Inflation woes: Is Food Corp part of solution or problem?

For the past several years, double-digit food inflation in India has coexisted with record food grain stocks with the Food Corporation of India (FCI). Currently, double the mandatory buffer stock level is with the FCI. So is the FCI part of the problem and how do we make it part of the solution?

CNBC-TV18's Latha Venkatesh discusses the issue with Dr Ashok Gulati, Professor of Agriculture Economics and past Chairman of the Agricultural Prices Commission; Mr T Nanda Kumar, Chairman NDDB and Former Agriculture Secretary and Mr Sanjay Kaul, CEO of National Collateral Management Services Ltd and former part of the Agriculture Ministry. All of them have contributed columns and research papers in this area.

Below is a verbatim transcript of the discussion on CNBC-TV18

Q: I have with me the objectives of the FCI and it says effective price support operations for safeguarding interest of farmers, distribution of food grains throughout the country for the PDS and maintaining satisfactory level of operational and buffer stocks or food grains to ensure food security. I don't see price management as even a goal. Was the FCI always set up only with the idea of procurement and price management became an incidental objective just given to it in the past few years?

Gulati: The basic objective of FCI - FCI was created at 1965 and at the same time agriculture prices commission within a week's difference was created. The prices commission was to recommend so-called a remunerative prices for the farmers and FCI was to ensure that those prices are somehow delivered to them. FCI was supposed to be the lender of the last resort in a way to the farmers. That is farmer can get a better price from the market, let him sell there and if the prices collapse then the FCI will be there to buy.

That was the original function but buying and then it has to dispose off, where to dispose off and that was in the public distribution system and that public distribution system before FCI was largely fed by PL 480 imports. So that will gradually substitute it from PL 480 imports we went on to our domestic procurement and over time with green revolution, the procurement increased and now the situation is it has gone to such a large level that there is need to do a good thinking.

Q: My point is price management was never inherently and systematically thought through. It seems to have been given in as an objective only in the last few years when food inflation became such an aging issue. Is that right?

Gulati: Once you are giving through the Public Distribution System (PDS) and that price is fixed and subsidized, in a way that acts also as anchor on the open market prices depending upon how much you are distributing.

Q: Yes, but that always is a very small portion of aggregate demand. Therefore while it might protect a vulnerable segment or supposedly vulnerable segment, it is certainly not intended to cool prices in the market. I think the Government of India never thought through -- how to use FCI to surprise management? Protection of vulnerable section is, yes, through PDS but we have not thought through how to use it for price management in the sense of open market operations, have we?

Gulati: That is right. That is somewhat a later development when you have huge surpluses accumulated, normally you never had those and very few years and you have to liquidate and that thing is coming later in the game.

Q: Since you were in the ministry at that time, was open market operations thought through at all, what went wrong, why is it that record buffer stocks could never be used to cool prices throughout the country?

Kumar: There are two parts to the story. The first is that given the nature of FCI and the need for FCI to buy whenever prices fall below MSP, FCI has no control on how much quantity they should buy. They have to take up everything that is offered. On the other side, the private market would buy if they see a profit at the end of the year. So if they don't see a profit at the end of the year or the MSPs are high, FCI ends up procuring a substantial amount of food grains because that is their mandate.

The question is if you cannot push everything down into the PDS system then you are left with the surplus and if FCI is left with the surplus that means there is some shortage on the private side of the market. So how do you manage this? So we started with some kind of offloading of stocks on a transparent auction basis. At that time we thought of MSP plus freight as a benchmark price.

Q: When did FCI start offloading outside PDS?

Kumar: I think 2003-2004 probably around that time when we had surpluses. 2006-2007 we were in short supply so we didn't do too much. I think 2003-2004 would be the correct year to do that. But what is lacking in the whole system is a clear policy on: How to offload? When to offload? What should be the modalities of offloading?

So, if you want to do a real price management, we need a very clear roadmap on how surplus stocks will be offloaded into the market. Without that it becomes a very ad hoc kind of a decision that okay, prices are rising, let us offload some then hold back then offload some so that is the real problem.