1. Prologue
2. [Act 1] Minimum support prices (MSP)
   1. What is Open Ended Procurement?
   2. How is MSP determined?
3. [Act 2] Sugar pricing problem
   1. SEFESU-2014
   2. C.Rangarajan on Sugar pricing
4. [Act 3] Food Corporation of India (FCI)
   1. FCI: procurement problems
   2. Open Market Sale Scheme (OMSS)
   3. Decentralized Procurement Scheme (DCP)
   4. Storage expansion schemes
      1. #1: Private Entrepreneurs Guarantee (PEG) Scheme.
      2. #2: Grameen Bhandaran Yojana
      3. #3: other initiatives
   5. Budget 2014: Procurement Reforms
5. [Act 4] Subsidies + MSP = Food inflation + Resource misallocation
6. Appendix: MSP price for 2014-15

Prologue

1. Fertilizer subsidy & schemes, Budget-2014 announcement
2. Minimum support pricing (you’re here)
3. National food security act (NFSA)
4. WTO Bali Summit
5. APMC reforms, National market for agriculture, NSEL crisis
6. El Nino and its impact on Indian monsoon

[Act1] Minimum support prices (MSP)

Minimum Support price	@which Government will buy. This is meant to serve as “floor” price, below which Government will not allow prices to fall, EVEN If there was bumper crop.
Procurement price	@which FCI will purchase foodgrain for PDS distribution system Procurement prices >>higher than MSP

What is Open Ended Procurement?

Wheat and Rice	FCI conducts “Open ended procurement” Means Government will buy AT MSP, from any farmer who comes forward to sell. (even if market prices are running higher than MSP)
other crops	NOT open ended. Means, Government will buy ONLY when their prices fall below MSP in open market.

How is MSP determined?

• Commission for Agricultural Costs and Prices (CACP) since ’85
• Under Agriculture ministry (and NOT consumer affairs ministry).
• CACP Has two non-official members from farming community.
• CACP recommends minimum support prices (MSP) based on certain economic criteria.
• Subsequently, the center announces MSPs for 24 major agricultural commodities, including sugarcane, before each season.
• MSP announced for both RABI and Kharif SEASONS.

Season	North India	South India
Kharif: June to Sept	Rice, Cotton, Bajra, Maize, Jowar, Tur	Rice, Maize, Ragi, Jowar, Groundnut
Rabi: Oct to March	Wheat, Gram, Rapeseeds and Mustard, Barley	Rice, Maize, Ragi, Groundnut, Jowar
Zaid: April-June	Vegetables, Fruits, Fodder	Rice, Vegetables, Fodder

• Sugarcane is a kharif crop. (says Hindu)
• 60% of India’s foodgrain and oilseeds grown in Kharif Season. (says Economic Survey)

[Act 2] Sugar pricing problem

Sugar pricing coverned under Essential Commodities (EC) Act 1955 => Sugarcane (Control) Order 1966

MSP	CACP recommends this price.
FRP	Fair and remunerative price (FRP) Rs. 220 per quintal. dept. of food and public distribution decides It is price which sugar factories pay to farmers. FRP takes into account the cost of production of sugarcane, recovery rates, and pricing of sugar and its by-products Important byproducts: molasses, bagasse, and press mud.
SAP	State administered price. State governments decide. Rs. 280 in UP. Higher than Union’s FRP

• In recent years, good production of sugarcane + previous stock of sugars = retail price of sugar has declined.
• Then State government should reduce the SAP as well- otherwise sugarmill owner’s profit margin will decline.
• But state governments not doing this, to keep farmer votebank happy.
• But state governments have not reduced the SAP.
• Result: UP Mill owners have ~6000 crore rupees payment pending to farmers.

SEFESU-2014

• To give interest-free bank loans to sugar mills. So they can clear arrears to farmers.
• By Department of food and public distribution, under consumer affairs ministry.
• full name: Scheme for Extending Financial assistance to Sugar Undertakings (SEFASU-2014)
• although instead of SEFESU, a more apt name would have beeen “राजीव गाँधी मिल मालिको की तिजोरी साफ़ होने से बचा लो योजना.”

C.Rangarajan on Sugar pricing

• State Government should stop this SAP mechism.
• State Government should  adopt the the already existing national FRP system.
• Sugarcane prices should be linked with market price of sugar after crushing. (meaning if retail sugar price goes up then increase FRP, when it goes down then decrease FRP.)
• Not all states accept Rangarajan.

Enough of MSP. Moving to the next topic

[Act 3] Food Corporation of India (FCI)

• open-ended procurement of food grains
• Storage of foodgrains.
• Distribution of foodgrains.

 

Who procures what?

Wheat & rice	FCI
Coarse grain	State Governments
Oil seed & Pulses	by NAFED & other Central agencies under the Price Support Scheme (PSS) when the market rates of these commodities fall below MSP.

FCI: procurement problems

1. procurement successful mainly rice and wheat
2. That too only in a few states like Punjab, Haryana, Andhra Pradesh, and Madhya Pradesh.
3. Government keeps raising MSP but traders unwilling to pay that much to farmers. Ultimately, FCI has to procure.
4. This higher procurement leads to exceeding stocks than the quantity necessary as buffer stock (to fight drought/worst case scenario).
5. So, FCI has to carry forward this buffer stock to next year. But godowns capacity insufficient.
6. Result? Rotten grain.

