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http://www.insightsonindia.com/2014/11/17/agriculture-procurement-buffer-stock-fci-reforms-pds/

Agriculture: Procurement, Buffer Stock, FCI Reforms and PDS

By INSIGHTS

..
Food Corporation of India
1. Procurement
2. Storage
3. Operational Stock
4. Strategic and Buffer stock
5. Open Market Sale Scheme
6. FCI reforms
7. Entrepreneur Guarantee Scheme
Public Distribution System
1. Identification of Beneficiaries
2. Food Security Act
3. Other Welfare Schemes
4. Central Issue Price and Economic Cost
Topics from Syllabus Covered
1. GS paper 2
1. Government policies and interventions for development in various sectors and issues arising out of
their design and implementation.
2. Welfare schemes for vulnerable sections of the population by the Centre and States and the
performance of these schemes; mechanisms, laws, institutions and Bodies constituted for the
protection and betterment of these vulnerable sections
3. Issues relating to poverty and hunger.
2. GS paper 3
Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution
System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security;
Technology missions; economics of animal-rearing.

In previous 2 articles we covered agricultural inputs, issues related to input subsidies and pricing policy of the
government along with WTO. Next most deserving issue comes out be procurement, storage, domestic and
international trade. These stages are also heavily controlled by government. Minimum Selling Price regime forces
government for an open ended procurement policy. This takes away discretion of FCI both in determining
quantity to bought and price to be paid. Grains are squeezed out of open market and land into Godowns. Further,
even grain which is left in open market and notified under APMC are meant to be brought to agricultural markets
for sale and this increase costs and delays the movement of products in value chain. There are other interventions
too, such as interstate cesses and taxes which further add upto the costs. Government has made relentless
efforts to remove these hindrances, but agriculture being a state list subject has met with very limited success.
A. Food Corporation of India
It was formed in 1960s and was part of larger plan directed toward food security and self-sufficiency. Other major
institution was CACP. These two institutions along with MSP regime and Public distribution system were
expected to work in tandem. FCIs responsibility was to procure, Store and discharge grains as per policy of the
government. Over the time, as in other cases these institutions too failed to adapt to changing circumstances
such as changing demands of economy. As a result FCI now reels under chronic inefficiency through huge
wastages, and storage cost of grains keeps on cumulating.
FCI deals in rice, wheat and coarse grains only. NAFED deals with pulses and oilseeds
1. Procurement
As we have already learned that government is buyer of last resort and due to rising MSPs, government most of
the time becomes preferred customers to farmers. In past few years government is buying about a third of total
food grain production. New Food Security Act changes the situation dramatically. Previously, government had to
distribute subsidized foodgrains only to below poverty line people and those covered under Antyodaya Anna
Yojna (about 2.5 crore families). But now government is committed to provide food to 50% of urban and 75% of
rural population at even higher subsidy. Act is expected to Increase procurement significantly.
FCI follows two models of procurement viz. centralized and decentralized procurement.
The decentralized procurement was introduced by the Government of India in 1997-98 where states, which
voluntarily become part of this program, procure, store and distribute food grains under the targeted public
distribution system (TPDS) and other welfare schemes (OWSs), on behalf of the central government. The idea
was to enhance the efficiency of the process by encouraging local participation. All expenses are centrally met. In
Centralized procurement, grain is first moved to FCI godowns and then reallocated to states. This results in extra

expenditure on storage and transportation. Currently, only 10 states undertake decentralized procurement.
Functions of FCI
-To procure foodgrains
-To Maintain operational stock and buffer stock for food security
-Allocation of grains to state
-Selling grains to state at Central Issue Price
-Distributing and transporting grains to state
(Procure Stock AllocateSellTransport)
2. Storage
For what purposes FCI maintains stock of food grains?
All countries maintain some backup to tackle with any possible food crises due to Drought or any other natural
calamity. At times there can be violent fluctuations in prices of important commodities due to macroeconomic
imbalances for e.g. due to short term price rises in production can soon shift from essential food crops to cash
crops. Countries have two options to secure, either to maintain physical stock of foodgrains or to maintain enough
FOREX reserves so that at time of crisis country is able to import sufficient stocks. In case of latter country can
lose its own capacity to intervene.
In aftermath of LPG reforms, India struck to its policy of maintaining sufficient physical stocks, in spite of pressure
from developed countries in forums such as WTO. In contrast most of ASEAN countries turned away from
physical Stock toward international market. In year 2007 there was food prices crisis due to low global production,
which pushed global agro prices higher. Indias stocks saved it from any hardship, but ASEAN countries had to
spend substantially higher FOREX reserve to overcome the shortage.
Further, in developed countries big agro corporations maintain huge inventory of agricultural products. And they
have to depend lesser upon government support. Again, in India private sector despite having promising future
doesnt yet have capacity to take care of any crisis.
Another major reason for stocking of food is to serve worlds largest public distribution system. As already said,
passage and implementation of FSA is expected to raise procurement upside, which in turn will raise need for
stock maintenance.
Last but not least, FCI under an open ended policy has no option but to buy whatever is offered to it by farmers.
So unless a similar policy of regular disbursement is not followed, stocks will keep piling up.
These points makes stocking of food grains imperative. But, on the grimmer side Indias stock are almost double
than it needs and per year carrying cost of grain is as high as Rs 5 per kg. Carrying costs Include rent,
management, maintenance and interest on money blocked in stock. This coupled with pilferage, theft and quality
deterioration fails whole concept and turns a virtue into vice.

