An absurd situation has developed in regard to the Food Administration of India. While about 40 per cent of India's population is still below the poverty line because they do not have the money to buy their minimum requirements of foodgrains, the government is not having sufficient space for storing its huge and burgeoning stocks of foodgrains which are being carried forward from year to year, adding to the storing costs of foodgrains.

On July 1, 2000, the FCI's stocks had risen to the record level of 42 million tonnes which is 18 m.t. larger than the norm of 24 m.t. and is 10 m.t. larger than the record stock of 32 m.t. on July 1, 1999. The accumulation of such large stocks of foodgrains is due to the fact that during the eight years period upto 1999-2000, the total procurement of foodgrains by the government had exceeded the total sales by 65 m.t. This meant on average, an excess of 8 m.t. in the procurement of foodgrains every year. During 1993-94 and 1994-95, the excess was higher at 12 m.t. and in 1999-2000, the excess was a record 16 m.t. which was equal to the sale during that year. ( Table I)

The carrying forward of the large quantities of foodgrains from year to year has resulted in substantial increases in the amount of interest paid to the banks for the amounts borrowed by the FCI for the procurement of foodgrains. On the basis of the ex-godown prices, the 42 million tonnes of foodgrains held by FCI on July 1, 2000 had a value of over Rs 42,000 crores. And all these stocks had been purchased by the money borrowed from the banks at high rates of interest. The amount of interest paid to the banks is a major cost of the FCI and increases in this cost is a loss of the FCI. In addition to this cost, FCI expends substantial amounts on procurement, storage and distribution and also incurs substantial losses due to wastage and pilferage. A new kind of loss on account of the large and unmanageable size of foodgrains stocks had come to light in 1996 when it was found that some senior officers in the FCI had diverted about 3 million tonnes of foodgrains to non-existing firms with a view to deriving personal gains. The scam was referred to the Punjab and Haryana Court for trial and judgement.

Economic cost

The rising costs and losses have resulted in substantial increases in FCI's Economic Cost of foodgrains. Between 1991-92 and 1998-99, FCI's Economic Cost had risen from Rs 391 to 808 per quintal in case of wheat and from Rs 497 to 980 per quintal in case of rice. Because of the large increases in the Economic Cost of FCI the amount of subsidy paid by the government to FCI on its sale of foodgrains had risen from Rs 2,850 crores in 1991-92 to Rs 8,700 crores in 1998-99. But, this more than three-fold increase in the amount of subsidy had taken place in spite of the fact that FCI's sale of foodgrains at 19 m.t. in 1998-99 was equal to the sale in 1991-92. Consequently, the per quintal subsidy paid by the government to the FCI had risen from Rs 150 in 1991-92 to Rs 458 in 1998-99 which means more than three-fold increase in eight years time. (Table I)

It is important to note that the large increases in the amount of subsidy is not due to increase in the FCI sale of foodgrains but due to the large increase in the Economic Cost of FCI. And, the large increase in the Economic Cost of FCI is due to rank inefficiency, gross mismanagement and pervasive corruption at every stage of its operations.

Dual pricing

During 1999-2000, government introduced the dual pricing system under which foodgrains were sold to the Below Poverty Line (BPL) (poor) families at half of the Economic Cost and to the Above Poverty Line (APL) (non-poor) families at 90 per cent of the Economic Cost. This resulted in some increase in the offtake by the BPL families mainly due to the millions of APL families having turned BPL families for taking advantage of the comparatively much lower issue prices for them. But, offtake by the APL families recorded substantial fall because millions of such families had shifted to the open market where better quality foodgrains were available at lower prices. The consequential fall in the total offtake coupled with the increase in procurement of foodgrains resulted in the stocks of foodgrains showing a record growth of 10 million tonnes in one year and rising to the record level of 42 million tonnes on July 1, 2000.

Because of the dire necessity of having storing space for the large quantities of rice procured from the new crop the government planned to sell large quantities of wheat by reducing its price to Rs 700 per quintal against the Economic Cost of Rs. 900 per quintal. But, the government could not sell any substantial quantities of wheat on account of the low prices in the open market and the prospects of the prices remaining low because of the record wheat crop of 74 million tonnes in 2000 after a bumper wheat crop of 71 million tonnes in 1999.

The government explored the possibilities of offloading some quantity of wheat through loaning or barter, but, all in vain. The government has remained saddled with huge stocks of foodgrains which cannot be sold and cannot be exported because of the high Economic Cost of FCI. The Subsidy for 1999-2000 is estimated at Rs. 8,200 in the budget, but, it is expected to be around the higher figure of Rs 8,700 crores because of (i) the substantially higher amount of the subsidy for the BPL families, who have accounted for the bulk of the offtake during 1999-2000, and (ii) large increase in the carrying cost of the record stocks of foodgrains. On the basis of the subsidy of Rs 8,700 crores during 1999-2000, the per quintal subsidy works out to Rs 544 which is about equal to the procurement price of Rs. 550 for wheat. This is an absurd situation.

