The Indian economy is currently facing a slowdown and one of the main reasons for this situation is low demand. In the Union Budget 2020, the Finance Minister had announced that the government would be investing in National Infrastructure Pipeline to boost economic growth. One of the ways to save money to invest in this ambitious infrastructure project is by improving the country’s foodgrain management system, which is facing leakages, losses, corruption and inefficiency. If these issues are addressed through efficient reforms and necessary measures, the government can save at least Rs.50,000 crore, which can be used for infrastructure projects.
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How can the improvement of food grain management help in addressing the economic slowdown?
- In the second quarter of this fiscal year, the GDP growth rate has fallen to 4.5% and the agriculture GDP (GDPA) declined to 2.1%.
- The current hovering of GDPA at around 2% is a cause for great concern as the agricultural sector still employs about 44% of India’s workforce.
- If these individuals do not gain from the growth process, their incomes will remain restrained, leading to a further decrease in the demand for manufactured goods, housing etc.
- Low demand in the economy is one of the main reasons for India’s current economic slowdown.
- The government must boost demand without causing excessive inflation (beyond 6% maintained by the RBI) to boost the economy.
- Furthermore, there is the challenge of maintaining the fiscal deficit target of 3.3%. The Comptroller and Auditor General of India (CAG) had already pointed out that the country’s real fiscal deficit is much more if the loans taken by many public sector undertakings are taken into consideration.
- The government had earlier announced an investment package for the infrastructure of about Rs.103 lakh crore over the next five years.
- One of the ways to finance infrastructure projects without causing high inflation or breaching fiscal deficit target is by addressing inefficiency in the food grain management system under the National Food Security Act (NFSA). This can save at least Rs.50,000 crore per annum.
- The NFSA gives certain quantities of wheat and rice to 67% of the population at Rs.2/kg and Rs.3/kg respectively. The economic cost of these to the Food Corporation of India is Rs.25/kg and Rs.35/kg respectively.
- This led to the government providing Rs.1.84 lakh crore for food subsidy in the last Union Budget.
- The Food Corporation of India currently has unpaid bills of Rs.1.86 lakh crore and it had to borrow more to finance its operation.
- Yet, the grain stocks with the FCI are more than double the buffer stock norms as on 1st January every year.
- This massive accumulation of grain stocks is due to the highly inefficient strategy of food management wherein the food grain procurement remains open-ended and the disbursal of these stocks is restricted to the public distribution system (PDS).
- The open market operations (OMO) is much less when compared to what is needed to liquidate the surplus stocks.
- Now if the rabi procurement is good, the FCI would not have the necessary storage space to accommodate it.
- The money locked in these excessive stocks is more than Rs.1 lakh crore.
- If the government liquidates even half of the excessive stocks, it can get Rs.50,000 crore, which can be used to finance the government’s ambitious infrastructure projects.
How does India manage food grains?
- In 2019, India was ranked 102nd position in the Global Hunger Index out of the 117 countries.
- Considering the excessive food stocks, this is poor performance and is mostly due to ineffective management policies.
- The Food Corporation of India is the nodal agency under the Ministry of Consumer Affairs. It is responsible for:
- Procurement of crop produce at Minimum Support Price (MSP)
- Movement of the crop production to deficit regions
- Public distribution
- maintenance of buffer stocks
- State Government Agencies (SGAs) and Private Rice Miller procure on behalf of the FCI within the states.
- The Food Corporation of India is the only agency that is entrusted with the movement of food grains from the procuring states to the consuming states through a network of storage infrastructure owned by the FCI.
- The individual state governments distribute food grains through the Targeted Public Distribution System (TPDS) and other welfare schemes.
- The food grains are sometimes sold in the open market under the Open Market Sales Scheme to reduce any inflation and increase storage space within states.
- This mechanism of food grain procurement and distribution helps reduce inflation and assure farmers that their produce gets a sufficient price through MSP.
What are the methods used to store the foodgrains?
With the increase in food grain procurement since 2008-09, the Food Corporation of India had to depend on space available through Central Warehousing Corporation (CWC), State Warehousing Corporation (SWC) and the private players. The methods used by these organisations to store food grains include the following:
- Covered storage: This is the most popular storage method used by FCI, CWC and SWCs. It is the method wherein a jute bag is used to store the grains. Grains packed in jute bags are piled inside warehouses or godowns.
- Cover and Plinth (CAP) Method is a method in which the food grains are stored in the open with necessary precautions like rat and damp-proof plinths. This method also makes use of dunnage and covering of stacks with special polythene covers etc.
- Silos: These are tall tower-like structures used to store grains. Silos require 30% less land when compared to the conventional warehouses and can run round the clock, making them more efficient.
- Silo bag technique: Silo-bags is hermetic-type storage made with a plastic bag in the shape of a tube. These bags can protect the grains from rains, UV rays, humidity, dust etc. They are also best suited for short-term, high-volume grains to assist with harvest logistics.
What are the challenges associated with food grain storage in India?