1. Operational Stock :
Operational Stocks are defined as the minimum quantities required for running the TPDS/NFSA and Other
Welfare Schemes until quantities procured from the new crop. These are made out of current year
production and are meant to be consumed in following year.
It should be noted that new wheat comes into market every year in April and most of the rice comes
October, more particularly in north. But consumption and disbursement is almost even throughout the year.
While maintaining Operational stocks intra-year variations are taken care of and in case of buffer stocks,
inter year variations are considered.
2. Strategic Stock and buffer stock
FCI maintains stocks of grains in excess of what is needed for meeting operational needs, and these
stocks are called strategic stocks. Buffer stocks are part of strategic stock. In addition to buffer norms,
government has prescribed a strategic reserve of 3 million ton of wheat in 2008 and 2 million tons of rice in
2009. So, total strategic reserves are 5 million tons. Theres a bit lack of clarity regarding terminologies.
(Strategic reserves = Buffer stock + Strategic reserves)
The government fixes the buffer stock norms, prescribing the minimum quantities of food grains (wheat
and rice) to be maintained in the central pool at the beginning of each quarter, namely for January, April,
July and October.
How buffer stock is determined?
A Technical Group, chaired by the Secretary of the Ministry of Food, with representations from the Ministry
of Agriculture, FCI, Planning Commission and Ministry of Consumer Affairs, periodically evaluates both the
levels and composition of buffer stocks of food grains (rice, wheat and coarse cereals) to be maintained
through the year with both the central pool (with FCI) and with the states.
Technical group determines buffer stock scientifically and taking into account production and
consumption/offtake by states patterns of the past, and expected patterns of future. For e.g. In last 12
years only twice (in 2002 by 12.4% and 2009 by 5.83%) cereal output declined. So, something like
average of 12.4 % and 5.83% can be a factor in determining requirement of backup stocks.

3. Open market Sale Scheme

This is a price control mechanism. As we know Central Pool of foodgrains has been created primarily to
maintain a minimum buffer stock for meeting the unforeseen exigencies like drought, flood and other
natural calamities and also for providing foodgrains required for Public Distribution System and the other
foodgrains based welfare program of the Government. In addition, the FCI on the instructions from the
Government has been resorting to sale of foodgrains i.e. wheat and rice at predetermined prices to the
open market from time to time to achieve the objectives as under:-To enhance the supply of foodgrains especially during the lean season and thereby to have a healthy and
moderating influence on the open market prices.
-To offload the excess stocks in the Central pool and to reduce the carrying cost of foodgrains to the extent
possible.
-To save the foodgrains from deterioration in quality and to use foodgrains for human consumption.
-To release valuable storage space for stocks procured during the ensuing marketing season of wheat /
rice
FCI reforms
FCI has no discretion at all in any of the matters. Food Corporations of India Act, 1964 lays down that all its
operations will be financed by the Government of India. FCI does not even have a profit and loss account.
As we have seen procurement is open ended, MSPs and bonuses are beyond FCI. Neither quantity for
buffer stock nor distribution through TPDS or other welfare schemes is in its hands. There are many
suggestions to revamp FCI including breaking it into 3 entities, one for procurement, storage and
disbursement each. Other one is fully decentralize FCI and its operation in hands of state. But these efforts
can bring comparative better practices but not any radical change. For this to work, whole value chain from
MSPs to PDS is needed to be considered under a single integrated policy.
Lets say, in place of MSP, income support policy is adopted, in which farmers will get income support on
basis of land they hold and they wont get some different benefits as per crop. In this scenario, FCI will
have to purchase at market prices and this can end its open ended procurement and maintain stock
precisely required for buffer and operational purposes. If farmer is getting income support (or even direct
benefit transfer) it will make no difference to him whether he sells in market or FCI.
On other hand, if for FSA and TPDS, government adopts direct transfers, then again FCI will get its whole
economic cost recovered and grains will be sold on market prices.
This will make grain much cheaper as -It will reduce carrying costs.
-It will result in good quality sale, less pilferage etc.
Government recently formed high-level committee on restructuring Food Corporation of India (FCI) to suggest for
reforms in FCI.
There are three storage agencies- Food Corporation of India (FCI), Central Warehousing Corporation and
State Warehousing Corporations. The storage capacity could be either owned by these agencies or be hired
from private owners. The grain is stored either in covered godowns, or silos or in uncovered godowns called
covered and plinth (CAP). The storage capacity here is the grand total storage capacity of all the three agencieshired/owned and covered/CAP
Storage capacity with FCI is largest and it is increasing reasonably. But capacity under Cover and Plinth is
increasing faster than covered ones. CAP is unscientific and FCI is recommended to store only operational or

