How India’s grain policies have stoked FCI’s debt binge

Food Corporation of India (FCI), the state grain procurement agency, buys rice and wheat from growers every season at guaranteed prices but farmers fear that those purchases may end under new agricultural laws at the centre of recent protests.

Farmers say the new laws will shut the regulated wholesale markets they depend on to take their produce. But FCI has racked up huge debts from the purchases required to meet its role as a buyer of last resort and to supply India’s food welfare programme.

How have FCI’s purchases created massive grain stockpiles?

For years, the government, across different administrations, has ordered FCI to purchase grain in excess of its requirement to run the world’s biggest food welfare programme as a buyer of last resort to placate farmers.

FCI’s safety net encourages farmers, especially from states such as Punjab, Haryana, Madhya Pradesh and Chhattisgarh to grow tonnes of rice and wheat.

FCI supplies grain to more than 800 million beneficiaries entitled to receive 5 kg of rice and wheat every month at 3 rupees and 2 rupees a kg, respectively.

Robust output in many states and rising purchases by FCI have led to overflowing warehouses.

By the end of the crop year to June 2020, FCI’s rice and wheat stocks surged to 97.27 million tonnes against its requirement of 41.12 million tonnes.

According to official estimates, the value of the extra grain lying at state warehouses comes to about $39 billion.

FCI cannot export the grain as its rice and wheat are more expensive than world prices. Also, World Trade Organization rules restrict exports of grain meant for welfare programmes.

Why FCI’s purchases have risen in the past two decades?

Punjab and Haryana were at the forefront of India’s Green Revolution in the 1960s and have traditionally accounted for the bulk of FCI’s purchases.

But in the past two decades, farmers from other states such as Madhya Pradesh and Chhattisgarh have ramped up rice and wheat output, increasing FCI’s purchases.

In 2020, Madhya Pradesh sold 12.94 million tonnes of wheat to FCI against 3,51,000 tonnes in 2000/01. FCI’s purchase of rice from Chhattisgarh totalled 5.2 million tonnes this year, up from 8,57,000 tonnes two decades ago.

Why has FCI run up debts?

In the past decade, FCI’s expenses have risen as the guaranteed price for common rice has climbed by 73 per cent and for wheat by 64 per cent.

However, the prices at which FCI sells rice and wheat to India’s food welfare programme have remained unchanged.

The government is supposed to pay the difference between FCI’s procurement prices and sales prices. But for the past few years, the government has not fully compensated FCI, forcing it to borrow every year. FCI’s total debt has ballooned to 3.81 trillion rupees ($51.83 billion).

For the current fiscal year to March 2021, the government earmarked 1.15 trillion rupees in food subsidies, but FCI is likely to spend about 2.33 trillion rupees, partly because of free grain distributions during the coronavirus lockdown, stretching its debt further.

Reuters