The government has been caught in an extremely difficult and embarrassing situation. But, this situation is entirely of its own making. During the past 35 years, the government has been ignoring and even doing just the opposite of what had been recommended by the various expert committees of eminent economist appointed by the government itself. This is apparent from the working of the Public Distribution System (PDS) since its inception in 1965.

The PDS

The Public Distribution System had been started in India with the establishment of the Food Corporation of India (FCI) on 1-1-1965. Actually, the planners and economists have always been opposed to the PDS because of the principle that State should not involve itself with buying and selling of commodities and should restrict itself to exercising control over those involved in it. The entire question of FCI handling the buying and selling of foodgrains was referred to the Foodgrains Policy Committee formed under the chairmanship of Professor M.L. Dantwala, an eminent economist of India.

In its report submitted to the government on 15-9-66, the FPC says: “It has to be remembered that purchase operations by a single large buyer tend to raise prices much more than by a large number of small buyers. Government's purchase prices are likely to turn out to be so high that neither the objective of holding the price-line, nor that of equitable distribution to all, including the low-income groups, can be expected to be achieved. It would be a different matter of course, if the country is prepared to bear a crippling burden of a very large subsidy. We do not recommend it.” (page 37)

The FPC had strongly opposed government's involvement with the procurement and sale of foodgrains. But, the government held the views of the FPC as contrary to the tenets of socialism which stipulates State control over production and distribution of all essential services and commodities. The FPC had to relent under great pressure from the government. It agreed to the functioning of the FCI, but laid down stringent conditions for compliance. The FPC explicitly recommended that “FCI should strive to reduce the cost of procurement, handling and distribution of foodgrains by rationalising their operations and, ultimately, set norms for the government and the private trade. (page 52).

But, the FCI flouted all conditions laid by the FPC and its handling charges have been rising ever since its inception in 1965. This has resulted in a rising trend in the amount of food subsidy paid by the government to the FCI. The food subsidy which was only Rs. 71 crores in 1970-71 had risen to Rs 650 crores in 1980-81 and to Rs 2,200 crores in 1987-88. In June 1988, the government asked the Bureau of Costs and Prices (BICP) to review the cost structure of FCI and suggest ways and means for controlling the trend for large increases in the amount of subsidy. In their report submitted to the government in July 1990, the BICP made the following recommendations:

1. Food subsidy should be calculated on the basis of normative costs and not actual costs.
2. Issue prices of foodgrains should at least be 75 per cent of the market prices in general and about 90 per cent of the market prices in case of high quality foodgrains.
3. Grain losses in transport should be reduced by allowing private transport contractors to operate along with the state agencies.
4. Forty lakh tonnes of foodgrains should be released by the FCI into the open market with a view to reducing the burden of subsidy and bringing down prices in the market.
5. Government should enter international forward market for foodgrains because it will enable it to reduce the stocks held in buffer for price stabilisation operations during the drought years, and, thus, cut down operational costs and the amount of subsidy, especially when there are large leakages from stocks. The government transactions in international forward marketswill also curtail speculative hoarding of stocks by traders during critical times of shortages.
6. Forward Market Commission should be set up for domestic market for a select number of foodgrains.
7. Dismantling of the PDS will benefit the large majority of the poor who are not covered by the PDS because the large quantity of foodgrains which is kept in the FCI godowns will remain in the market and reduce the prices of foodgrains.
In February 1992, the Commission for Agricultural Costs and Prices (CACP) demanded a fresh look at all aspects of the management of food economy in general and the PDS in particular, and made the following recommendations:
1. The government should reduce its commitment of foodgrains distribution by limiting it to the really poor only.
2. The rate of subsidy should be reduced in a period of three years. The Eighth Plan (1992-97) says that a concerted effort will be made during the plan period for limiting the PDS benefits to the poor families only.

The three myths.
The PDS should have been discontinued or curtailed considerably in accordance with the recommendations of the various Committees and the Eighth Plan. But, the government allowed the PDS to function by covering its large and fast growing losses by paying subsidies to the FCI. The Socialists of different hues in the Parliament were of the view that state control over the supply of essential needs of the people is an integral part of socialism, and, therefore, PDS should be supported, whatever the cost. And, the Congress government in the Centre was minority government and for remaining in power it needed the support of socialists and communists in the Parliament. But, the government tried to justify the functioning of PDS by spreading the myths that: (i) it halps the poor by supplying cheaper foodgrains;
(ii) it prevents inflationary increases in prices; and
(iii) it helps the farmers by purchasing their foodgrains. These three myths stand demolished by government's own data and statistics published from time to time, as may be seen from the following paras.

In 1999, PDS covered 165 million people, out of which 60 million were below the poverty line. These 60 million poor formed only 1/6 of the 360 million poor in India. The remaining 5/6 or 300 million poor remained dependent upon the market where prices of foodgrains had risen because of the very large purchases made by the FCI. A system which seeks to help 1/6 of the poor by adding to the miseries of the remaining 5/6 of the poor by raising the prices of foodgrains cannot be called a system that helps the poor. Therefore, the myth that PDS helps the poor stands demolished.

