The Government is considering downward revision of ‘reserve price’ of rice from Rs 2,785 per quintal to Rs 2,250 per quintal for selling food under the Open Market Sale Scheme [OMSS] during the current financial year [FY] 2019-20. However, there is no plan for any revision in reserve price of wheat, and the current reserve price of wheat Rs 2,080 per quintal will continue to prevail throughout the remaining period of 2019-20.
The scheme is run by the ministry of food civil supplies and consumer affairs to dispose off wheat and rice stored in buffer stock [also known as the ‘central pool’] kept by the Food Corporation of India [FCI] – the agency which is 100% owned by the Government of India [GOI]. Foodgrains are sold through tender at a ‘reserve price’ to flour and rice millers and user industries. The reserve price essentially sets a floor below which the ministry won’t sell.
One gets a sense that consumers of food based products will get relief as rice millers and user industries who get their inputs [read: rice and wheat] will pass on this benefit by way of corresponding reduction in the price of their final output. But, there is no guarantee that they will actually do it on ground zero.
The bigger questions we need to address are: What is the rationale of running the OMSS? What prompts the government to sell to industries and millers? Why does it have to reduce reserve price? Why should it at all be in the business of selling food?
The states’ primarily responsibility is governance that involves among others maintenance of law and order, managing external relations, provision for basic services such as water, sanitation, health, education etc, building infrastructure such highways, roads [where private sector may not be inclined to invest]. For the government to get into selling food looks anomalous. Yet, it is very much there.
The genesis lies in its implied commitment to provide food security to every citizen which in 2013 was recognized as a ‘fundamental right’ when the then ruling dispensation under UPA – II enacted the National Food Security Act [NFSA]. As a follow up, the government has taken upon itself the responsibility of arranging supply of food to ‘intended beneficiaries’ at low price unrelated to the cost of procurement, handling and distribution which is higher. The difference between the two is reimbursed as subsidy.
The operations are spearheaded by the Food Corporation of India [FCI] which along with state agencies procures food from the farmers and makes it available to beneficiaries through a network of fair price shops [FPS] spread in every nook and corner of the country. The scale of operations can be gauged from the fact that every year a total of 60 million ton is supplied to a mammoth 800 million persons entailing subsidy outgo of close to Rs 200,000 crore.
To carry out these operations effectively and ensure that requirement of all households are met in full corresponding to given calorie intake, the FCI maintains buffer stock as per specified norms. The task requires meticulous planning and deft execution as even slightest deviation from the expected performance either way i.e. ‘excess’ or ‘shortfall’ can cost the country heavily. Unfortunately, this is where FCI and other state agencies have failed miserably.
The FCI has always kept stocks far in excess of the norm. As on November 1, 2019, this was about 60 million tons [including 23 million tons of rice and 37 million tons of wheat]. This is nearly 100% more than the norm. Apart from adding to the cost of carrying stocks increasing subsidy payments, this creates problems of storage in view of the limited space [the current foodgrain storage capacity in the country is around 88 million tones including 75 million tons covered and 13 million tons covered area plinth (CAP)]. The problem gets aggravated especially when new crop arrives.
The only way this can be redressed is to take out a portion of the existing stocks in the in the central pool to make way for the new arrivals. The government uses precisely this option by undertaking sales under OMSS. During 2018-19, it had sold 8 million tons of wheat whereas during the current year, it plans to sell 10 million tons [or 25% more than last year]. The sale of rice during 2018-19 was 8.5 million tons even as the target for current year is 5 million tons.
These sales are made at substantial loss to the government. For instance, last year, the sale/reserve price was Rs 1900/- per quintal [on an average] as against cost of purchase, handling and storage around Rs 2500 per quintal leading to loss of Rs 600/- per quintal. On total sale of 8 million tons, the loss would be Rs 4800 crore. Likewise, sale/reserve price of rice was Rs 2650 per quintal against cost of Rs 3300 per quintal entailing loss of Rs 650 per quintal. On total sale 8.5 million tons, the loss would be Rs 5500 crore.
On wheat and rice put together, the total loss to the government on sale under OMSS during 2018-19 was thus Rs 10,300 crore with corresponding gain to private firms and traders. During the current year, the reduction in reserve price [as in case of rice] or increase in quantum of sale [as in case of wheat] will result in more losses having to be paid for by higher subsidy. All this is due to poor management of our food procurement and distribution system.
Our systems are flawed both at the policy as well as the operational level. An ‘open-ended’ system of procurement of whatever surplus is offered by farmers [after meeting their own consumption needs] for sale at minimum support price [MSP] results in available storage space bursting at seams. At the same time, sale of these grains at throwaway price of Rs 1/2/3 per kg for coarse grains, wheat and rice respectively under NFSA against the cost of supply [or the market price] being 10-15 times higher results in gargantuan subsidy burden.
The huge gap between the price under NFSA for sale to beneficiaries under the public distribution system [PDS] and the cost of supply [or market price] creates huge arbitrage opportunities leading to leakage/diversion which could be a high of 50% in some states. Even as Modi – government has tried to plug it by using information technology [IT] and aadhar authentication in particular, going by subsidy payments which continues to be high, one wonders whether it has been able to make any dent on leakages.
The traders and private firms get a double bonanza first by way of having direct access to heavily subsidized food [courtesy, leakages under PDS] and second, sourcing grains from FCI buffer stock under OMSS at a price significantly lower than prevailing market price. They all thrive at the expense of tax payers’ money who eventually pays for the burgeoning subsidy on food – all in the name of giving succor to majority of the poor.
The government should take immediate steps to stem the rot. True, every citizen has the right of ‘access’ to food at ‘affordable’ price. But, to ensure this, it need not itself take a plunge into buying and selling of food. It should leave this to market forces. Instead, it should work on creating conditions under which supply-demand is allowed to interact freely and prices settle at reasonable level.
The saving in subsidy a mammoth Rs 200,000 crore annually should be used for giving direct help to the poor households under DBT [direct benefit transfer] and invest in infrastructure viz. rural roads, warehouses, cold storage, IT etc which will help in efficiently functioning markets and lower prices.
Modi should crack the whip on this long pending reform.