Grain stocks: Is it a problem of storage capacity?

Grain
stocks: Is it a problem of storage capacity?

(http://www.ideasforindia.in/article.aspx?article_id=117)

Bharat Ramaswami
Indian Statistical Institute

bharat@isid.ac.in
(07.10.2013)

Foodgrains rot due to insufficient
storage capacity, even as millions go to bed hungry. This column argues that
increasing capacity is only a partial resolution. The crisis has happened
before and will happen again unless different ways are found to support
farmers and consumers.

Since 2010, the problem of
insufficient storage capacity has attracted both political and media
attention. Commentators in the media bemoan that India lets grains rot when
there are people that go to bed hungry. Similar comments have echoed in the
Parliament. In September 2010, hearing the Right to Food public interest
petition, the Supreme Court asked the government to distribute to the poor
the foodgrains that would otherwise rot. Since then, the mismatch between
stocks and capacity has if anything worsened. Peak stocks in 2012 went beyond
80 million tonnes. In 2013, the early projections are that stocks will
cross 90 million tonnes.

It is useful to break up the issue
into two questions: how much storage capacity is required for public stocks
and second, what policies will bring capacity in line with grain
purchases.

How much
storage capacity is required?

Crop harvests occur at particular
points in time (rabi in the case of wheat and predominantly kharif
in the case of rice) while consumption is continuous through the year. Hence
the crop needs to be carried from the harvest months to the other months when
there is no harvest. This constitutes the demand for seasonal storage.
As there is no seasonal pattern in the consumption of either rice or
wheat, the demand for seasonal storage (both public and private) can be
worked out from timing of crop harvests and the principle that grain must be
allocated equally over time.

To estimate the storage capacity
for seasonal public stocks, we suppose that that grains are not carried over
from one marketing year to another. Of course, total storage also
includes stocks that are carried over years. The needs of such annual
storage can be separately computed and added to the seasonal storage. So
to assume zero storage over crop marketing years is to simply focus on the
seasonal storage issue.

Thus, in the case of rice, we
suppose public stocks are zero on October 1 (the beginning of the kharif
marketing year). Say, the amount of rice that is procured for subsidised
distribution is x. One-fourth of x is used in the quarter
of the calendar year (October-December) and the carry-over is three-fourths
of x on January 1, which is then progressively reduced to half and
one-fourth of x in the succeeding quarters. A similar scheme can
be worked out for wheat. Storage requirements taper off at the end of
the marketing years for rice (September) and for wheat (March)
respectively.

It can be easily seen that the
peak demand for storage occurs on January 1 and this constitutes the storage
capacity that must be planned for¹. With the passage of the
Food Security Act, it is expected that grain procurement would go up.
The Rangarajan Committee estimated a food distribution requirement
ranging from 64 to 74 million tonnes of grain (Economic Advisory Council,
2011). With a 60-40 split between rice and wheat, the peak storage demand
does not exceed 41 million tonnes even in the high requirement scenario of 74
million tonnes. To this figure, we can add the emergency/ strategic
reserves of 5 million tonnes that the government wishes to keep. The total
peak storage would therefore be around 46 million tonnes².

Gap
between required and existing storage capacity

The Food Corporation of India
(FCI) – the central government agency responsible for procurement and storage
of grain for the Public Distribution System (PDS) – has a storage capacity of
32 million tonnes, of which about half is hired. Hence, assuming that the FCI
has hired all the capacity that is possible then the gap between FCIs
existing capacity (32 million tonnes) and the required capacity (46 million
tonnes) is about 14 million tonnes. Incidentally, in the 11^th Five
Year Plan, the FCI identified a gap of 16 million tonnes of capacity that
needed to be created.

But the
government buys far in excess of what it distributes

However, going by the recent
experience of peak stocks exceeding 80 million tonnes, additional capacity
required is nearly 50 million tonnes. So why are our calculations off
the mark? That’s because our computations are based on government’s
commitments to the PDS. However, what the government buys from farmers
(procurement) does not match the PDS requirements. This can be seen from
Figure 1 which plots the annual figures for procurement and PDS sales. Since
the early 1990s, procurement has consistently exceeded PDS sales. This is why
there have been recurrent crises of excess stocks and consequently, of
storage capacity. An earlier manifestation was in the early 2000s.
In August 2001, the government stashed away 65 million tonnes in
warehouses, school buildings or simply under tarpaulins in open fields.

