in which the food subsidy bill of Rs 27,000 crore can be reduced ""and some of these are within FCI's ken, for they include needlessly high grain stocking norms; open-ended procurement at arbitrarily determined support prices; sale of government stocks at prices below even FCI's acquisition cost to the trade, industry and exporters; high transit and storage losses; and heavy administrative overheads.

Fortunately, the FCI's board of directors has finally woken up to the need for cutting costs, paving the way for corrective action in some of these fields.

As a result, FCI has begun exploring the possibility of getting insurance cover for losses during storage and transit, downsizing its staff strength, and seeking ISO certification to improve operational efficiencies. However, considering the past record of FCI, judgement must be reserved till the results show.

The root cause of the problem is of course the government's role in the foodgrain purchase and sale business, when it would clearly be cheaper and perhaps better to bring private companies into the picture.

FCI needs to concentrate primarily on maintaining the minimum foodgrain buffer, so as to ensure food security. The size of the buffer, too, needs to be scaled down "" as suggested by several expert committees.

Running the public distribution system (PDS) is already a state subject. As such, the states should logically arrange to procure the stocks they need, in case they want to continue the PDS.

The central food subsidy would be sharply reduced, and vast sums of money saved, if some of these fairly simple measures could be taken.

A good harvest year is the right time to make these departures, since grain prices are low in the open market.