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LATEST NEWS UPDATES | Rotting grain & judicial transgression by Ashok Khemka

Rotting grain & judicial transgression by Ashok Khemka

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published Published on Oct 7, 2010   modified Modified on Oct 7, 2010

The mountainous state-owned food stocks lying in the open and rotting in the rain are in stark conflict with a failing public distribution system , hunger, malnutrition and high food prices. The poor management of food stocks provoked the Supreme Court to transgress into executive domain when, on August 12, the court made certain directions like limiting procurement to covered warehousing capacity and distributing the rotting foodgrains free of cost to the poor. The directions were given with the noble intent to prevent the wastage of foodgrains and a feeling of empathy towards the poor and hungry.

As on August 1, 2010, the total food stocks with the FCI were 55 million tonnes (mt) as compared to the buffer requirements of 27 mt. Of this, 15 mt of wheat was lying in the open in Punjab and Haryana alone. As per estimates, 50,000 tonnes of food stocks have already deteriorated beyond human consumption as a result of long, improper storage.

There are two essential components to the management of food stocks: procurement and distribution through PDS. To ensure that stocks are available round the year for the PDS, different buffer stock norms are prescribed for different points of time during the year. The storage ought to be in scientific warehouses to prevent damage . FCI’s losses are billed to the exchequer and are known as the food subsidy bill.

If the stocks exceed the warehousing capacity, safe storage becomes a challenge . But if the stocks are lower than the buffer stock norms, the problem would be to meet the requirements for PDS. This is addressed if FCI is mandated to manage the stocks as per buffer stock norms through open market operations of buying /selling. The efforts of FCI to dispose of some of the excess stocks of wheat at a price of . 1,240 per quintal (excluding VAT) in the recent past have met with abject failure since the price demanded was not commensurate with the quality of the stocks offered in addition to the additional transactional costs in dealing with FCI staff. The solution also does not lie in fixing the open market sales scheme (OMSS) price much below the market price. This will only offer the trader arbitrage opportunities in connivance FCI staff. Low OMSS prices had led to large-scale corruption in the FCI, for which the government failed to pinpoint responsibility.

Unfortunately, the court’s directions to distribute rotting foodgrains free of cost to the poor, no doubt appealing to the emotions , would suffer from the same malady. It would lead to massive diversions due to arbitrage opportunities in active collusion with the FCI staff without benefiting the intended beneficiaries. Organised diversion of PDS stocks direct from government warehouses to private flour mills is rampant , with the differential pocketed between the transporters, the PDS shopowners and the government staff. The FIRs yield no concrete result, given the quality of investigation and prosecution and the interminable delays in judicial trials.

Chief economic adviser to the government Kaushik Basu has suggested offloading excess food stocks in small lots in order to depress market prices. The same was officially suggested to the FCI/food ministry two years back to dispose of the excess stocks by open and transparent domestic auctions in small monthly lots to reduce any arbitrage opportunities instead of disposals at fixed prices to selected parties. However, FCI continues to dither between exporting excess food stocks and domestic disposals at fixed prices.

A mere announcement of offloading excess food stocks in small lots by open domestic auctions would act as a dampener on open market prices of foodgrains . Fixing stock limits under the Essential Commodities Act would ensure that the distributive efficiency of the private trade is harnessed to the optimum. Unfortunately, the government, by acting as the biggest hoarder, is unwittingly catalysing rising domestic market prices.

The problem of safe storage of foodgrains can be addressed by incentivising warehousing down to the gram panchayat level under the Rashtriya Krishi Vikas Yojana. As on date, FCI incurs a cost of . 315 per quintal per month on average on storage without accounting for pilferage and spoilage. This is 50% more than what the private trade spends, despite advantages such as economies of scale, state support for warehousing land and other regulatory measures. This cost can be reduced through public-private participation in handling the buffer stocks.

Even a system of staggered purchases by offering producer farmers an extra . 200 per quintal per month would obviate the need for much additional warehousing capacity. The huge annual food subsidy bill of . 70,000 crore is spent on subsidising the inefficiencies of FCI, the high interest charges of over 12% for financing procurement operations paid to the public sector banks, taxes and other levies amounting to 8-10 % to the procuring states, commission of 2.5% to the middlemen arhtiyasfor performing simple aggregation services and a profit of 2% to the state procuring agencies.

The nutritive value the food stocks retain after long periods of storage are never discussed. The manifold prophylactic and curative chemical treatment of stocks may also leave hazardous residues or traces in the stocks.

The transaction costs for consumer in accessing the PDS and his capacity to enforce quality are never discussed. He is offered food at . 3 per kg while the government spends . 16 on his behalf. The only way the consumer can ensure that the quality he receives is worth the amount being spent on his behalf is for the amount to be put at his disposal by direct cash transfer in the form of food coupons. These are important issues that need to be comprehensively addressed in order to make the best utilisation of the huge food subsidy bill.

The market mechanism is the most effective way to achieve this with the government’s role limited to making food accessible in remote places where normally the private trade would not find it profitable to venture. The government, for the moment, may have bought temporary relief by ordering the release of 2.5 mt of additional foodgrains, but the questions raised by the Supreme Court remain to be holistically addressed and should trigger wholesale reforms in the way the food system is currently managed.

(The author is an IAS officer. Views are personal.)

The Economic Times, 7 October, 2010, http://economictimes.indiatimes.com/opinion/editorial/Rotting-grain--judicial-transgression/articleshow/6703577.cms


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