Recommendations of High Level Committee on

restructuring of FCI
High Level Committee (HCL) on restructuring of Food Corporation of
India (FCI) has submitted its report to the Government. It was submitted by Shri
Shanta Kumar, Chairman of the Committee to the Prime Minister, Shri Narendra
Modi yesterday. The HCL was set up by the Government on 20 th August, 2014.The
major issue before the Committee was how to make the entire food grain
management system more efficient by reorienting the role of FCI in MSP
operations, procurement, storage and distribution of grains under Targeted Public
Distribution System (TPDS).
The Committee had wide consultations with several Chief Ministers, Food
Secretaries and other stakeholders in various States. Suggestions from public were
invited through various newspapers also. Executive Summary of the report is as
followsBackdrop:

Government of India (GoI) set up a High Level Committee (HLC) in

August 2014 with Shri Shanta Kumar as the Chairman, six members and a
special invitee to suggest restructuring or unbundling of FCI with a view to
improve its operational efficiency and financial management. GoI also asked
HLC to suggest measures for overall improvement in management of
foodgrains by FCI; to suggest reorienting the role and functions of FCI in
MSP operations, storage and distribution of foodgrains and food security
systems of the country; and to suggest cost effective models for storage and
movement of grains and integration of supply chain of foodgrains in the
country.

The HLC had wide consultations with various stakeholders in its several
meetings in different parts of the country. It also invited comments through
advertisements in newspapers and electronic media. HLC would like to
gratefully acknowledge that it has benefitted immensely from this
consultative process, and many of its recommendations are based on very
intensive discussions with stakeholders.

In order to conceive reorienting the role of FCI and its consequent

restructuring, one has to revisit the basic objectives with which FCI was
created, and what was the background of food situation at that time. It is
against that backdrop, one has to see how far FCI has achieved its
objectives, what the current situation on foodgrain front, what are the new
challenges with regard to food security, and how best these challenges can
be met with a reoriented or restructured institution like FCI.

FCI was set up in 1965 (under the Food Corporation Act, 1964) against
the backdrop of major shortage of grains, especially wheat, in the country.
Imports of wheat under PL- 480 were as high as 6-7 MMT, when country's
wheat production hovered around 10-12 MMT, and country did not have
enough foreign exchange to buy that much quantity of wheat from global
markets. Self-sufficiency in grains was the most pressing objective, and
keeping that in mind high yielding seeds of wheat were imported from
Mexico. Agricultural Prices Commission was created in 1965 to recommend
remunerative prices to farmers, and FCI was mandated with three basic
objectives: (1) to provide effective price support to farmers; (2) to procure
and supply grains to PDS for distributing subsidized staples to economically
vulnerable sections of society; and (3) keep a strategic reserve to stabilize
markets for basic foodgrains.

How far FCI has achieved these objectives and how far the nation has
moved on food security front? The NSSO's (70th round) data for 2012-13
reveals that of all the paddy farmers who reported sale of paddy during JulyDecember 2012, only 13.5 percent farmers sold it to any procurement
agency (during January-June 2013, this ratio for paddy farmers is only 10
percent), and in case of wheat farmers (January-June, 2013), only 16.2
percent farmers sold to any procurement agency. Together, they account for
only 6 percent of total farmers in the country, who have gained from selling
wheat and paddy directly to any procurement agency. That diversions of
grains from PDS amounted to 46.7 percent in 2011-12 (based on calculations
of offtake from central pool and NSSO's (68th round) consumption data
from PDS); and that country had hugely surplus grain stocks, much above
the buffer stock norms, even when cereal inflation was hovering between 8-

12 percent in the last few years. This situation existed even after exporting
more than 42 MMT of cereals during 2012-13 and 2013-14 combined,
which India has presumably never done in its recorded history.

