Dear Mr Modi who will sort out the mess at Food Corporation of India?

Data released by the Petroleum Planning and Analysis Cell(PPAC) suggests that on January 13, 2016, the price of Indian basket of crude oil touched $27.32 per barrel. I expect the government to increase the excise duty on petrol and diesel soon, to capture the benefit of this ‘further’ fall in the price of oil.

If and when this happens this will be the eight such rise since November 2014. While the government has been quick to increase excise duty on petrol and diesel in order to shore up its finances, the same enthusiasm has been missing when it comes to controlling wasteful expenditure.

Let’s take the case of the Food Corporation of India(FCI). Last week the Supreme Court was hearing a case concerning the loaders at FCI and the exorbitant salaries they draw. As the judges reacted: “The report shows that in August 2014, 370 labourers received more than Rs 4 lakh in salary. Around 400 others got between Rs 2 lakh and 2.5 lakh in the same month…How is that possible?

The judges were essentially referring to the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report). This report was released in January 2015.

In fact, as the Shanta Kumar committee report points out: “Some of the departmental labours (more than 300) have received wages (including arrears) even more than Rs 4 lakhs/per month in August 2014. This happens because of the incentive system in notified depots.

Interestingly, even those who did not get paid Rs 4 lakh in August 2014, get paid quite a lot. The average salary of an FCI worker was Rs 79,588 per month between April and November 2014, which is seven to eight times higher than what a contract labourer gets paid. As can be seen from the following table the average salary of a worker has more than doubled between 2009 and 2014.

Financial yearAverage Salary
April to Nov 201479588
Source: Shanta Kumar Committee Report

As the Shanta Kumar committee report points out: “FCI engages large number of workers (loaders) to get the job of loading/unloading done smoothly and in time. Currently there are roughly 16,000 departmental workers, about 26,000 workers that operate under Direct Payment System (DPS), some under no work no pay, and about one lakh contract workers. A departmental worker (loader) costs FCI about Rs 79,500/per month (Apri-Nov 2014 data) vis-a-vis DPS worker at Rs 26,000/permonth and contract labour costs about Rs 10,000/per month.”

There are a few points that need to be made here. First, is the fact that workers are paid different wages depending on how they are categorised, even though the do the same work. Hence, an FCI worker gets paid eight times that a contract worker gets paid. This is not fair.

The second point is why pay workers close to Rs 80,000 per month for loading and unloading stuff, when the same job can be carried out at the cost of Rs 10,000 or Rs 26,000 per month? This is a clear waste of money. The Supreme Court judges put the loss at Rs 1800 crore. This doesn’t sound much on its own, given the big numbers we are used to when we talk about the government.

But compare this with the plan outlay of the ministry of environment for 2015-2016, which is at Rs 1,446.60 crore. As the budget document points out: “The Plan outlay of Ministry of Environment, Forests & Climate Change is Rs 1,446.60 crore. An Amount of Rs 758.16 crore is allocated for Ecology and Environment which, inter alia, includes Rs 63.14 crore Conservation of Natural Resources and Ecosystems, and Rs 213.05 crore for Research and Development, Rs 100 crore for National Coastal Management Programme and Rs 76.10 crore for Environmental Monitoring and Governance.  Rs 150 crore has been provisioned for National Adaptation Fund for Climate Change.”
The point being there are better ways of spending money than paying an FCI worker Rs 79,500 per month.

Also, it is not surprising that those making Rs79,500 per month or more, get cheaper contract labour to do their work. If I was earning Rs 4 lakh per month and was in a position to outsource my work to someone at the cost of Rs 10,000 per month, I would do the same thing.

As the Shanta Kumar committee report points out: “Some of the departmental labours (more than 300) have received wages (including arrears) even more than Rs 4 lakhs/per month in August 2014. This happens because of the incentive system in notified depots, and widely used proxy labour. This is a major aberration and must be fixed, either by de-notifying these depots, or handing them over to states or private sector on service contracts, and by fixing a maximum limit on the incentives per person that will not allow him to work for more than say 1.25 times the work agreed with him. These depots should be put on priority for mechanization so that reliance on departmental labour reduces.”

The Supreme Court judges have given the government a time of 10 days to respond on how this daylight robbery of the country can stop. “Labourers in FCI have an aggressive past. Officers have been murdered. There is a clique that is operating there and FCI has become a hen that lays golden eggs for them. The FCI is literally held to ransom by the labourers and their unions and there is something seriously wrong with it,” the Supreme Court judges said.

The prime minister Narendra Modi before he became the prime minister talked a lot about “minimum government maximum governance”. This is one area where the slogan can be put into practice. The loot of the nation by a few thousand workers of the FCI needs to stop. The money thus saved needs to be put to better use.

The question is will this stop? The trouble is that after being elected Modi has continued with the maximum government handed down to him. Any elected official (or for that matter even any individual) has limited time and mind-space to tackle things. This is even more true for this government, where the lack of ministerial talent is glaringly obvious and the government is run more and more by the prime minister’s office.

The prime minister’s office is busy with many things, propping up loss making units like Air India and MTNL, being among them. In this environment does it have the time and the mind-space to tackle the mess that FCI is in?