The argument that PDS prevents inflationary increases in prices of foodgrains is also a myth and the truth is that PDS itself raises the prices of foodgrains in the market by making inordinately large purchases of foodgrains and, thus, reducing the availability in the market. All the Committees appointed by the government and the Eighth and the Ninth Plan has recommended that government should reduce their procurement of foodgrains and restrict their operations to the really poor families of the society.

As may be seen from (Table I), government procurement of foodgrains had formed 11 per cent of its production in 1970-71 and 12 per cent of the production in 1980-81. This proportion had risen to 18 per cent in 1990-91. In 1999-2000, government had procured as much as 20 per cent of the production of foodgrains which formed 4/5 of the total marketable surplus of about 25 per cent of production. The FCI has, thus, emerged as the biggest hoarder of foodgrains in India.

Hoarding inevitably leads to increase in prices and large hoarding leads to large increases in prices. No wonder, therefore, that the prices of foodgrains have been rising faster than prices of the manufactured articles in spite of the large increases in the production of foodgrains and the huge stocks of foodgrains with the FCI.

Between 1986-87 and 1998-99, the wholesale price index with 1981-82 as the base had risen from 130 to 419 for foodgrains: from 132 to 334 for manufactures and from 134 to 353 for all commodities. This significantly larger increase in the prices of foodgrains makes a nonsense of the claim that FCI operations control the prices of foodgrains. The comparatively larger increase in the prices of foodgrains is more hurtful for the poor because about 5/6 of them buy their foodgrains from the market and a very large part of their income is spent on buying of foodgrains.

The large increase in the prices of foodgrains is largely due to large increases in the margins of the FCI. In 1965 when FCI was constituted, private traders used to have a margin of 10 per cent per quintal of wheat and the FPC had recommended that FCI should keep its margins low with a view to reducing the margins of the traders. But, the margins of FCI have risen to about 4-5 times of the margins in 1965. And, the traders have also raised their margins accordingly. (Table II)

The very high margins of FCI have also resulted in the farmers not getting proper price for their foodgrains. Between 1991-92 and 1998-99, the procurement price of wheat has been about 2/3 of the Economic Cost of wheat (Table II). The margin charged by the FCI has, thus, been about 1/2 of the procurement price paid to the farmer.

After taking into consideration, retailers' margin also, the share of producer in the consumer's rupee comes to about 60 paisa only. This is a very low return to the producer and cannot give him proper incentive for increasing productivity and production of his land. For being able to increase producer's share in consumer's rupee the margin of the FCI will have to be reduced.

Summing up

The long period of over 35 years of the functioning of PDS is an example of deductio absurdum i.e. pursuing wrong policies to the point of reaching a manifestly absurd situation. In 1997, Shri C. Subramaniam the former Agriculture Minister. had suggested that FCI should be disbanded and decentralised arrangements should be made for sale and purchase of foodgrains in the country.

Organiser has been repeatedly pointing to the flaws, fallacies, follies and failures of the PDS. Organiser issue dated 11-5-1997 includes an article titled “For a Decentralised Sale and Purchase of Foodgrains.” This article enumerated certain basic principles of a rational policy of Food Administration for India, which are reproduced below:

1. Farmers' Cooperatives should be organised.
2. These Cooperatives should give loans to the farmers against hypothecation of their crops.
3. Loans should be adjusted against the value of the produce after it is sold.
4. Cooperatives should decided as to when and at what price the produce should be sold.
5. Cooperatives should be given loans by the State government, the Central Government and banks.
6. The poor should be covered by a suitable system of food stamps.
An extremely important endeavour on these lines has been made by the Australian Wheat Board (AWB) and, consequently, a grower owned and controlled commercial structure has been operating there since July 1999.

Foodgrains Procurement Sale and Subsidy
Year	Production	Procurement	Sale	Total Subsidy (Rs. crores)	Per quintal Subsidy (Rs.)
	Million Metric Tonnes
1970-71	66	7(11)	9	71	8
1980-81	90	11(12)	15	650	43
1990-91	129	23(18)	15	2450	163
1991-92	130	17(13)	19	2850	150
1992-93	130	18(14)	18	2800	156
1993-94	140	27(19)	15	5537	369
1994-95	147	25(17)	13	5100	392
1995-96	139	22(16)	15	5377	358
1996-97	151	20(13)	20	6066	303
1997-98	149	24(16)	17	7500	441
1998-99	157	30(19)	19	8700	458
1999-2000	157	32(20)	16	8700	544

Notes: 1. Foodgrains in this table mean rice and wheat only. 2. Figures in brackets indicate procurement as percentage of production. Source: Indian Economic Survey 1999-2000

II Economic Cost and Margins of FCI Wheat

(Rs. per quintal)
Year	Procurement Price(Rs.)	Economic Cost(Rs.)	Margin of FCI Col 2-1
			Rs.	%
	1	2	3	4
1991-92	275(70)	391	116	42
1992-93	330(65)	504	174	53
1994-95	360(65)	51	191	53
1995-96	380(65)	584	204	54
1996-97	475(74)	640	165	35
1997-98	510(64)	801	291	57
1998-99	550(68)	808	258	47

Notes: Figures in brackets indicate procurement price as percentage of Economic Cost. Source: Indian Economic Survey 1999-2000