What all this indicates is that India has moved far away from the shortages
of 1960s, into surpluses of cereals in post-2010 period, but somehow the
food management system, of which FCI is an integral part, has not been able
to deliver on its objectives very efficiently. The benefits of procurement have
not gone to larger number of farmers beyond a few states, and leakages in
TPDS remain unacceptably high. Needless to say, this necessitates a re-look
at the very role and functions of FCI within the ambit of overall food
management systems, and concerns of food security.

Major Recommendations of HLC:

Below is a summary of major recommendations of HLC keeping in mind
how procurement benefits can reach larger number of farmers; how PDS system
can be re-oriented to give better deal to economically vulnerable consumers at a
lower cost and in a financially sustainable manner; and finally how stocking and
movement operations can be made more efficient and cost effective in not only
feeding PDS but also in stabilizing grain markets.
On procurement related issues

HLC recommends that FCI hand over all procurement operations of

wheat, paddy and rice to states that have gained sufficient experience in this
regard and have created reasonable infrastructure for procurement. These
states are Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha
and Punjab (in alphabetical order). FCI will accept only the surplus (after
deducting the needs of the states under NFSA) from these state governments
(not millers) to be moved to deficit states. FCI should move on to help those
states where farmers suffer from distress sales at prices much below MSP,
and which are dominated by small holdings, like Eastern Uttar Pradesh,
Bihar, West Bengal, Assam etc. This is the belt from where second green
revolution is expected, and where FCI needs to be pro-active, mobilizing

state and other agencies to provide benefits of MSP and procurement to

larger number of farmers, especially small and marginal ones.

DFPD/FCI at the Centre should enter into an agreement with states before
every procurement season regarding costing norms and basic rules for
procurement. Three issues are critical to be streamlined to bring rationality
in procurement operations and bringing back private sector in competition
with state agencies in grain procurement: (1) Centre should make it clear to
states that in case of any bonus being given by them on top of MSP, Centre
will not accept grains under the central pool beyond the quantity needed by
the state for its own PDS and OWS; (2) the statutory levies including
commissions, which vary from less than 2 percent in Gujarat and West
Bengal to 14.5 percent in Punjab, need to be brought down uniformly to 3
percent, or at most 4 percent of MSP, and this should be included in MSP
itself (states losing revenue due to this rationalization of levies can be
compensated through a diversification package for the next 3-5 years); (3)
quality checks in procurement have to be adhered to, and anything below the
specified quality will not be acceptable under central pool. Quality checks
can be done either by FCI and/or any third party accredited agency in a
transparent manner with the help of mechanized processes of quality
checking. HLC also recommends that levy on rice millers be done away
with. HLC notes and commends that some steps have been taken recently
by DFPD in this direction, but they should be institutionalized for their
logical conclusion.

Negotiable warehouse receipt system (NWRs) should be taken up on

priority and scaled up quickly. Under this system, farmers can deposit their
produce to the registered warehouses, and get say 80 percent advance from
banks against their produce valued at MSP. They can sell later when they
feel prices are good for them. This will bring back the private sector, reduce
massively the costs of storage to the government, and be more compatible
with a market economy. GoI (through FCI and Warehousing Development
Regulatory Authority (WDRA)) can encourage building of these warehouses
with better technology, and keep an on-line track of grain stocks with them
on daily/weekly basis. In due course, GoI can explore whether this system

can be used to compensate the farmers in case of market prices falling below
MSP without physically handling large quantities of grain.

GoI needs to revisit its MSP policy. Currently, MSPs are announced for 23
commodities, but effectively price support operates primarily in wheat and
rice and that too in selected states. This creates highly skewed incentive
structures in favour of wheat and rice. While country is short of pulses and
oilseeds (edible oils), their prices often go below MSP without any effective
price support. Further, trade policy works independently of MSP policy, and
many a times, imports of pulses come at prices much below their MSP. This
hampers diversification. HLC recommends that pulses and oilseeds deserve
priority and GoI must provide better price support operations for them, and
dovetail their MSP policy with trade policy so that their landed costs are not
below their MSP.