Figure
1: Procurement and PDS Sales

Source:
From government documents, Economic Survey and website of Food
Corporation of India.

From the figure, it is clear that
the difference between procurement and distribution is too large to be
explained by the need for emergency reserves. Nor can excess
procurement be explained by an intent to stabilise consumption and prices.
If that was the case, distribution ought to exceed procurement in years
of low availability. Stabilisation re-orders supplies over time but
does not alter the total supplies over a long enough period of time. One
implication is that the averaged difference between procurement and
subsidised distribution ought to be zero. Indeed, this is what obtained in
the period prior to 1989-1990 (Ramaswami 2002). This has clearly not happened
in the last two decades.

The
pressure to hoard

The explanation lies in the
procurement process and the fixation of the procurement price. While the
politics around the procurement price is a proximate reason, an even more
fundamental reason is the unwillingness to tolerate even small possibilities
of under-supply to the PDS. At the higher levels of the government, there is
immense paranoia about food shortages affecting the PDS. Politicians
and bureaucrats perceive the costs of insufficient supplies but nobody is
held accountable for excessive stocks and high prices. Predictably, the
errors are in one direction. High procurement prices and large government
stocks displace private trade and therefore, bumper procurement and stocks
continue until the momentum is broken by an exceptional event such as a
drought or by ad-hoc dumping of grain in the domestic (open market
sales) or international market (exports).

India does not have an announced
protocol for stock depletion by way of sales to the domestic or to the
international market because of the bureaucratic and political caution that
lead to excessive stocks in the first place. In addition, high
procurement prices typically mean that stocks have to be sold at a loss.
As this would show up immediately as an increase in food subsidy, the
finance ministry is typically unenthusiastic. Even when the government
ultimately sees reason, the financial implications mean that the chain of
decision-making is long and subject to frequent review. Speedy response to
excess stocks is not part of the government DNA.

The implication is that as long as
the key structure of the procurement system is unreformed, there will always
be a tendency to accumulate excess stocks. Indeed, it is likely, that an
expanded PDS (consistent with the National Food Security Bill) will reinforce
this tendency. With a Food Security Act, the government has an explicit legal
obligation to meet the requirements of the PDS. A failure, here, would not
only be politically costly but could also result in legal sanctions for the officials
concerned. For this reason, a food security act will amplify the tendency to
“play it safe”.

Reforming
the procurement process: Closed-ended procurement

One way out is to have a
systematic policy of open market sales. Kaushik Basu proposed a mechanism of
selling grain in small batches to many traders and consumers to maximise the
impact of open market sales on prices (Basu 2011). His proposal was made in
the context of market stabilising interventions wherein procurement varies
according to available supplies. But as we have seen, the foodgrain
intervention has been systematically biased towards excess procurement.
Hence, the socially beneficial, first best policy here would be to reduce
procurement rather than to have open market sales.

The ideal reform would be to move
procurement from being open-ended to being closed-ended so that it meshes
better with the PDS. Currently, the procurement system is open-ended in the
sense that the government is committed to buy whatever farmers wish to sell. A
closed-ended procurement process would be one where the government buys only
that much grain as to meet its distribution requirement.

Such reform of the procurement
process will be hard. States that gain from open-ended procurement will
oppose such a move. While a closed-ended procurement process would meet
political difficulties, incremental reform may be possible. First, if the
expanded obligations under the Food Security Act are met by a mix of
transfers in-kind and in cash, it will restrain the pressures on procurement.
Of course, the problem vanishes in a world where cash transfers completely
replace the transfers in-kind.

Second, it is important to
unbundle the procurement for PDS from the procurement for buffer stocks. This
can be done by creating a new agency called, say, the Risk Management
Agency (RMA). The FCIs liability will remain limited to the grain purchased
for distribution requirements. The stocks in excess of this requirement
should be transferred to the books of the RMA. Such an arrangement will make
excess stocks visible in financial accounts and therefore garner attention
from economic and political observers. This might therefore force the
government to take excess stocks into account when deciding procurement
prices.

Notes:

For more details about the
method and calculations, see Ramaswami and Murugkar (2013)
These calculations assume
that rice procurement happens only in the last quarter of the calendar
year when in fact it happens in the first quarter of the calendar year
as well. As a result, the calculations assume more seasonality in
procurement and storage than what is actually the case. Hence the peak
storage requirement calculated above is an upper bound.