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The Centre and states are busy launching welfare programmes and promising goodies to the people to perpetuate their power.
Punjab has its atta-daal programme. Andhra Pradesh, Tamil Nadu, Chhattisgarh, Madhya Pradesh, Bihar and others are further “enhancing” their subsidy schemes, though humongous inventories are hoarded in the central pool.
Now, instead of taking rice from the Food Corporation of India (FCI), the Karnataka Food and Civil Supplies Corporation (KFCSC) has initiated its own convoluted tendering procurement programme of about 1.2 to 1.8 million tonnes for 2013-14, which is about 1-1.5 lakh tonnes/month. This equals the annual import of Indonesia or the Philippines.
The cost of KFCSC rice is about Rs 25/kg to be disposed of at Rs1/kg — a subsidy of 96 per cent. This programme runs parallel to the 90 per cent subsidy system in the Food Security Bill. Subsidies come out of direct/indirect taxation.
Central plus state subvention constitutes “double implicit taxation”.
Karnataka is already engaged in supplying pulses and edible oil under its own discounting arrangements. Sugar, too, is available under PDS.
If Central and state institutions are in competition to prove that good politics has to be bad economics, this is going to rock the economy badly.
Since July 2013, KFCSC Ltd notified tenders for the procurement of 1,00,000-1,50,000 rice per month for distribution at @Re.1/kg under PDS. The KFCSC Web site mentions “supplies to be made to 67 godowns”. The average quantity at each warehouse will be 1,500 tonnes.
Bidding by any party for a minimum of 100 kg (one quintal) of rice is permissible with 2 per cent as deposit. This facilitates easier participation by small shopkeepers, traders or millers. Payment to the seller is against a receipt indicating the location of the warehouse. Spoilage, pilferage, damage or manipulation in such isolated warehouses cannot be ruled out.
Losses and Round Tripping
A back of the envelope calculation reveals that for purchasing 1,00,000 tonnes of rice at Rs 25/kg, the State government will incur an expenditure of Rs 250 crore ($38.5 million) per month or about Rs 3,000 crore ($462 million) annually.
Monthly sale realisation — basis Re.1/kg — will be Rs 10 crore or Rs 120 crore per annum. The subsidy component will be Rs 3,000 minus Rs 120 or Rs 2,820 crore ($435 million) per annum
At the national level, the efficiency of PDS is 50 per cent, which suggests that Rs 1,410 crore ($220 million) will be wasteful expenditure.
This component of subvention meant for beneficiaries goes to the pockets of third parties.
Since the Central Government itself is a proactive promoter of 90 per cent subsidy, we cannot castigate the State government for offering 6 per cent more.
Market sources indicate that most of tendered rice supplies are sourced from States such as Uttar Pradesh (economic cost Rs 27/kg of FCI), released under PDS at Rs 5.65/kg (BPL rates).
This grain is then re-polished and billed for Rs 25/kg to KFCSC. These will be re-distributed at Rs1/kg in Karnataka and its round tripping again is not ruled out.
Imagine a commodity having four values simultaneously: Rs 27 at FCI, Rs 5.65 at BPL, Rs 25 at KFCSC, and Re. 1 in Karnataka under PDS. The scope for arbitrage is tremendous.
Net Effect
If this model is extended to 27 states, each spending about Rs 3,000 crore per annum for one lakh tonnes rice, it aggregates Rs 81,000 crore ($12.4 billion) as direct subsidy while 50 per cent — Rs 40,500 crore ($6.2 billion) — is gulped by third parties.
Yet, about 30 million tonnes of surplus rice (Rs 81,000 crore or $12.4 billion) is hoarded by FCI, while an additional Rs 3.4 crore ($14 billion) is planned for procurement by FCI and its agencies after two months.
It is shocking that states are also sucking up additional rice supplies, squeezing the open market and pumping inflation.
If central subsidy under the food Bill, as claimed by Government is Rs 1,25,000 crore (though disputed to be on the lower side), the total subsidy with States’ additional spending of Rs 81,000 crore adds up to over Rs 2,00,000 crore ($31 billion) or around 2 per cent of GDP, over and above the current fiscal deficit of 4.8 per cent of GDP — which is unsustainable.
(The author is a grains trade analyst.)
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