Open Market Sale Scheme (OMSS)

• FCI can E-auction of Rice and Wheat.
• August 2014: FCI began selling wheat to flour millers, traders and food companies under this scheme.

But Why?

• FCI has large (unmanageable) buffer stock of wheat=> better sell them away.
• Since last year, (retail) wheat price increased from 16 to 19 / kg.=> if FCI sells in open market=> supply will increased => retail price should decrease.

• Therefore Government wants to hit two birds with one stone through OMSS.

Data not important except for FCI- Management trainee interviews

FCI	bidder has to pay
old wheat stock	Rs.1500 + transport cost
new wheat stock	1.05 x (Rs.1500 + transport cost) (meaning 5% premium)

Decentralized Procurement Scheme (DCP)

• Launched after mid-90s.
• Under this scheme, the State Government directly purchase of paddy and on behalf of FCI (the Union Government).
• State Governments also store and distribute these foodgrains under TPDS and other welfare schemes.

Benefits of Decentralized procurement:

• Reduces transport costs, transit losses, leakages.
• Reduce food prices in the open market. (Because less leakage and transit losses)
• Increase food availability.

Economic survey observes

1. Only few states implemented this Decentralized procurement scheme – And that too only for rice procurement
2. Survey recommends all states should adopt this scheme, for both rice & wheat.

Storage expansion schemes

Since FCI’s godown capacity is insufficient, they’ve taken following initiatives

#1: Private Entrepreneurs Guarantee (PEG) Scheme.

• Minister of Consumer Affairs, Food and Public Distribution
• Objective: To increase grain storage capacity through private entrepreneurs.
• Under the scheme FCI guarantees to hire private godowns for 10 years.

#2: Grameen Bhandaran Yojana

• by NABARD
• Funds given for construction and renovation of godowns in rural areas
• Private companies, entrepreneurs, NGO and self-help groups eligible.

#3: other initiatives

• 100% FDI allowed in warehouse construction.
• 150% Income tax deduction allowed, for construction of warehouses.
• Government has setup a statutory body: Warehousing Development and Regulatory Authority (WDRA) for supervision of warehouses across India.
• Warehouse receipts are made fully negotiable i.e. can be used for taking loans from banks and trading at commodity exchange.

Budget 2014: on Public procurement reforms

• We’ll restructure FCI
• to reduce losses in transportation and distribution losses
• We’ll enhance the PDS efficacy. (Efficacy = Capacity or power to produce a desired effect)
• Even if there is inadequate rainfall (to due EL NINO), we’ll still provide wheat and rice at reasonable prices to poors.
• If and when required, we’ll sell FCI’s foodgrains in open market to keep prices under control (for the middle class)

[Act 4] Subsidies+ MSP = Food inflation + Resource misallocation

Economic survey blame subsidies and MSP for the food inflation.

• With rising incomes, Junta shifting away from wheat, rice and staples towards more superior food like vegetables, fruits, eggs, milk, and meat.
• In a market economy, supply side resources get reallocated as per purchase pattern from demand side.
• For example, if people buy more tomatoes, some farmers shift from wheat farming, and put their land-labor-capital for tomato cultivation.
• But because of the fertilizer-diesel-electricity subsidy on one side and MSP regime on the other, the farmers are continuing to stay in wheat cultivation instead of growing something else.
• This has resulted in high level inflation in non-cereal food viz. vegetables, fruits, edible oil.
• + hidden cost of leakages, inefficiency, and illegality that flourish alongside the public system
• Market-based economies often provide income support, food stamps, and cash transfers to farmers and producers for protecting them but without distorting the resource allocation.
• India needs to adopt the same system.

Survey reforms

• Large food stock, yet high food inflation. Because government becoming the single largest buyer.
• Emphasis on rice+wheat procurement but consumer preference changing.
• %Cereal Expenditure declined over the years. People spending more on  protein-rich food.
• Therefore, instead of giving rice / wheat to juntaa, Government should give them food stamps or DBT. Let’em decide which food item they want to buy.
• This’ll also reduce subsidy leakage and fiscal deficit.
• This will motivate farmers to shift from rice-wheat to other crops.

Appendix: MSP price for 2014-15

CAPF 2014 did ask a question from these figures. Altogather cost : benefit bad. Anyways, here goes the data from the official site of CACP

Commercial		Rabi Crops
Jute (TD5)	2400	Wheat	1400
Sugarcane	220	Barley	1100
Copra (Milling)	5250	Gram	3100
Copra (Ball)	5500	Lentil (Masur)	2950
		Rapeseed/ mustard	3050
		Safflower	3000

Kharif Crops

Paddy Common	1360	Urad	4350
Paddy Grade “A”	1400	Groundnut	4000
Jowar-Hybrid	1530	Sunflower Seed	3750
Jowar-Maldandi	1550	Soyabean Black	2500
Bajra	1250	Soyabean Yellow	2560
Ragi	1550	Sesamum	4600
Maize	1310	Nigerseed	3600
Tur (Arhar)	4350	Medium Staple Cotton	3750
Moong	4600	Long Staple Cotton ^^	4050