Insufficient storage facilities:
- India currently lacks the necessary storage facilities at the farm level, leading to the damage of grains by pests and insects.
- Furthermore, the storage facilities in the country are unsuitable for long-term storage of grains.
Imbalance in India’s storage capacity:
- A CAG report published in 2013 showed a serious imbalance in the availability of storage capacity.
- It was found that there was a huge shortage of space in storage facilities in consuming states.
- As per the report, out of the total FCI storage space, 64% was located in large procurement states such as Punjab, Haryana, Andhra Pradesh, Uttar Pradesh and Chattisgarh.
- The warehouses or godowns lack the necessary conditions like proper temperature and moisture.
- This seriously harms the quality of grains, leading to damage and wastage of the stocks.
- The grains are infested with moulds and insects because of the lack of safe storage facilities.
- In this context, the 2013 CAG report pointed out that the lack of adequate safe and scientific storage practices led to excessive damage to food grains in the central pools maintained by the State Government Agencies in Punjab and Haryana.
Storage in open space:
- The absence of proper Cover and Plinth storage facilities during the procurement seasons led to stocks being simply deposited into the open spaces without any sort of precautionary measures to preserve these excessive grains.
- This results in damage to stocks due to the seepage of water from the ground due to the lack of proper plinth and the occurrence of floods and rains.
- According to a paper released by the World Health Organisation, Mycotoxins are found in mouldy grains. These are very common in the godowns.
- Mycotoxins are naturally occurring toxins produced by certain moulds (fungi), which can be found in food.
- These cause a variety of health effects and pose a serious health threat to both humans and livestock, ranging from acute poisoning to long-term effects like immune deficiency and cancer.
Lack of adherence to the First-In-First-Out (FIFO) principle:
- Surplus procurement has become a major issue due to the lack of proper estimation.
- Due to the excessive procurement, it has caused a high strain on the storage capacity.
- Not ensuring early disposal of the damaged stock has led to a blockage in the storage space and damage to the existing stock.
Problems with FCI:
- Procedures not on par with safe and scientific storage methods
- Irresponsible management
- Delay in disposal approvals for damaged stocks from FCI
- Land allotment delays by state governments
What does Shanta Kumar Committee recommend?
The government had set up a six-member committee to recommend ways to rationalise storage, procurement and distribution of the crop. This committee was headed by Shanta Kumar. Its recommendations are as follows:
- The committee recommended that the FCI should hand over all the procurement operations of wheat, paddy and rice to states that have gained sufficient experience in this regard and have the necessary infrastructure for the procurement.
- These states include Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab.
- Furthermore, the FCI should accept only surplus grains (after deducting the needs of the states under NFSA) from these state governments to move them into the deficit states.
- Also, the FCI should aid those states where farmers suffer from distress sales at prices much below MSP.
- The FCI should play a pro-active role in providing benefits of MSP and procurement to a larger number of farmers, especially small and marginal ones.
Enhancement of Negotiable Warehouse Receipt System (NWRs):
- Under the Negotiable Warehouse Receipt system, farmers can deposit their produce to the registered warehouses and get about 80% advance from the banks against their produce valued at MSP. Later, these farmers can sell when they feel prices are profitable.
- This system will bring back the private sector, reduce the cost of storage to the government and be more compatible with a market economy.
- The centre, through FCI and Warehousing Development Regulatory Authority (WDRA), can encourage building these warehouses with better equipment and keep an online track of grain stocks with them on a daily/weekly basis.
- In due course, the centre can explore whether this system can be used to compensate the farmers in case the market prices are falling below MSP without physically handling the large quantity of grain.
Revisiting MSP policy:
- Currently, MSPs are announced for 23 commodities. However, the price support effectively operates mainly in wheat and rice, that too only in select states.
- This creates a twisted incentive structure that is more favourable to wheat and rice production.
- While the country is short of pulses and oilseeds (edible oils), their prices often go below MSP without any effective price support.
- Additionally, trade policy works independently of MSP policy, and many times, imports of pulses come at prices much below their MSPs, hampering the diversification.
- The committee recommended that the pulses and oilseeds must be diversified and that the centre must provide better price support operations for them and merge their MSP policy with trade policy so that costs are not below MSP.
- Shanta Kumar Committee had recommended a re-examination of NFSA, its commitments and implementation.
- The leakages in PDS range from 40 to 50% and in some states, it goes as high as 60 to 70%.
- Therefore, the Centre must defer implementation of NFSA in states that have not done end-on-end computerisation, have not put the list of beneficiaries online for verification and have not set up vigilance committees to check pilferage from PDS.
Stocking and movement:
- The Committee recommended that FCI should outsource its stocking operations to various other agencies like Central Warehousing Corporation, State Warehousing Corporation, private sector under Private Entrepreneur Guarantee (PEG) scheme, and even state governments that are building silos through the private sector on state lands (Madhya Pradesh).
- It should be done on a competitive bidding basis, inviting various stakeholders. This is to bring down the storage cost.
- Also, India needs more bulk handling facilities than it currently has.
