Prime Minister, Modi has directed the food ministry to take a look at the recommendations of the Shanta Kumar committee on restructuring and re-orientation of food procurement, handling and distribution system and prepare action points for consideration by the cabinet committee on economic affairs (CCEA).
The committee was set up in the back drop of Modi’s statement in his Independence Day address on August 15, 2014 that his government was considering to trifurcate the operations of monolith Food Corporation of India (FCI) in to three distinct entities each focusing on procurement, handling and distribution with a view to improve efficiency and reduce cost.
This had left an impression that the existing dispensation of government buying ‘unlimited’ quantities of food from farmers at minimum support price (MSP) and meeting requirements of major chunk of population (including millions of better-offs/above poverty line households) would be preserved. Yet, the Kumar committee has made far reaching recommendations that will tantamount to a complete overhauling of extant system.
By ordering immediate action on their implementation, Modi has demonstrated his intent to unleash radical reforms that many thought he won’t dare given deeply entrenched vested interests – including from within his own party – in continuing with the extant dispensation.
So, what is the prescription of the committee? How will it address the maladies afflicting the sector? What benefits it will bring to farmers? How will it help consumers? How will it help improve government’s fledgling balance sheet?
Under Food Security Act (FSA), 2/3rd of India’s population (50% in urban and 75% rural areas) or around 800 million is entitled to 5 kg of food grain per person per month @ Rs 3/2/1 per kg of rice, wheat & coarse cereals respectively. As per government estimate, annual subsidy outgo on this mammoth scheme is about Rs 130,000 crores (as per calculation by Ashok Gulati, ex-chairman, CACP, this is substantially higher at around Rs 200,000 crores).
The committee has recommended a drastic reduction in coverage under FSA from extant 2/3rd of population to 40%. This is a clear acknowledgement that the differential 27% who are proposed to be knocked off actually did not deserve to be supported by government’s subsidy program. In other words, they can fend for themselves buying their food needs at market prices.
Even within the 40% intended to be covered under FSA, only the poorest of poor households included under the Antyodaya scheme will be entitled to supply of food @ Rs 3/2/1 per kg of rice, wheat & coarse cereals respectively with the proviso that they will get 7 kg of food grains per person per month (up from 5 kg they get under extant FSA). The rest will get access at 50% of price paid to farmers.
Considering that as per census done by NSSO (National Sample Survey Organization), a poor person consumes on an average 10 kg per month, the provision for only 5 kg under extant FSA is grossly inadequate. To that extent, committee’s recommendation for increasing this to 7 kg will give him relief by reducing dependence on market purchase at a much higher price.
The package offered by the committee strikes a judicious blend between the overriding need to fully protect the most vulnerable sections of the society on one hand and reducing the burden of subsidy on the exchequer thereby improving the finances of the central government on the other.
The reduction in coverage under FSA to 40% will entail annual subsidy payment of Rs 77,000 crores. However, in view of proposed increase in entitlement to the poor under Antyodaya to 7 kg per person per month, the outgo will be higher at about Rs 100,000 crores. On a net basis, there will still be saving of Rs 30,000 crores vis-a-vis outgo under extant dispensation.
The committee has recommended delegating grain procurement largely to the states, especially in the major grain-surplus regions, and outsourcing storage to the central and state warehousing corporations and the private sector. The FCI will focus chiefly on price-support operations in the eastern region, where distress sales by farmers are quite common for want of official procurement.
Even now, delivery of food through the public distribution system (PDS) is the responsibility of the state governments. While undertaking these operations, they ride piggy back on FCI and claim reimbursements from the centre – for excess purchases made, bonuses paid over and above MSP and in some cases high taxes – bloating subsidy bill to un-manageable proportions.
Decentralization of handling and stocking operations by putting state governments in the driver’s seat will help in reducing cost and reining in subsidy. When, states know that the cost of these operations has to come from their budget, they will be prompted to manage these more efficiently and even cut taxes. The committee’s recommendation for roping in private sector will also help by injecting competition and better utilization of facilities.
It has recommended shift from extant system of subsidizing food – vide selling at low price – to direct transfer of subsidy to consumers in their bank account using bio-metric identification with Aadhaar. Initially, this will be launched in cities with population of 1 million and then, cover food surplus states in next phase. Food deficit states will be covered in the third phase.
Since, under a dispensation of direct transfer, the food seller – be it government authorized fair price shop (FPS) or a private outlet – will sell at full price, there won’t be any scope for leakage or diversion which is rampant under existing system about 50% on an average and substantially higher in several states.
Fertilizers – a major agricultural input – also accounts for a size-able chunk of government’s subsidy burden. As for food, fertilizer subsidy is also delivered vide controlling their sale at low price and compensating manufacturers for the excess of production and distribution cost over this as subsidy. This system too is prone to leakages and black-marketing. Accordingly, the committee has recommended replacing the extant arrangements by a scheme of direct financial support to farmers on per hectare basis. This will yield saving of about Rs 30,000 crores.
Put together, food and fertilizers account for over Rs 200,000 crores of subsidy. Implementation of reforms on the lines recommended by Shanta Kumar committee with emphasis on decentralization and competition and targeting subsidies only to the poor will go a long way in reining in subsidies and yet helping farmers.
Modi has made a good beginning by asking food ministry to prepare a list of action points on committee’s recommendations. He should take it to its logical end by getting cabinet’s approval and setting the stage for implementation within this year.