Has Food Corporation of India reduced its inefficiency?

Conventional wisdom has it that the Food Corporation of India (FCI) is a highly inefficient organisation. With the final cost of procuring wheat and rice rising from Rs 1,411.9 and Rs 2,039 per quintal (2015-16 estimates) to Rs 2,181.7 and Rs 3,038.9, respectively, it is tempting to conclude that FCI has done little to improve its cost efficiency.

But a closer look at FCI's finances suggests otherwise. In large parts, the costs incurred in carrying out its operations are actually fixed by the central and state governments. As these costs are beyond the purview of FCI, it can do little to rein these in. On the other hand, in areas where FCI exercises complete control, it has actually managed to lower its costs over the past few years.

The total cost (economic) of grain procured by FCI can be broadly divided in two major categories - acquisition and distribution. Acquisition costs, which account for 81-84 per cent of the total costs, comprise the cost of procuring grain and procurement incidentals. But as these are largely fixed by central and state governments, they are beyond FCI's control.

Distribution costs account for 16-19 per cent of the total. These include expenses on account of freight, handling, storage, interest on borrowings, shortages and administrative overheads. These are largely under FCI's control and here it has managed to increase efficiency and curtail expenses.

FCI has managed to reduce its handling costs as a proportion of total distribution costs from 19.5 per cent in 2011-12 to 17 per cent in 2013-14. Storage costs have also been brought down from 11.4 per cent in 2011-12 to 10.8 per cent in 2013-14. Storage losses have been cut from Rs 405 crore in 2011-12 to Rs 370 crore in 2013-14.

This decline in storage losses and costs can be attributed to better facilities and lower procurement. "Switching from temporary open storages, which were unscientific, to scientific godowns has resulted in wastage going down," says a senior FCI official. "Storage losses in rice, about 0.5-0.6 per cent of total procurement, have been brought down to 0.2-0.25 per cent."

Add the decline in procurement during peak months and the savings are huge. Wheat procurement has gone down from 38.1 million tonnes (mt) in 2012-13 to 28 mt in 2014-15, while rice procurement has gone down from 35 mt in 2011-12 to 32.1 mt in 2014-15.

Further, FCI's own administrative overheads have also gone down from 9.6 per cent in 2011-12, to 6.7 per cent in 2013-14. This sharp decline is largely due to a restructuring exercise it undertook in 2010. As a result, FCI's sanctioned personnel went down from 55,045 to to 36,837 in 2015. What is significant is that its actual strength is significantly lower, declining from 36,566 in 2009 to 23,218 in 2015.

On curtailing other distribution costs, though, little headroom has been made. Freight costs have gone up from 31.5 per cent of distribution costs in 2011-12 to 36.4 per cent in 2013-14. Similarly, interest costs, as a percentage of distribution costs, have gone up from 16.5 per cent in 2010-11 (Rs 1,560 crore) to 25.8 per cent in 2013-14 (Rs 4,708 crore).

It is difficult to put the blame for these rising costs on FCI's doorstep. Freight costs are determined by the cost of fuel and the railway rate structure and are thus beyond FCI's control. Similarly, rising interest costs are not entirely due to inefficiencies in operation.

In large measure, the increase in interest costs is because of pending arrears with the government. FCI representations to the High Level Committee put this figure at Rs 50,000 crore in 2014-15. Because of delays in disbursal from the central government, FCI has no option but to borrow from the market to fund operations. This interest burden is a big drag on finances.

Data put out by the committee show that while FCI's distribution costs increased by roughly Rs 6,400 crore from 2011-12 to 2013-14, growing at a faster pace than acquisition costs, 72 per cent of this is due to higher freight and interest costs, beyond FCI's control.

This is not to say inefficiencies in other operations have been eliminated. Transit losses are on the rise, increasing from Rs 333 crore in 2011-12 to Rs 406 crore in 2013-14. "These losses are because of multiple handling," says an FCI official, although "they have been brought down from 0.5 per cent to 0.39 per cent".

There is also the contentious issue of labour costs. There are about 100,000 contract workers who earn roughly Rs 10,000 each per month. By contrast, the cost of department labour that FCI must bear turns out to be eight times higher, with their wages hovering around Rs 80,000 per month. This is a big source of inefficiency on which little headway has been made so far.

But senior FCI officials say they expect to see some movement on this issue in the future.

The optimism stems from the fact that recently the Nagpur bench of the Bombay High Court issued a set of directives asking the central government to decide within a month on FCI's representation for grant of exemption under Section 31 of the Contract Law Act of 1970.

The Centre now has to decide on whether to abolish the departmental labour system in a phased manner or absorb their services in other establishments as recommended by the committee. If the Centre accepts FCIs representation, it will pave the way for streamlining costs, thereby eliminating a principal source of inefficiency.

Then, there is the issue of grain meant for the Public Distribution System (PDS) being diverted. "There are significant leakages that arise from the transfer of grain from godowns to fair price shops. Cheap grain is diverted into the open market and sold at higher prices by a mafia comprising state officials, transporters and ration shop owners," says Santosh Mehrotra, professor at Jawaharlal Nehru University. Checking this is critical to reducing leakages in the system. But, this requires intervention by state governments.

"State governments must be compelled and motivated to digitise PDS operations, to cover not only the use of cards but also movement of grain all the way from FCI godowns to PDS retail outlets," says Alok Sinha, former chairman of FCI and currently secretary-general of the Indian Council for Food and Agriculture.

Another source of inefficiency stems from the current system of grain management. Critics argue that by holding on to grain well above the prescribed buffer stock limits, FCI incurs significant holding costs. Further, because of poor storage facilities, these stocks often end up rotting.

On this issue, too, FCI has no control. The decision on how much to keep as buffer stock and how much to release in the markets is entirely up to the government. To rectify this Sinha says, "The government must ensure FCI is allowed to dispose grain beyond buffer stock limits. This would not only reduce storage losses but huge holding costs."

Mehrotra agrees, saying, "FCI has to be given some degree of autonomy for open market operations. This will lower its holding costs significantly."