A Problem Of Plenty Is Adding To Food Corporation Of India’s Woes

A vicious cycle of higher production of wheat and rice, increased procurement by the government, and limited demand for excess stock in the open market is adding to the pressure on Food Corporation of India.

FCI has seen financing needs rise over the last three years and has stepped up borrowings from sources such as the National Small Savings Fund. With wheat and rice stocks running at record highs and FCI seeing limited demand to offload these commodities in the open market, funding pressures at the government’s official procurement agency are expected to remain high.

Data for the first five months of financial year 2019-20 shows that FCI’s attempts to sell excess rice and wheat stocks, even at prices lower than the economic cost, have only been partially successful.

In the case of rice, FCI has been able to sell about 40 percent of what it offered to sell in the open market. While in the case of wheat, it has been able to sell only 15 percent.

FCI procures rice and wheat for sales through the Public Distribution System. It conducts open market sales in special circumstances, such as the recent buildup in stocks.

An email sent to FCI seeking clarity on rising food stocks wasn’t answered.

Running Out Of Storage?

The attempt to reduce excess holdings comes against the backdrop of record high stock of rice and wheat. These stocks rose after a 68 percent increase in procurement in 2018-19.

With limited success of open market sales, stocks remain high.

Wheat stocks stood at 435.9 lakh metric tonnes as on Aug. 1, 2019, while rice stocks stood at 328.9 lakh metric tonnes on the same date, according to data included in the Handbook of Statistics on the Indian Economy, released by the Reserve Bank of India last week.

Taken together, stocks are coming close to FCI’s stated storage capacity.

According to a Press Information Bureau statement in February, the total storage capacity available with FCI, Central Warehousing Corporation and state agencies stood at 851.54 lakh metric tonnes as of December 2018, which included 724.79 lakh metric tonnes in covered capacity.

It’s a vicious circle, said Amit Kar, head and principal scientist at the Indian Agricultural Research Institute.

Farmers were selling more to the government because of the prices offered. Traders, too, were opting to wait for an open market sale by the FCI for more attractive rates than the cost of purchasing from farmers, he said.

Operations Increasingly Unviable?

Experts say there is larger problem that extends well beyond the current year.

Production of rice and wheat has been rising as yields per hectare for the crops are at a record high. But instead of curtailing sowing of these cereals, farmers continue to focus on them as these are the commodities the government procures the most.

To prevent distress in an already weak agricultural economy, the government stepped in to procure more.

Data from the RBI’s statistical handbook shows that procurement as a share of food production rose to 36.7 percent for rice in FY19—an all-time high. For wheat, while the share of procurement is below record highs, it’s rising once again.

Even after procurement, marketing and storage are rising causes of concern, said YS Shivay, professor for rice-wheat agronomy at Indian Agricultural Research Institute.

As government storage capacity is limited, money goes to private players as rent. In the absence of any long-term planning by the government, these factors along with rising cost of labour are making the process increasingly financially unviable, Shivay said.

All of this is adding to the “economic cost” and “buffer carrying costs” incurred by FCI, both of which are on the rise as well.

Eventually, this cost burden gets transferred to the government.

The government reimburses cost of carrying of buffer stock of foodgrains maintained by FCI as subsidy, explained Kar. It also reimburses the difference between the Food Corporation’s sales and weighted average acquisition cost, he said.

In a report in January, the Comptroller and Auditor General had pointed to the increase in food subsidy arrears that had built up, including to FCI.

“To cover financial requirements arising out of the subsidy arrears, the FCI resorts to various methods in different years such as bonds, unsecured short-term loans and National Small Saving Funds loans among others,” CAG had flagged in a report that looked at data till 2016-17.

Since then, FCI’s borrowing requirements have only risen.

FCI’s borrowings from the National Small Savings Fund stood at Rs. 1.86 lakh crore at the end of FY19 compared to Rs. 1.21 lakh crore in FY18 and Rs 70,000 crore in the year before that, according to data available on the agency’s website.