Relevant Problem Background Organisational Hierarchy

Revenue Model of FCI Objectives of FCI Effective price support operations for safeguarding the interests of the farmers. Distribution of Food grains Maintaining satisfactory level of operational and buffer stocks of food grains to ensure National Food Security Regulate price vs Free Markets Distribution of food grains throughout the country for public distribution system

Farm Support in some developed countries Problems faced by FCI

I.

About FCI

Food Corporation of India was setup on 14th January 1965 under Food Corporation Act 1964 with authorized capital of almost INR 25.0 billion [1] to implement the national policy for price support operations, procurement, storage, preservation, inter-state movement and distribution operations. It was incorporated in order to fulfill following objectives of the Food Policy [3]: Effective price support operations for safeguarding the interests of the farmers. Distribution of food grains throughout the country for public distribution system Maintaining satisfactory level of operational and buffer stocks of food grains to ensure National Food Security Govt. of India provides funds to FCI to meet the cost of fixed assets like Offices, Godowns, Silos, Railway Sidings and Weighbridges. For financing the food grains and sugar operations entrusted to corporation by the Govt. of India, the working capital is provided by the consortium of 44 banks. FCI purchases the food grains for the Central Pool at the procurement prices and issues the same at the Central Issue Prices fixed by the Government of India. The issue price so fixed does not cover the full cost incurred by the Corporation in the procurement, movement, storage and distribution of food grains. The different price represents the consumer subsidy for the Public Distribution System, and is paid to the Corporation by the Government of India. The Corporation also maintains buffer stock of food grains on behalf of the Govt. of India and the carrying charges of the buffer stocks are also reimbursed by the Government to the Corporation.

Food Subsidy released to FCI including sugar (Rs. in Crores #) Year Subsidy
199596 199697 199798 1998-99 1999-2K 9002.25 2000-01 11652.13 2001-02 2002-03 2003-04 2004-05 200506*

5325.45 6016.73 7900.00 9049.34

16724.00 22678.72 23874.04 23327.73 8852.56

* up to 14-07-2005
It operates through 5 zonal offices and a regional office in Delhi. Each year, the Food Corporation purchases roughly 15-20 per cent of India's wheat output and 12-15 per cent of its rice output. The losses suffered by FCI are reimbursed by the Union government, to avoid capital erosion, and thus declared as a subsidy in the annual budget.

Revenue Model of FCI FCI is not a profit making organisation. At the beginning of every quarter, FCI estimates its expenditure for the quarter based on the farm subsidies, officer salaries etc and also calculates its revenue which comes through distribution done by the State departments. Based on the deficit, the Government gives advanced subsidies to the FCI for the quarter.

How does FCI get money from Government of India? The FCI has been borrowing an average of Rs.25000 crore from a consortium of Banks consisting of 65 Member Banks under the leadership of State Bank of India. In February 2005, the Corporation started borrowing through Bonds and its first tranche of the Bonds could raise over Rs 9000 crore in a record time of just less than one day against the target size of Rs.500 crore to be raised in 10 days. The Bond issue is a land mark achievement in seeking cheaper source of finance. This is the first step towards debt restructuring plan of the FCI. Funds being the life blood of an organization, an appropriate mix of the borrowing by way of Bonds, terms loans and Consortium financing for meeting the total funds requirement of the FCI would be resorted to keeping in view the seasonal variations in cash flow and core funding requirements of the FCI. Hierarchy of FCI Chairman & Managing Director Addl.Secretary & F.A, Ministry of CAF&PD Joint Secretary, Min. Of Consumer Affairs Food & Public Distribution Joint Secretary, (DM)Min.of Agriculture Krishi Bhawan Managing Director, Central Warehousing Corporation Principal Secretary(Food), Govt. of Punjab, Deptt. of Food, Civil Supplies & Consumer Affairs

LEGENDS CGM GM Fin IR-L A/CS M&P CPF QC S&C P&IR Chief General Manager General Manager Finance Industrial Relation-Labour Accounts Marketing & Procurement Contributory Provident Fund Quality Control Storage & Contract Policy & Industrial Relations IA & PV PE A&R P&R I&E TRG Vig Movt Engg Internal Audit & Physical Verification Personnel Establishment Appeal & Review Planning & Research Import & Export Training Vigilance Movement Engineering

Activities performed by FCI

I. Procurement of Food grains

To nurture the Green Revolution, the Government of India introduced the scheme of minimum assured price of foodgrains which are announced well before the commencement of the crop seasons, after taking into account the cost of production \ inter-crop price parity, market prices and other relevant factors.

