CAG, food security and good sense

The National Food Security Bill (NFSB) couldn’t be passed in the Parliament session that ended last week, despite a spirited promotional pitch by its proponents — including Nobel Laureate Amartya Sen. Last week also saw the Comptroller and Auditor General of India (CAG) table its report on “Performance Audit of Storage Management and Movement of Food Grains in Food Corporation of India (FCI)”.

Allocations vs off-take

This report, covering the period from 2006-07 to 2011-12, has highlighted some of the major systemic deficiencies in the operations of the public distribution system (PDS).The convergence in the timing of the NFSB being introduced in Parliament and tabling of the CAG report provides an opportunity to understand the problems potentially arising from implementing the proposed legislation. Before formalising it into an Act, the Government may well look into the current creaky system of procurement and distribution of grains, whose flaws cannot be eliminated, even if attempted to be remedied through the new legislation.

A significant observation made in the CAG report pertains to the allocations made from the Central foodgrain pool for the targeted PDS and various welfare schemes during 2006-12. These, as the accompanying chart shows, stood way above what actually got lifted by the States. It points to a lack of real demand and also overestimation by the Centre while making allocations.

Equally interesting is the fact that in most years, even procurement of grain by FCI and State agencies has been lower than the allocated quantities, while more than the actual off-take. Clearly, it means a limited capacity of the system to distribute whatever grain is procured.

In the event of the NFSB becoming an Act, one can expect a further step-up in grain allocations by the Centre. That would, then, require procurement to go up even more to match the proposed allocations. Where is this extra grain going to come from — when the Commission for Agricultural Costs and Prices (CACP) has noted that up to 98 per cent of the market arrivals in major States are already being mopped up by FCI/agencies? And even if more grain gets procured, what is the guarantee of it getting lifted? Also, what would be the impact of such large-scale procurement by government agencies on open market prices? It all raises questions on the very feasibility and sustainability of the proposed NFSB.

Storage, accountability

The CAG report has also made pertinent points about the status of storage capacity available with FCI. The latter’s ‘storage gap’, corresponding with the peak space requirement on June 1 after the wheat crop’s procurement, was estimated at 332 lakh tonnes (lt) in 2012. That amounted to 40 per cent of the total Central pool stock of 824 lt for that date (June 1, 2012).

From this observation, it is natural to ask: If FCI does not have storage capacity for 332 lt of grain (worth Rs 66,000 crore or $12 billion), how is it going to handle the additional quantities that will have to be procured for the NFSB? It is quite possible that in this case, the Centre would pass on the onus for creating the matching storage infrastructure to the States!

Related to this is the involvement of multiple agencies — including State corporations and even private millers — in storing foodgrains constituting the so-called Central pool. The CAG is right in observing that having so many agencies, without any “single point accountability” that should mandatorily lie with FCI, is conducive to a situation where the indicated stock in the Central pool may not actually be available for distribution at a given point of time.

That, in turn, raises strong possibilities of mismanagement, theft and pilferage of the stocks supposedly held in the Central pool. Needless to add, the chances of these would go up even more with grains selling at Re 1 (coarse cereals), Rs 2 (wheat) and Rs 3 (rice) under the NFSB. At these rates, large-scale diversion and ‘round-tripping’ of the same grain back to the Government procurement agencies are inevitable. In the process, a new ‘grain mafia’ class could well emerge.

MSP vagueness

Another observation by the CAG is about minimum support prices (MSP) of paddy and wheat being fixed in an ad-hoc manner. The MSP of wheat alone during 2006-12 was fixed anywhere between 30 and 66 per cent over the ‘C2’ cost. The latter, determined by the CACP, takes into account all input costs — including the imputed value of family labour and rental income foregone. While there are set procedures for computing C2 costs, there are no such established norms, though, for arriving at the margins (over the C2 costs) while fixing the MSP.

By hiking MSPs without following any norms, the impact on the quantum of the Government’s food subsidy bill has been predictable. The fiscal costs will go up further when this arbitrariness in fixing MSPs gets combined with the fixed Rs 1-3/kg retail pricing formula under the NFSB.

In 2011-12, the Government incurred over Rs 88,000 crore ($16 billion) as the economic cost of the grains handled by it, while realising slightly over Rs 26,000 crore ($4.7 billion) through their disposal. The FCI’s economic cost for wheat alone is now about Rs 20/kg, against a realisation of Rs 6 or so. Under NFSB, the latter will be Rs 2. And who knows, with progressive reductions in the coming years, it could be virtually free!

The conclusion from all this is as follows: Off-take under the PDS is currently less than allocations as well as procurement. The FCI’s storage gap, at around 40 per cent, will only increase with higher procurement sought under the NFSB — unless the States oblige by augmenting warehousing capacities (which is unlikely). On top of it, there is no single-point accountability on quality or quantity of grains stored, just as the system of MSP fixation follows no norms whatsoever. The nation needs to seriously consider whether the above monolithic mechanism needs to be promoted further under the proposed NFSB law.