- Many of FCI’s old conventional storages that have existed for many years can be converted into silos with the help of the private sector and other stocking agencies.
- Better mechanisation of all silos and conventional storage is vital.
- Covered and plinth (CAP) storage should be gradually phased out so that no grain stocks remain for more than 3 months.
- Silo bag technology and conventional storages must replace CAP.
- Grain movement must be containerized to help reduce transit losses.
Buffer stocking and liquidation:
- One of the major challenges faced by FCI is the excessive buffer stocks, leading to the loss of thousands of crores of rupees.
- The FCI must liquidate stocks in open market or export markets, whenever the stocks go beyond the buffer stock norms.
- The current system is extremely ad-hoc, slow and costly.
- Transparent liquidation policies, which automatically kick-in when FCI is faced with stocks that exceed buffer norms, are a need of the hour.
- Flexibility must be provided for the FCI to operate in the Open Market Sales Scheme and export markets.
Direct subsidy to farmers:
- The committee recommended that the farmers should be given a direct cash subsidy.
- This will enable the government to address the imbalance in the fertilizer sector where urea prices are administered at a very low level when compared to other fertilizers.
- This also would help divert urea to non-agricultural purposes and increase the efficiency of fertilizer use.
- Additionally, the direct cash subsidy to farmers can even help those who take loans from moneylenders at exorbitant interest rates to buy necessary inputs, resulting in relief to the distressed agrarian sector.
- The committee called for total end-to-end computerization of the entire food management system, starting from procurement from farmers to stocking, movement and finally the distribution via TPDS.
- It can be done on a real-time basis and some states have already done an admirable job at computerizing the procurement operations.
- However, the movement and distribution in TPDS have been a weak link and that is where much of the leakages take place.
- The FCI must be reformed so that it becomes an agency that focuses on innovations in Food Management System
- It must give higher emphasis on creating competition in every segment of the food grain supply chain so that the overall cost is substantially reduced, leakages are plugged, and it serves a larger number of farmers and consumers.
- This will make the supply chain more streamlined, with a focus on eastern states for procurement, improvement of the entire grain supply chain towards bulk handling and end-to-end computerization by bringing in investment and technical and managerial expertise from the private sector.
What are the initiatives taken by the government to enhance grain storage capacity?
National Policy on Handling and Storage of Food Grains, 2000:
- Its objective is to reduce the losses that occur during the storage and transit of food grains at the farm and commercial levels.
- It also aims to modernise the system of handling, storage and transportation of food grains.
- This policy provided a road map to cut storage and transit losses.
- The steps outlined include:
- Declare food grains storage as infrastructure
- Encourage mechanical harvesting, cleaning and drying at farm and market levels
- Transport grains from farm to silos in special trucks
- Construct chains of silos at receipt and distribution points
- Encourage private players to build grain storage capacities that can be rented to the government.
- Encourage the private sector to develop infrastructure for integrated bulk handling, storage and transportation of food grains.
- In this context, the FCI and the state-run Warehousing Boards have taken several steps to modernise and enhance the storage facilities.
Gramin Bhandaran Yojana:
- It is a capital investment subsidy scheme for the construction/renovation of rural godowns.
- Introduced in 2001-02, the scheme provides a subsidy for the construction/renovation of rural godowns.
- Under this scheme, the project for the construction of godowns can be taken up by any individuals, farmers, groups of farmers, firms, NGOs, SHGs, companies, corporations, cooperatives, federations etc.
Private Entrepreneurs Guarantee (PEG) Scheme:
- This scheme was formulated in 2008.
- Under this scheme, the storage capacity is created by private players, Central Warehousing Corporation or State Government Agencies for guaranteed hiring by the Food Corporation of India.
- The government does not provide any funds or lands for the construction of godowns and full investment is done by private parties or CWC or state agencies.
- After the godown is constructed and taken over by the FCI, storage charges are paid to the investor for a guaranteed period of 9 to 10 years irrespective of the quantity of food grains stored.
What can be the way forward?
- There is a need for bold reforms in India’s grain management system.
- Shanta Kumar Committee has provided the necessary recommendations that can be utilised to address the current shortcomings in this system.
- Other points that need to be taken into consideration are as follows:
- While the poor under the Antyodaya category should continue to get the maximum food subsidy, for others, the issue price should be fixed at 50% of the procurement price (as was done under Vajpayee government for the BPL category).
- The subsidised grain distribution under NFSA should be limited to 40% of the population rather than the current 67%. In this context, the government must provide the exact number of people who are living in extreme poverty in India.
- The rice procurement in the northwestern states of Punjab and Haryana must be limited to prevent further depletion of the groundwater table.
- The government must invite the private sector to participate in grain management.
- If the government takes these initiatives, it can save another Rs.50,000 crore each year.
- It will also help the government to reduce its fiscal deficit.
- Furthermore, if the government liquidates stocks quickly, it can also contain inflation.
The food grain management system in India is highly inefficient, leading to a huge loss for the government. Critically examine the challenges faced by the system and provide the necessary solutions to resolve the same. (250 words)