Coronavirus impact | Cash flow of state procurement agencies to see positive impact: India Ratings

The novel coronavirus, or COVID-19, pandemic could have a positive impact on the cash flow from operations (CFO) of state procurement agencies (SPAs) in FY21. This is due to the higher offtake from Food Corporation of India (FCI), in response to the various welfare schemes announced by the government, resulting in liquidation of SPAs’ unsold inventory and debtors, according to a report by India Ratings & Research.

SPAs procure the stock of wheat and paddy from designated mandis and supply them to FCI for building its central pool. In FY16, stock in the central pool grew 7 percent to 36.7 million tonne (MT) before declining 15 percent in FY17.

"Since then, stock in the central pool has increased at a rapid pace, growing 22 percent each in FY18 and FY19 and 23 percent in FY20 to 56.9 MT. This is line with the record harvests seen in wheat and rice over FY18-20. In FY18, the combined production of wheat and rice was 212.6 MT, which increased to 220.1 MT in FY19 and further to 225.1 MT in FY20 (as per third Advance Estimates)," the report said.

As a result, the stock of food grains maintained by FCI has generally been way higher than the foodgrain stocking norms.

"According to the stocking norms, the country is expected to maintain a certain level of foodgrain stocks, which is a combination of operational and strategic reserves. As on April 1, the stock of rice and wheat maintained by FCI was 32.2 MT and 24.7 MT as against the stocking norms of 13.6 MT and 7.5 MT, respectively," it added.

The substantial increase in the central pool stock has had a negative impact of the liquidity of SPAs. Most SPAs have recorded negative CFO over FY18-20 due to a build-up in inventory at their end, as the offtake from FCI slowed down due to its own burgeoning stock.

In addition, as SPAs record revenue against unsold inventory in the form of storage charges and associated interest income, the receivable claims from FCI have been mounting, thereby increasing the liquidity pressure. Regular enhancements in working capital limits have accordingly supported the liquidity position of SPAs during these years, it said.

"Ind-Ra believes that SPA’s CFO position could turn positive, despite the expectation of record harvests in both wheat and rice. In view of the COVID-19 pandemic and the resultant lockdown, the Centre has announced various welfare schemes to alleviate the stress faced by the poor," it added.

Under the PM Garib Kalyan Ann Yojana, free distribution of 5 kg of food grains and 1 kg of pulses per household for the next three months was announced in March for the 80 crore beneficiaries covered under the National Food Security Act.

This scheme has now been extended up to November-end. Furthermore, the existing limit of 5 kg per person per month of foodgrains at subsidised rates for those covered under the scheme had been hiked to 7 kg per person per month.

"As all such welfare schemes are being routed through FCI, Ind-Ra feels the same would free-up the storage space, thereby making them ready to accept fresh produce coming in from various SPAs. This would reduce the inventory holding and consequent debtors of SPAs and accordingly facilitate liquidity through CFO generation," the report stated.