Economic Highlights

New Delhi, 12 March 2010

‘Hoarding’ Food Subsidy

REVAMPING OF FCI CRITICAL

By Shivaji Sarkar

Food subsidy has become a simple tool for hoarding at public expense and bleeding the consumer with higher food prices. It needs to be looked whether the subsidy is helping the farmers and consumers or the big traders -- the national and multi-national corporate. In effect, it has resulted in turning the Food Corporation of India (FCI) as the biggest hoarder by virtually not serving the society, its stated objective.

Indeed, the role of the FCI in aiding the process of food inflation from 17 to 20 per cent needs to be studied and probed. However, the role of subsidies is not restricted to food grains. It spills over to sugar. It gets a subsidy of Rs 653 crore as proposed in 2010-11. The sugar undertakings were given a direct subsidy of 501.83 crore during 2009-10. This is in addition to the reimbursement of Rs 285 crore to sugar factories for internal transport and freight charges to export shipment of sugar. This year Rs 200 crore has been allocated on this count.

Finance Minister Pranab Mukherjee has decided to give many tax sops and continue with the “subsidy’ for food (not agriculture). And, food subsidy is to the tune of Rs 55,578 crore. It is an impressive figure for a poor country and poorer farmers. This is so when the country is at a critical juncture, where strong government focus on agriculture is needed. In the current year, India is stated to have grown by around 7 per cent, while at the same time the agriculture output has grown at less than 1 per cent.

India has around 146 million hectares (ha) of land under agriculture, which yields around 230 million tonnes of food grain, while in case of China it has 100 million ha of land, which yields 400 million tonnes of food grain. The present budget like the last many does not propose much of an allocation to increase the farm yield.

India produces around 600 million tonnes of food products (fruits + vegetables), of which around 25-30 per cent is wasted due to lack of adequate logistical support. Hence, the need to raise production along with productivity of land and developing cohesive logistical support are of utmost importance to manage the long-term food security issue.

So logically farm subsidies are needed to increase farm production so that yield could be raised with the help of: (a) modern irrigation systems, (b) access to better quality seeds, (c) access to right fertilizers and (d) increasing priority sector lending norms

But who benefits? Not the Indian farmer. Entire food subsidy is given to the FCI. It is supposed to pass on the benefit to the farmers by purchasing their products at a minimum support price. The FCI has done this, but has not passed on the benefit to the consumers. Instead, it has become the biggest agency for hoarding food grains. It has not released any food grains, except for the BPL users.

In addition, the FCI is supposed to maintain a buffer stock of 82 lakh tonne of wheat and 118 lakh tonnes of rice while it maintains a stock of 230 lakh tonnes of wheat, and a stock of 242 lakh tonnes rice, more than double the requirement.

Even for sugar there is a carryover stock of 24 lakh tonnes and the current season is expected to produce 160 lakh tonnes against a domestic demand of 230 lakh tonnes. The shortage is being made up by 50 lakh tonnes of import.

Importantly, the FCI is envisaged as an agency that would maintain buffer stock for release during famines or food emergency. In normal circumstances it releases food grains for the targeted public distribution system (TPDS), which is now restricted to below poverty line (BPL) families. Not all the BPL families get the 35 kg quota or many do not lift it as well.  

It was expected that after Prime Minister Manmohan Singh’s address to the Chief Ministers’ meeting a decision would be taken to broad base the FCI. Further, it was envisaged to have a market interventionist role. But that is not being done. The FCI warehouses have become safe hoardings as traders know it would not come to their distress. Hence, the FCI is primarily serving the cause of the private big traders at the public’s expense.

Strangely enough nobody has discussed the issue in Parliament. With increased stocks the administrative costs and wastage also go up so gradually the food grains released would attract higher prices even for the BPL families, which many State governments again would subsidise for political reasons. In fact, the issue of raising the basic issue price has been discussed recently at the Union Cabinet but a decision was deferred for a possible political backlash.

The nation is thus subsidizing an inefficient system that corrupts the market more. Since this creates a shortage in the market, the benefit goes to private corporate, who has the option to jack up prices more and rake in higher profits. The FCI is being used instead of a market interventionist objective to help the market play havoc with the consumer.

The functioning of the FCI helps those who are against such subsidies particularly the lobbies in the World Trade Organisation (WTO). It weakens the nationalist lobby that is for continuance of subsidy for ensuring food security. The FCI is doing what international grain traders want so that they can have a field day.

In this given backdrop, the Finance Minister’s proposal to look for ways to directly transfer subsidies to the farmers seems to be a better option. But there are many pitfalls in the proposal. Despite that the need for FCI would not be obviated. But it calls for a revamp of its role and repositioning it as a dynamic mechanism to regulate the market. The welfare of consumers and farmers depends on its benign role and not the malignant one as it is now. ---INFA

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