temporary stocks here. Here quality deterioration, pilferage and theft is substantially higher.
CAP storage is an indigenous method developed by FCI, whereby foodgrains are stored in the open with
precautions such as rat and damp proof plinths and covering of stacks with specially fabricated polythene covers
etc.
Entrepreneurs Guarantee Scheme
Private sector is being roped in to create capacities for the government (on a five to ten year guarantee period)
under the Private Entrepreneurs Guarantee (PEG) Scheme since 2008; the progress has been tardy as private
entrepreneurs do not find it profitable.
As against the buffer norm of 16.2 million tons and strategic reserves of 5 million tons, total foodgrains
storage in the FCI godowns was reported at 57.38 million tons as on August 1. Currently rice and wheat are
released from godowns after 24 and 36 months respectively. Food Ministry issued orders to bring this period
down to 18 months. It was decided that 10 million tons of wheat and 5 million tons of rice will be released in the
market. Consequently now, as per news stocks has come down substantially and newly procured rice will not be
stored under cover and Plinth. This also partially explains recent cooling of CPI inflation.
Transportation In addition to this, transportation of grains from FCI/ CWC godowns to state godowns is with
FCI and from State Godowns to Fair Price Shops is of State
B. Public Distribution System
PDS was 1st introduced in post WW2 period due to crippling food shortages and then in times of food crisis of
1960s was significantly expanded. In early days it was Universal subsidized delivery, in 1990s Revamped PDS
was launched to include hilly and inaccessible areas, then finally Targeted PDS was introduced.
In 2001 Public distribution system order was passed under ESSENTIAL COMMODITIES ACT ,it governs rules
regarding identification of beneficiaries and commodities to be included .
Identification of beneficiaries
-National Sample Survey Organization -Every 5 years Identifies BPL based on per capita consumption
expenditure
-Ministry of rural development through BPL surveys provides Criteria for inclusion or exclusion
-States finally identify eligible Households
-Planning commission make state wise list of identified households
-Central govt. Allocates Food grains to each state based on above.
This is current system, and
Enactment of Food security Act has done away need for BPL based identification. As Food security act is currently
implanted by only 11 states, other states are following BPL based system. Still identification will be done by state
governments only and Socio Economic Caste Census will be instrumental in this.
States can also increase entitlements at their own expense. Tamil Nadu, Chhattisgarh and Madhya Pradesh are
proving
National Food Security Act,2013

1. Coverage and entitlement under Targeted Public Distribution System (TPDS): Upto 75% of the rural
population and 50% of the urban population will be covered under TPDS, with uniform entitlement of 5 kg
per person per month. However, since Antyodaya Anna Yojana (AAY) households constitute poorest of the
poor, and are presently entitled to 35 kg per household per month, entitlement of existing AAY households
will be protected at 35 kg per household per month.
2. State-wise coverage: Corresponding to the all India coverage of 75% and 50% in the rural and urban
areas, State-wise coverage will be determined by the Central Government. Planning Commission has
determined the State-wise coverage by using the NSS Household Consumption Survey data for 2011-12
and also provided the State-wise inclusion ratios.
This means that coverage ratio will be different for states. Poor states will get more than 75% and 50%
of coverage and rich states will get lesser coverage
3. Subsidized prices under TPDS and their revision: Foodgrains under TPDS will be made available at
subsidized prices of Rs. 3/2/1 per kg for rice, wheat and coarse grains for a period of three years from the
date of commencement of the Act. Thereafter prices will be suitably linked to Minimum Support Price
(MSP).
4. In case, any States allocation (of food grain from FCI) under the Act is lower than their current allocation, it
will be given atleast average offtake during last three years, at prices to be determined by the Central
Government.
Existing prices for APL households for wheat and rice has been determined as issue prices for the
additional allocation to protect the average offtake during last three years.
5. Nutritional Support to women and children: Pregnant women and lactating mothers and children in the
age group of 6 months to 14 years will be entitled to meals as per prescribed nutritional norms under
Integrated Child Development Services (ICDS) and Mid-Day Meal (MDM) schemes. Higher nutritional
norms have been prescribed for malnourished children upto 6 years of age.
6. Maternity Benefit: Pregnant women and lactating mothers will also be entitled to receive maternity benefit
of not less than Rs. 6,000.
7. Women Empowerment: Eldest woman of the household of age 18 years or above to be the head of the
household for the purpose of issuing of ration cards.
8. Cost of intra-State transportation & handling of foodgrains and Fair Price Shop Dealers
margin: Central Government will provide assistance to States in meeting the expenditure incurred by them
on transportation of foodgrains within the State, its handling and FPS dealers margin as per norms to be
devised for this purpose.
9. Food Security Allowance: Provision for food security allowance to entitled beneficiaries in case of nonsupply of entitled foodgrains or meals.
10. Penalty: Provision for penalty on public servant or authority, to be imposed by the State Food Commission,
in case of failure to comply with the relief recommended by the District Grievance Redressal Officer.
Other Welfare Schemes
Apart from TDPS and Food Security Act, there are number of other schemes for which FCI stocks and issue
grains. Important among them are
1. MID-DAY MEAL SCHEME by Ministry of Human Resource Development
The Scheme presently covers students of Class I-VIII of Government and Government aided schools,
Education Guarantee Scheme/Alternative and innovative Education Centers. It was launched with a view
to enhance enrollment, retention, attendance and simultaneously improving nutritional levels among
students in primary schools.