1.

The Food Corporation of India along with other Government agencies provide effective price assurance for wheat, paddy and coarsegrains.

2.

FCI and the State Govt. agencies in consultation with the concerned State Govts. establish large number of purchase centres throughout the state to facilitate purchase of foodgrains

3.

Centres are selected in such a manner that the farmers are not required to cover more than 10 kms.to bring their produce to the nearest purchase centres of major procuring states.

4.

Price support purchases are organized in more than 12,000 centers for wheat and also more than 12,000 centers for paddy every year in the immediate post-harvest season.

5.

Such extensive and effective price support operations have resulted in sustaining the income of farmers over a period and in providing the required impetus for higher investment in agriculture for improved productivity.

6.

To name a few states about Rs.41,000 millions for paddy and 43,000 millions for wheat in Punjab and Rs. 45,000 millions for levy rice in Andhra Pradesh is paid to the farmers/ millers during wheat / rice procurement season.

7. 8.

India today produces over 200 million tonnes of foodgrains as against a mere 50 million tonnes in 1950. In the last two decades, foodgrain procurement by Government agencies have witnessed a quantum jump from 4 million tonnes to over 25 million tonnes per annum.

9.

Foodgrains are procured according to the Government - prescribed quality standards.

10. Each year, the Food Corporation purchases roughly 15-20% of India's wheat production and 12-15% of its rice production. 11. This helps to meet the commitments of the Public Distribution System and for building pipeline and buffer stock.

II. Storage Management 1. Another facet of the Corporation's manifold activities is the provision of scientific storage for the millions of tonnes of foodgrains procured by it. In order to provide easy physical access in deficit, remote and inaccessible areas, the FCI has a network of storage depots strategically located all over India. These depots include silos, godowns and an indigenous method developed by FCI, called Cover and Plinth (CAP). 2. CAP storage is a term given to storage of foodgrains in the open with adequate precautions such as rat and damp proof plinths, use of Dunn age and covering of stacks with specially fabricated polythene covers etc. FCI has 24.18 million tonnes (owned & hired) of storage capacity in over 1451 godowns all over India 3. In order to reduce storage and transit losses of foodgrains and to bring additional resources through Private Sectors participations., Govt. of India had announced a National Policy on Handling Storage and Transportation of Foodgrains in June, 2004 for Bulk and conventional godowns.In the Ist phase,after a series of deliberations, it was approved that total capacity of lakhs MT be created at the identified based depots and feild depots through private sector participation on Build-Own & Operate (BOO) Basis. RITES were appointed as consultants for the project. A letter of acceptance of proposal of the project in two circuits has been awarded to M/s. Advani Exports Ltd. , the lowest bidder to complete the Project in 3 years from the date of execution of the service agreement.

III.

Transport Management

Ensuring accessibility to food in a country of India's size is a Herculean task. The foodgrains are transported from the surplus States to the deficit States. The foodgrain surplus is mainly confined to the Northern States, transportation involves long distance throughout the country. Stocks procured in the markets and purchase centers is first collected in the nearest depot and from there dispatched to the recipient States within a limited time. FCI moves about 250 Lakh tonnes of foodgrains over an average distance of 1500 Kms. Movement Lakh Tonnes (Prov.) Sugar 12.0 11.0 11.0 7.0 3.0 3.0 2.0 0.8 1.4 1.8 2.4 1.8 1.9 3.5

Year 1996-1997 1997-1998 1998-1999 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 2008-2009 2009-2010

Foodgrain 235.5 191.1 190.8 221.9 161.6 204.5 248.8 297.0 338.7 315.5 288.7 277.92 256.65 312.25

