FCI (Food Corporation of India) is sitting on a mountain of wheat and paddy. In January, the total stock of rice and wheat with FCI was 45.4 million tonnes. This increased to 46.3 million tonnes by April and touched 62.2 million tonnes in May. In July, the stock increased further to 74.2 million which was significantly higher than the buffer norm requirement of 41.12 million tonnes of grain as of July.

Increase in procurement through MSP operations in the kharif marketing year 2018-19 in rice and rabi marketing year 2019-20 in wheat, explain the jump in stocks with FCI to record levels. Higher inventory means higher storage and financing costs for FCI and a higher food subsidy bill for the Centre.

The cash-strapped government has already not been paying FCI. In fact, over the last three years, the government has only been arranging loans for FCI from the National Small Savings Fund for a large part of its dues to the corporation on procurement. In 2018-19, FCI’s borrowing from NSSF stood at a record 1.91 lakh crore.

So why does the FCI keep accumulating stock and not dispose it in the market, to lower its burden?

FCI does dispose its stocks from time to time. While a portion of the stock goes to the TPDS (Targeted Public distribution System) and households identified under NFSA (National Food Security Act) and other welfare schemes, the balance is sold through the open market sale scheme (OMSS) and FCI doesn’t get a good price most of the times – it actually ends up selling at below cost and end up incurring loss.

Problems with open market sale

FCI releases wheat and rice at predetermined prices in the open market only during the lean season. It invites tenders and sells it to bulk consumers and private traders. The State Governments/ Union Territory Administrations are also allowed to participate in the auction if they require wheat and rice outside TPDS. The price at which grains will be sold via OMSS is fixed by the Ministry of Consumer Affairs, Food and Public Distribution Department.

But the issue is that this pre-determined price also called the reserve price, is often less than the acquisition cost/economic cost of grains for FCI and it ends up making loss in the sale. Further, at times when production of grains is high and the Centre makes huge procurement, private traders avoid buying from farmers in mandis during the harvest time and wait for the government’s OMSS to begin to buy at a lower price - the reserve price for OMSS also takes into account the prevailing market price.

Last year was a case in point. The reserve price for wheat in OMSS in 2018-19 for second, third and fourth quarter for Madhya Pradesh, Punjab and Haryana was announced at ₹1,900, ₹1,925 and ₹1,950 per quintal, respectively. The economic cost of wheat was ₹2,435.23 per quintal – this is MSP plus procurement incidentals, cost of storage and distribution, plus taxes. Considering only the procurement price plus procurement incidentals, the cost worked out to ₹2,002 per quintal. Given that the reserve price that was fixed was lower than the economic cost and even lower to the procurement cost plus incidentals, FCI suffered loss.

Why fix it lower?

Now, why is the reserve price fixed lower to the economic cost? Market sources say that this may be due to the FCI’s desperation to offload excess food stocks.

As of May, the total storage capacity available with FCI and state agencies was 86.2 million tonnes, of which about 13-14 million tonnes is ‘covered and plinth storage’ – where the grains are stored in the open. With total stocks with FCI now over 70 million tonnes, there is pressure on it to empty its current stock before the next season so that there is space for the fresh procurements.

In the auction so far this year by FCI through OMSS since May, much of the stock has been taken up by state agencies and not many bulk consumers have come forward. The reserve price fixed for wheat for Madhya Pradesh, Punjab and Haryana for the first, second, third and fourth quarter of 2019-20 is ₹2,080, ₹2,135, ₹2,190 and ₹2,245. This is lower even to last year’s economic cost on the grain for FCI.