2. WHEAT BASED NUTRITION PROGRAMME (WBNP): by Ministry of Women & Child Development
The foodgrains allotted under this Scheme are utilized by the States/UTs under the Integrated Child
Development Scheme (ICDS) for providing nutritious/ energy food to children below 6 years of age and
expectant/lactating women.
3. ANNAPURNA SCHEME by Ministry of Rural Development
Needy senior citizens of 65 years of age or above who are not getting pension under the National Old Age
Pension Scheme are provided 10 kgs of foodgrains per person per month free of cost under the scheme.

4. RAJIV GANDHI SCHEME FOR EMPOWERMENT OF ADOLESCENT GIRLS (RGSEAG) SABLA

By Ministry of Women & Child Development
The Scheme aims at empowering adolescent girls of 11-18 years by improvement of their nutritional
and health status and upgrading various skills like home skills, life skills and vocational skills. It also
aims at equipping the girls on family welfare, health hygiene etc. and information and guidance on
existing public services along with aiming to mainstream out of school girls into formal or non-formal
education. The requirement of food grains under the scheme for nutrition is @ 100 grams of grains per
beneficiary per day for 300 days in a year
Central issue Price (CIP) and Economic Cost
CIP is the price at which food grains are issued by FCI to states. CIP are different for APL and BPL
beneficiaries. For APL beneficiaries, CIP is equal to the economic cost of the foodgrains, which includes
procurement, storage, interest and transportation cost. For BPL CIP is same as was fixed in 2000.
Interestingly, APLs CIP (at economic cost of Rs 8.30 per kg in the case of rice and Rs 6.10 per kg for
wheat) which was fixed in 2002 is still continuing and in effect APLs to whom subsidy is not intentionally
directed are still getting subsidized food.
Given these problems direct benefit transfers seems to be best bet. In some developed countries food
coupons are used. Government issues coupons which entitle holder to get subsidized things or benefits.
This coupon comes back to state agency who is then compensated by government as per value of coupon.
Role of FCI in ensuring food security in India is magnificent. It is in center of Indian Agro-economy and any
tinkering with structure or process cant survive in isolation. Reform in FCI perhaps is biggest part of
general economic reforms in the country. It needs to work toward efficiency and cost effectiveness, and live
upto its purpose of food security. It is said that for every 1 kg that reaches beneficiary FCI releases 2.5 kg
grain. This, if true, is unethical negligence. It would mean substantial amount of grain is being diverted into
black markets.
Another data provided by NSSO claims that 5 kg provided at subsidized rates fulfils just fewer than 50% of
needs of an average individual (10.2 kg and 9.8 kg/month is rural and urban areas respectively). As a
result, still he has to get 5 kg grains from open market. To provide this 5 kg grains at highly subsidized rate,
there is huge web of inefficient, underperforming and struggling institutions and systems (that we just
studied). It is often doubted that these push costs of grains in open market substantially higher. In last few
years Indias comparatively much higher food inflation indicates toward this.
Agricultural policy ought to leave more than sufficient grains in the open market, it is only then market
forces will able to work
Questions
1. Explain need for reforms in FCI. What steps government has taken so far?
2. Is farmers interest for high crop realization, contradictory publics concern for low food prices?
3. What impact does food security act has on current PDS system?
Next Article
5. Agriculture Products Market Committee
-Model Act
-Issues with Model Act
6. Stock Limits under Essential Commodities Act

7. Interstate Movement Barriers

8. Future and derivatives in Agro products
9. International Trade in Agro Products

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