Total 247.8 202.1 201.8 228.9 164.6 207.5 250.8 297.8 340.1 317.3 291.1 279.7 258.6 315.8

Regularly rice and wheat procured in the Northern States is moved to far flung corners Imphal, Manipur or Kanyakumari in Tamnilnadu and to the higher reaches of the Himalayas in the North. An average of 12,00,000 bags (50 Kg) of foodgrains are transported every day from the producing States to the consuming areas, by rail, road, inland waterways etc. The stocks to Kashmir valley, H.P, Manipur, Sikkim, Meghalaya, which don't have rail link are fed by road A&N Islands and Lakhadweep etc are fed by inland waterways. Thus by effective planning and Management of the transport System FCI regularly moves foodgrain and sugar from the procuring Region to the concerning Region.

IV.

Distribution of Foodgrains

The national objective of growth with social justice and progressive improvements in the living standards of the population make it imperative to ensure that foodgrain is made available at reasonable prices. 1. Public Distribution of foodgrains has always been an integral part of India s overall food policy. It has been evolved to reach the urban as well as the rural population in order to protect the consumers from the fluctuating and escalating price syndrome. Continuous availability of foodgrain is ensured through about 5 lakhs fair price shops spread throughout the country. A steady availability of foodgrains at fixed prices is assured which is lower than actual costs due to Govt. policy of providing subsidy that absorbs a part of the economic cost. The Govt. of India introduced a scheme called Targetted Public Distribution Scheme (TPDS) effective from June, 1997. The stocks are issued under this scheme in the following two categories:a. Below Poverty Line (BPL): Determination of the families under this category in various states is based on the recommendation of the Planning Commission. A fixed quantity of 35 Kg. foodgrains per family per month is issued under this category. The stocks are issued at highly subsidized Price of Rs.4.15 per Kg. of wheat and Rs. 5.65 per Kg. of rice. b. b) Above Poverty Line ( APL) Families which are not covered under BPL are placed under this category. The stocks are issued at Central Issue Price of Rs. 6.10 per Kg. of wheat and Rs. 8.30 per Kg. of rice. Antyodaya Anna Yojna - During the year 2000-2001 Govt. of India decided to release foodgrains under Antyodaya Anna Yojna. Under this scheme the poorest strata of population out of earlier identified BPL population is covered. Foodgrains are being provided to 2.5 crores poorest of the poor families out of the BPL families at highly subsidized rates of Rs.2/- per kg. of wheat and Rs.3/- per kg. of rice by FCI. This is the biggest food security scheme in the world.

2. 3. 4.

5.

Allotment/Offtake of Wheat/Rice (Figs. In Lakh tones) APL BPL AAY TPDS TOTAL Mid Day Meal Nutrition Prog Hostels Annapurna Grain Bank NPAG WFP Defence Others2 Dcp Offtake Open Sale Grand Total
1

Scheme Qty. allotted Wheat Rice 118.3 59.7 60.2 113.9 34.8 67.2 213.4 240.7 4.9 22.8 5.8 3.4 0.6 2.5 0.3 0.6 0.0 0.1 0.2 0.6 0.4 0.1 1.2 1.2 40.5 24.0 0.0 0.0 46.5 10.3 313.9 306.2

Qty. lifted Wheat 71.2 42.6 25.6 139.4 4.5 5.1 0.7 0.3 0.1 0.1 0.5 1.3 4.7 50.9 16.4 223.8 Rice 49.5 65.4 43.5 158.4 18.5 2.4 2.7 0.6 0.1 0.3 0.1 1.2 8.8 78.4 5.2 276.5

1 For the period 4/2009 to 3/2010 2 Includes additional allocations made at various prices for relief/festivals/incentives etc.