On PDS and NFSA related issues

HLC recommends that GoI has a second look at NFSA, its commitments
and implementation. Given that leakages in PDS range from 40 to 50
percent, and in some states go as high as 60 to 70 percent, GoI should defer
implementation of NFSA in states that have not done end to end
computerization; have not put the list of beneficiaries online for anyone to
verify, and have not set up vigilance committees to check pilferage from
PDS.

HLC also recommends to have a relook at the current coverage of 67

percent of population; priority households getting only 5 kgs/person as
allocation; and central issue prices being frozen for three years at Rs
3/2/1/kg for rice/wheat/coarse cereals respectively. HLC's examination of
these issue reveals that 67 percent coverage of population is on much higher
side, and should be brought down to around 40 percent, which will
comfortably cover BPL families and some even above that; 5kg grain per
person to priority households is actually making BPL households worse off,
who used to get 7kg/person under the TPDS. So, HLC recommends that they
be given 7kg/person. On central issue prices, HLC recommends while

Antyodya households can be given grains at Rs 3/2/1/kg for the time being,
but pricing for priority households must be linked to MSP, say 50 percent of
MSP. Else, HLC feels that this NFSA will put undue financial burden on the
exchequer, and investments in agriculture and food space may suffer. HLC
would recommend greater investments in agriculture in stabilizing
production and building efficient value chains to help the poor as well as
farmers.

HLC recommends that targeted beneficiaries under NFSA or TPDS are

given 6 months ration immediately after the procurement season ends. This
will save the consumers from various hassles of monthly arrivals at FPS and
also save on the storage costs of agencies. Consumers can be given well
designed bins at highly subsidized rates to keep the rations safely in their
homes.

HLC recommends gradual introduction of cash transfers in PDS, starting

with large cities with more than 1 million population; extending it to grain
surplus states, and then giving option to deficit states to opt for cash or
physical grain distribution. This will be much more cost effective way to
help the poor, without much distortion in the production basket, and in line
with best international practices. HLC's calculations reveal that it can save
the exchequer more than Rs 30,000 crores annually, and still giving better
deal to consumers. Cash transfers can be indexed with overall price level to
protect the amount of real income transfers, given in the name of lady of the
house, and routed through Prime Minister's Jan-Dhan Yojana (PMJDY) and
dovetailing Aadhaar and Unique Identification (UID) number. This will
empower the consumers, plug high leakages in PDS, save resources, and it
can be rolled out over the next 2-3 years.

On stocking and movement related issues

HLC recommends that FCI should outsource its stocking operations to

various agencies such as Central Warehousing Corporation, State
Warehousing Corporation, Private Sector under Private Entrepreneur
Guarantee (PEG) scheme, and even state governments that are building silos

through private sector on state lands (as in Madhya Pradesh). It should be

done on competitive bidding basis, inviting various stakeholders and
creating competition to bring down costs of storage.

India needs more bulk handling facilities than it currently has. Many of
FCI's old conventional storages that have existed for long number of years
can be converted to silos with the help of private sector and other stocking
agencies. Better mechanization is needed in all silos as well as conventional
storages.

Covered and plinth (CAP) storage should be gradually phased out with no
grain stocks remaining in CAP for more than 3 months. Silo bag technology
and conventional storages where ever possible should replace CAP.

Movement of grains needs to be gradually containerized which will help

reduce transit losses, and have faster turn-around-time by having more
mechanized facilities at railway sidings.

