India’s foodgrain mountain is rising and it is proving to be expensive

Grains and Beans Groceries in Bulk Bags at Market (Source: ShutterStock)

The central pool of foodgrain stocks held by the Food Corporation of India (FCI) climbed to a record high after a very aggressive procurement of rice and wheat in the past kharif and rabi season involving a payout of Rs 2.5 lakh crore as the minimum support price (MSP) to the farmers. The FCI and state agencies acting on its behalf procured a record 128.67 million metric tonnes of wheat and rice during the recent kharif and rabi seasons, taking its holding net of issuances for public distribution to 119.65 million metric tonnes by June 1, 2021.

The current holding is about three times higher than the stocking norms for the central pool for the quarter beginning July 1. So much so, that the FCI has enough stock to provide every individual in the population of India with more than 85 kilos of foodgrain. The average annual per capita consumption of grains is estimated at 125 kilos by the consumer expenditure surveys, and that includes cereals in all forms including bakery products.

The FCI held about 29.92 million metric tonnes of rice as of June 1 and 60.29 million tonnes of wheat. It had another 28.7 million tonnes of unmilled paddy in stock. Procurement continued through June and an estimated 8 million tonnes of foodgrain were added to the stocks.

Thus, net holding at the end of the month, after allocating a portion to states for the public distribution system and free distribution to poor and vulnerable households, was at about the same level as at the beginning of the month. A press release of the ministry of food and consumer affairs on June 29 estimated the stockpile at 29.5 million metric tonnes of rice and 59.1 million metric tonnes of wheat.

The Union government has announced that 27.78 million metric tonnes of this hoard would be distributed free under the Pradhan Mantri Garib Kalyan Anna Yojna (PMGKAY). In the first tranche, the government allocated 7.9 million metric tonnes for distribution during May and June and the second tranche, 19.88 million metric tonnes is proposed to be distributed between July and November 2021.

Another 54.48 million tonnes of the two foodgrain—24.13 million metric tonnes of wheat and 30.25 million metric tonnes of rice—from the central pool were allocated to states and union territories for various schemes covered by the National Food Security Programme. The offtake will happen in multiple instalments spread through the year. A small quantity of foodgrain is also allocated for other welfare schemes such as mid-day meal schemes and for distribution to the defence personnel.

These allocations will however not drastically draw down the hoard. As some quantities are picked up by states, a new kharif crop of paddy will be available for procurement.

Foodgrain holding in the central pool typically peaks in June every year by when procurement of rabi crops, chiefly wheat, is completed. Some quantity of rice grown during the rabi season is also procured during April-June every year. The government agency’s holding this June was about 15% more than the holding in June 2020.

Incidentally, holding in June 2020 had increased by a sharp 21% from the previous year. Stock holding data published by FCI show that its June holding has been rising in double digits since 2018. As a result, June 2021 holding was about 82% higher than the holding in the same month of 2017.

Procuring and holding a large stock of foodgrain involves a considerable amount of taxpayers’ money.  Procurement by the FCI and state agencies on behalf of FCI is made at the minimum support price (MSP) announced at the beginning of the sowing season.

The ministry of food and civil supplies has estimated the MSP value of 43.28 million metric tonnes of wheat procured over the last few months at Rs 85,483.25 crore. The MSP value of 85.39 million metric tonnes of rice procured after the kharif and rabi season was estimated at Rs 1,61,213.98 crore.

This is not the only cost involved in hoarding foodgrain for public distribution and welfare schemes. More important than the procurement costs is the economic cost of procuring and holding a large hoard of rice and wheat.

Economic cost includes procurement incidentals such as labour, transportation, commissions and taxes, and distribution costs such as freight and handling, besides the pooled cost of grains, storage and interest costs. The pooled cost of grain is linked to the MSP and is the biggest component of the economic cost.

Government documents show the estimated economic cost of a quintal of wheat sold at about Rs 2,994 for 2021-22 while the MSP was Rs 1,975 and the pooled cost of the grain at Rs 1,921. For rice, the economic cost per quintal was estimated at Rs 4,294 against the MSP of Rs 1,940 and pooled cost of Rs 2,790.

It is this economic cost that is used to calculate the subsidy on foodgrain sold through the public distribution system. Subsidy on foodgrain has been rising as the issue price of wheat and rice hasn’t been revised since July 2002 while the economic cost has been climbing.

Thus, larger procurement leads to a rise in all costs associated with procurement, storage and distribution. Often, poor storage conditions lead to rotting and infestation of grains, making them inedible. Such grain is then sold cheap to makers of ethanol.