How Govts Use Food Corporation of India To Fight Elections

In yesterday's piece we saw how governments (both past and present) use the Food Corporation of India (FCI) to manage the fiscal deficit figure. Fiscal deficit is the difference between what a government earns and what it spends and is expressed as a percentage of the gross domestic product (GDP).

In today's piece we will dig a little more into this phenomenon and the results might just surprise you. Let's go about this pointwise.

1) As was mentioned yesterday, one of the main objectives of the FCI is to ensure that the farmers get the right price for their produce. Hence, the FCI buys rice and wheat directly from farmers at a minimum support price, set by the government every year. It does so through procurement centres spread across the country.

2) The FCI ends up buying more rice and wheat from states like Punjab, Haryana, Madhya Pradesh, Andhra Pradesh, Telangana, Rajasthan etc., and less from states like Bihar, Uttar Pradesh and West Bengal. Hence, in that sense it really doesn't have a pan India operation.

3) But that is the not the point here. Other than providing price support to farmers, FCI also needs to ensure food security of the country by maintaining stocks of rice and wheat. Hence, there is a certain amount of foodstock that FCI needs to maintain at any given point of time during the year.

4) This is where things get interesting. On January 1, of every year, FCI needs to maintain stocks of 214.1 lakh tonnes of rice and wheat. The operational stock of rice and wheat that it needs to maintain is 56.1 lakh tonnes and 108 lakh tonnes respectively. Over and above this, a strategic reserve of 20 lakh tonnes of rice and 30 lakh tonnes of wheat, that needs to be maintained. All this adds up to 214.1 lakh tonnes.

5) While FCI needs to maintain reserves of 214.1 lakh tonnes, what was the actual reserve of rice and wheat that FCI actually had? Any guesses? 454.12 lakh tonnes, which is more than double of what is required. Actually, 112% more. Of course, this extra stock comes with a cost attached to it.

6) Let's look at the stocks maintained by FCI on January 1, over the years. Table 1 has the details.

As on January 1	Rice (in lakh tonnes)	Wheat (in lakh tonnes)	Total (in lakh tonnes)
2016	126.89	237.88	364.77
2017	134.75	137.47	272.22
2018	162.06	195.62	357.68
2019	182.91	271.21	454.12

Source: Food Corporation of India

As can be seen from Table 1, the stock of rice and wheat in January 2019, has been the highest in the last four years. Of course, there is a cost attached to this. The price at which this excess rice and wheat is bought, and also the cost of carrying this inventory in the godowns of FCI and the ones that it hires.

7) Let's figure out how much extra rice and wheat is in the reserves. Take a look at Table 2.

As on January 1, 2019	(in lakh tonnes)
Actual Reserves of Rice	182.91
Reserves that need to maintained (operational + strategic)	76.1
Excess reserves of rice	106.81
Actual Reserves of Wheat	271.21
Reserves that need to maintained (operational + strategic)	138
Excess reserves of wheat	133.21

Source: Author calculations on data from Food Corporation of India

8) These excess reserves that can be seen in Table 2, as mentioned earlier have a cost attached to it. The acquisition cost of rice is Rs 20,019 per tonne, whereas the acquisition cost of wheat is Rs 29,245 per tonne. Hence, the acquisition cost of excess rice works out to Rs 21,382 crore (106.81 lakh tonnes multiplied by Rs 20,019 per tonne). The acquisition cost of the excess wheat works out to Rs 38,957 crore (133.21 lakh tonnes multiplied by Rs 29,245 per tonne).

9) The total cost of acquisition of this rice and wheat comes out to Rs 60,339 crore. Over and above this, there is the cost of storing this rice and wheat as inventory. As mentioned in yesterday's piece, the government of India doesn't compensate FCI adequately. In 2018-2019, Rs 1,20,922 crore will remain unpaid. The excess reserves of rice and wheat which cost the government Rs 60,339 crore are a part of this unpaid amount. The remaining unpaid amount is on account of FCI buying rice and wheat from farmers directly and then distributing it through the public distribution system at a very low price. The government needs to pay FCI for these losses and it hasn't.

The interesting thing is that the excess rice and wheat worth Rs 60,339 crore, hasn't been paid for by the government. Given that, the accounts of the government work on a cash basis, this hasn't been registered as expenditure on its books. Hence, the government has managed to control its fiscal deficit for this year, even while FCI has gone around procuring more rice and wheat than it needs.

Given that the government doesn't compensate FCI adequately, it has to borrow money to continue to be in operation. The rate of interest that FCI is paying on this debt is around 9%. This interest that the FCI pays on the debt also gets passed on to the government in the years to come.

10) The question is why did FCI buy much more this year than what it required to distribute through the public distribution system to meet the norms of the National Food Security Act and other welfare measures of the government or as required as per the stocking norms or in comparison to what it bought in previous years. The simple answer to this lies in the fact, that elections are scheduled in April and May 2019. And given this, the government has bought more rice and wheat from the farmers than it actually requires to meet the norms of the food security act or to maintain a buffer stock, for that matter.

Basically, in an election year, the government wants to keep the farmers, who form a major part of the voters, happy. Interestingly, such a huge jump in procurement was also seen in the run up to the 2014 Lok Sabha elections.

Of course, at the same time, the government has managed to keep this expenditure off its books, by not paying FCI for it immediately. Though eventually it (which could be another government and not this one) will have to pay for it.

This is a clear case of different political parties using the taxpayers' money to be in the good books of a major section of the voters, before the elections.

Regards,


Vivek Kaul
Editor, Vivek Kaul Publishing

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Vivek Kaul is the editor of Vivek Kaul Publishing, where readers gain sharp, insightful opinions and analysis on India's economy. He is the author of the bestselling Easy Money trilogy. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

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