On Buffer Stocking Operations and Liquidation Policy

One of the key challenges for FCI has been to carry buffer stocks way in
excess of buffer stocking norms. During the last five years, on an average,
buffer stocks with FCI have been more than double the buffer stocking
norms costing the nation thousands of crores of rupees loss without any
worthwhile purpose being served. The underlying reasons for this situation
are many, starting with export bans to open ended procurement with
distortions (through bonuses and high statutory levies), but the key factor is
that there is no pro-active liquidation policy. DFPD/FCI have to work in
tandem to liquidate stocks in OMSS or in export markets, whenever stocks
go beyond the buffer stock norms. The current system is extremely ad-hoc,
slow and costs the nation heavily. A transparent liquidation policy is the need
of hour, which should automatically kick-in when FCI is faced with surplus
stocks than buffer norms. Greater flexibility to FCI with business orientation
to operate in OMSS and export markets is needed.

On Labour Related Issues

FCI engages large number of workers (loaders) to get the job of

loading/unloading done smoothly and in time. Currently there are roughly
16,000 departmental workers, about 26,000 workers that operate under
Direct Payment System (DPS), some under no work no pay, and about one
lakh contract workers. A departmental worker (loader) costs FCI about Rs
79,500/per month (April-Nov 2014 data) vis-a-vis DPS worker at Rs
26,000/per month and contract labour costs about Rs 10,000/per month.
Some of the departmental labours (more than 300) have received wages
(including arrears) even more than Rs 4 lakhs/per month in August 2014.
This happens because of the incentive system in notified depots, and widely
used proxy labour. This is a major aberration and must be fixed, either by
de-notifying these depots, or handing them over to states or private sector on
service contracts, and by fixing a maximum limit on the incentives per
person that will not allow him to work for more than say 1.25 times the work
agreed with him. These depots should be put on priority for mechanization
so that reliance on departmental labour reduces. If need be, FCI should be
allowed to hire people under DPS/NWNP system. Further, HLC
recommends that the condition of contract labour, which works the hardest
and are the largest in number, should be improved by giving them better
facilities.

On direct subsidy to farmers

Since the whole system of food management operates within the ambit of
providing food security at a national as well as at household level, it must be
realized that farmers need due incentives to raise productivity and overall
food production in the country. Most of the OECD countries as well as large
emerging economies do support their farmers. India also gives large subsidy
on fertilizers (more than Rs 72,000 crores in budget of FY 2015 plus
pending bills of about Rs 30,000-35,000 crores). Urea prices are
administered at a very low level compared to prices of DAP and MOP,
creating highly imbalanced use of N, P and K. HLC recommends that
farmers be given direct cash subsidy (of about Rs 7000/ha) and fertilizer

sector can then be deregulated. This would help plug diversion of urea to
non-agricultural uses as well as to neighbouring countries, and help raise the
efficiency of fertilizer use. It may be noted that this type of direct cash
subsidy to farmers will go a long way to help those who take loans from
money lenders at exorbitant interest rates to buy fertilizers or other inputs,
thus relieving some distress in the agrarian sector.
On end to end computerization

HLC recommends total end to end computerization of the entire food

management system, starting from procurement from farmers, to stocking,
movement and finally distribution through TPDS. It can be done on real time
basis, and some states have done a commendable job on computerizing the
procurement operations. But its dovetailing with movement and distribution
in TPDS has been a weak link, and that is where much of the diversions take
place.

On the new face of FCI

The new face of FCI will be akin to an agency for innovations in Food
Management System with a primary focus to create competition in every
segment of foograin supply chain, from procurement to stocking to
movement and finally distribution in TPDS, so that overall costs of the
system are substantially reduced, leakages plugged, and it serves larger
number of farmers and consumers. In this endeavour it will make itself much
leaner and nimble (with scaled down/abolished zonal offices), focus on
eastern states for procurement, upgrade the entire grain supply chain towards
bulk handling and end to end computerization by bringing in investments,
and technical and managerial expertise from the private sector. It will be
more business oriented with a pro-active liquidation policy to liquidate
stocks in OMSS/export markets, whenever actual buffer stocks exceed the
norms. This would be challenging, but HLC hopes that FCI can rise to this
challenge and once again play its commendable role as it did during late
1960s and early 1970s.