2.3. Critical Evaluation of Buffer Stocks in India

There are several problems in operating and designing a sustainable food intervention system. From procurement of grains, to storing the grains to releasing them, the system is handled mainly by the government (although more recently some part of the logistics have been handed over to private contractors, based on tender-auctions) and is plagued with inefficiencies. Some of the inefficiencies are given below:

1. Open-ended procurement: The Government procures for TPDS, OWS and for maintaining buffer/strategic stocks. FCI has to procure a large amount of grain from market due to increasing commitment of government, and has become a buyer of last resort. In 2016-17, Government ended up procuring more than 30% of the marketable surplus of wheat.

2. Procurement Prices have become Support Prices: Procurement prices which were kept for maintaining the buffer stock has virtually become the prices for purchasing whatever amount the farmer offers for sale. The quantity purchased exceeds the storing capacity of FCI and leads to excessive damage of procured grains.

3. One tool serving many objectives: The buffer stocking policy of food grains has become the one tool with the government to fulfill the interlinked objectives of supporting food producers and food consumers, and of ensuring food availability at the national level. Buffer stocking is used to simultaneously tackle the problem of volatility in the price of food grains, provide food security and incentivize high production. Using the same instrument to achieve the objectives of ensuring remunerative price to farmers and providing the procured food grains to the poor at highly subsidized prices creates conflicts. By implication, this entails a huge gap between the purchase price and issue price, and consequently a larger subsidy bill.

4. Inefficient Inventory management: In the absence of clear targets for the stock level, the whole inventory management system of the FCI becomes inefficient and thus costly.

a. First, the FCI’s inventory management policy has a counter-cyclical character. The government should procure grain in times of abundant supplies in the market, and release it in times of scarcity. However, the need to meet the needs of the TPDS and the other food- based welfare schemes, the government not only withholds stocks during a bad crop year, because it expects off-take to be higher than normal, it also steps up its procurement, pushing up prices in an already supply-constrained market.

b. Inefficient Inventory management: Even after allocating to the mandated schemes and maintaining reserves, an excess of millions of tons of grain remains in the FCI godowns. There is no pro-active, pre-defined, sustainable policy practiced for this residual grain. As a policy, such residual grain, which is of good quality, can be released through two channels.

i. It could be released in the domestic market under the open market sale scheme (OMSS)

ii. Grain can be released in the global markets through exports (depending on the prevailing export policy)

Grain of inferior quality or destroyed grain is disposed of as feed, generally at a pre- determined reserve price.

The policy towards international grain trade has been of an ad-hoc nature, with the domestic grain supply and price situation determining the export/import policy every year. Also, there have been frequent bans on grain export. While, OMSS-Domestic remains a failure because the issue prices are always kept higher and poor quality of released grains. Both, the methods have proved inadequate for disposing off the residual grain.

5. Rising cost of Operation: Under grain management, FCI’s main heads of costs are acquisition costs, which include the pooled cost of grain and procurement incidentals, and distribution costs (these are costs involved in the allocation and distribution of grains to various states/UTs under various food- based welfare schemes). To maintain strategic stocks, FCI incurs buffer-carrying costs, which include the cost of warehousing, stock maintenance etc. and this cost of FCI is called “annual rate of buffer carrying cost”. This cost has more than doubled since 2001-02. There has been rise in all the above mentioned costs due to:

a. Higher acquisition cost: MSPs and Bonuses are continuously increasing. Mandi charges, milling charges, administrative charges are increasing as well. The economic costs of FCI for acquiring, storing and distributing food grains is about 40 per cent more than the procurement price.

b. Higher storage costs and losses due to inadequate capacity: FCI’s average annual rate of increase in storage capacity has been a meager 4.5 percent while the growth rate of rice and wheat stocks in the central pool has been more than 18 per cent. Data for the year 2011-12 show that FCI’s storage and transit losses have increased by close to 147 per cent in nominal terms between 2006-2007 and 2011-2012, much of which is accounted for by a 164% increase in storage costs in the period.

6. De-facto nationalization of the grain market: With more than 75 per cent of the marketable surplus procured by the government, very little grain is available for the open market. This lower market supply exerts an upward pressure on prices in the open market, neutralizing much of the consumer benefits that the subsidy provides. Also, the Essential Commodities Act, APMC Act and state government interferences adversely affect the price competitiveness of Indian grain in the international market.

7. Increasing gap between per capita production and per capita availability: Although rice and wheat production rose by 29 per cent between 2000 and 2012, per capita net availability of grains went down by close to 1 per cent. When rising stock levels with the government reduces grain availability for consumption, it counters the whole objective of buffer stocking. The idea was to procure grain and distribute it to the needy to improve the access to and availability of grain. However, if the grain is procured, stored, and not distributed/released when needed, then it could, contrary to the objectives of the system, increase food insecurity.

8. Inefficiencies in the targeted public distribution system: Along with high amount of pilferage, inclusion and exclusion errors, the economic cost of operation has also increased more than 100% in last decade, while the issue price has remained constant. The huge amount of financial implication can be observed by following facts (2014)

a. India’s food subsidy bill has grown more than 25 times (in nominal terms) during the

last two decades

b. it is more than one per cent of annual gross domestic product (GDP) and five per cent of the agricultural GDP

c. and is nearly one-third of all subsidies given by the central government.