The column originally appeared in the Vivek Kaul’s Diary on Equitymaster

Less than 5.8% of farmers benefit from the minimum support price system


Towards the end of April, the Parliament’s Committee on agriculture made a rather bizarre commendation to the government. “The committee urged that steps should be taken to fix remunerative pricing with 50% profit margin over cost of production for all the 24 crops without any further delay as recommended by this committee,” the committee said.
What does mean? The committee has basically recommended that the government should ensure that the minimum support prices that it declares for various agricultural crops should give the farmers a profit of 50% over their cost of production. The government declares minimum support prices for 24 agriculture crops which include rice paddy, wheat, jawar, bajra, maize, ragi, pulses, oilseeds, copra, cotton, jute, sugarcane, and tobacco.
Even though it declares the minimum support price for 24 crops it primarily buys only rice and wheat from farmers through the Food Corporation of India(FCI) and other state procurement agencies.
Why do I say that the suggestion of the Parliament’s Committee on agriculture is bizarre? The answer to this question lies in the
Report of the High Level Committee on Reorienting the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar Committee Report). The report makes some interesting points using data from the 70th Round of NSSO (National Sample Survey Organisation) on The Key Indicators of Situation of Agricultural Households.
As per this survey there are 90.2 million agricultural households in India. From this, during the period July to December 2012, only 18.67 million households reported selling paddy. Of this number only 13.5% sold to a procurement agency (i.e. either FCI or other state procurement agencies). This essentially means that only 2.52 million households sold paddy to the procurement agency. Of this who sold to a procurement agency only 27% of their sales were at the minimum support price.
Between January and June 2013, 5.46 million households reported selling paddy. Of this only 10% or 0.55 million households sold to a procurement agency. And of those who sold to a procurement agency only 14% of their sales were at the minimum support price.
The situation is similar when it comes to wheat. As per the survey, between January and June 2013, 13 million households reported the sale of wheat, but only 16.2% reported to have sold wheat to a procurement agency. Of those who sold to a procurement agency, only 35% of their sales happened at the minimum support price.
So what does this mean? The total number of agricultural households who were able to sell rice paddy and wheat to the procurement agencies works out to 5.21 million. As the Shanta Kumar Committee Report points out: “The number of households comes to just 5.21 million (2.55 million paddy households during July-Dec 2012; 0.55 million paddy households during Jan-June, 2013; and 2.11 million wheat households during Jan-June 2013).”
The figure of 5.21 million forms 5.8% of the total number of agricultural households of 90.2 million. In fact, this number is also on the higher side once one takes into account the fact that there are households that sell both paddy and wheat to the procurement agencies. Further, as mentioned earlier not all wheat and paddy is being sold to procurement agencies at the minimum support price.
After taking these factors into account, the number of direct beneficiaries from the minimum support price announced by the government and the procurement system set up to buy paddy and wheat, comes out to be even lower than 5.8% of the agricultural households.
As the Shanta Kumar Committee Report puts it: “The direct benefits of procurement operations in wheat and rice, with which FCI is primarily entrusted, goes to a miniscule of agricultural households in the country.”
Further, the procurement benefits large farmers in a few selected states like Punjab, Haryana, Andhra Pradesh and lately from Madhya Pradesh and Chhattisgarh. Large farmers are the luckiest of the lot—they have a ready made customer in the form of the government for what they produce and they don’t need to pay any income tax either. What muddles the situation further is that in some states, the procurement agencies buy nearly 70-90% of the wheat and rice and literally crowd out the private sector.
This crowding out leads to food prices going up.
Food inflation hurts the poor the most. Half of the expenditure of an average Indian family is on food. In case of the poor it is 60% (NSSO 2011). What Rahul and the Congress party need to understand is that everyone associated with agriculture does not own land. As per the draft national land reforms policy which was released in July 2013, nearly 31% of all households in India were supposed to be landless. The NSSO defines landlessness as a situation where the area of the land owned is less than 0.002 hectares.
Any price rise, particularly a rise in food prices which is what an increase in MSP leads to, hurts this section of the population the most. Didn’t the Parliament committee on agriculture consider this, before making the recommendation that it did? If yes, why do they want to make things difficult for a major section of the population, by recommending what they have? Or are MPs too close to large farmers that benefit the most from rising minimum support prices?
The grain bought by the government is sold through the public distribution system (PDS). This grain is sold at extremely subsidized prices. Rice is sold at Rs 3 per kg and wheat is sold at Rs 2 per kg. The trouble is that the PDS is terribly leaky. As per NSSO 2011 the PDS leakage is 46.7%. This means that of every 100 kgs of grain distributed through the PDS, 46.7 kgs hits the open market. This is not surprising given the huge gap in prices between grain sold through the PDS and that sold in the open market. In fact, in some states the leakage is as high as 70-90%.
And this led the Shanta Kumar Committee to ask: “Given such large leakages, one must question the reasons behind this, and whether it is worth keeping FCI pouring grains into a system that fails to deliver.”
To conclude, the question to ask is—what is the point in keeping such a wasteful system going? The trouble is that its become too much of a holy cow for the government to do anything about.

The column originally appeared on The Daily Reckoning on May 12, 2015