The Central Issue Price (CIP):(Rate: Rs./Qtl.) Commodity Effective From BPL Families APL Families Wheat 01- 07- 2002 415 610 Rice Common 01- 07- 2002 565 795* Rice Grade-A 01- 07- 2002 565 830 (*): Applicable to J&K, Himachal Pradesh, Sikkim, Uttaranchal and NE States. There are number of other welfare schemes of the Govt. of India : (a) Mid-Day-Meal-Scheme (MDM)- The Govt. of India have introduced MDM National Programme of Nutrition Support to Primary Education in Primary Schools w.e.f. 15.8.1995. Under the scheme every students upto 5th class of Govt. schools is entitled for 3 Kgs. of wheat/rice per month @ 100 Grams. Since October 2007 allocation of foodgrains have also been made for the students from 6th to 8th class in the educationally backward blocks and every student is entitled for 150 Grams of foodgrains per child per school day. The Scheme is partly run by Govt./Aided Schools/Local Bodies to serve free cooked / processed hot meal. FCI is supplying foodgrains free of cost to the State/UTs. This scheme is partly financed by Ministry of HRD. (b) Wheat Based Nutrition Programme (WBNP) - A scheme run by Department of Women and Child Development, Ministry of Women & Child Development for providing nutritious food to children below 6 years of age and expectant/lactating women. Foodgrains supplied by FCI at BPL rates. (c)&(d) SC/ST/OBC Hostels & Welfare Institutions & Hostels- The Ministry of CAF&PD and the Ministry of Social justice & Empowerment coordinate to monitor of the Scheme for providing foodgrains to SC/ST/OBC Hostels. Hostels having students belonging to SC/ST/OBC categories are eligible to draw 15 Kgs. Foodgrains per resident per month. The Government of India decided that w.e.f. 2.11.2000 foodgrains (wheat/rice) will also be allotted to the state Governments at the rate of 5 Kg per head per month for indigent people living in Welfare Institutions, such as. Beggar Homes, Home for Nari Niketan etc. sponsored by the State Govts. and the concerned administration. Foodgrains are supplied by FCI at BPL rates. It may be clarified that from the year 2002-03, the MOCAF&PD has been making the requirement of the State/UT under the head "Welfare Institutions & Hostels" to meet the requirement of the State/UT for providing foodgrains to different type of welfare institutions. Since April 2005, the Ministry of CAF &PD has enhanced quota of allotment under this scheme to 5% of the monthly allotment made under BPL & AAY. Presently, the foodgrains is being allotted by MoCAF&Pd on the basis of average offtake during last three years under the scheme. (e) Annapurna Scheme- Indigent Senior Citizens of 65 years of age or above eligible for National Old Age Pension under NOAPS, but not getting pension can get 10 Kgs of foodgrains per month. FCI is issuing foodgrains under this scheme to State/UT Govts. at BPL rates. Under This scheme of Ministry of Social Justice & Empowerment, Indigent people living in Welfare institutions like Beggar Homes, Orphanages, Nari Niketans etc. are given 15 kgs of foodgrains per person per month. Foodgrains are supplied by FCI at BPL rates. Presently, the scheme is being run by the Ministry of CAF&PD. (f) Sampoorna Gramin Rozgar Yojana- A scheme financially supported by Ministry of Rural Development in which foodgrains are supplied to the States/ UTs by FCI free of cost.

AAY Families 200 300 300

(g) Special Component of Sampoorna Gramin Rozgar Yojna - Under the Special component of the SGRY financed by Ministry of Rural Development for augmenting food security through additional wage employment during natural calamity. FCI release foodgrains free of cost to the State/UTs. Since 1st April 2008 no allotment of foodgrains has been made by the Govt. of India under SGRY.

(h) Foodgrains to Adolescent Girls Pregnant and Lactating Mothers ( AGPLM). GOI introduced this Scheme w.e.f January , 2003 Under this scheme foodgrains is being supplied by FCI at BPL prices to the State/UT Govt. for Adolescent Girls, Pregnant and Lactating Mothers ( AGPLM). The identified under nourished woman/girl is provide 6 Kg. of foodgrains (wheat/rice)/month. The scheme is partly supported by Planning Commission. The scheme is being run by MoCAF&PD with the new name Nutritional Programme for Adolescent Girls (NPAG). (i) World Food Programme (WFP) - FCI is sparing stocks to WFP projects from the Central Pool stocks as and when required by them. FCI is working as 'FOOD BANK' for World Food Programme(WFP) projects in India . When India was deficit of foodgrains, WFP used to get stocks to meet the deficiency through import. (J) Emergency Feeding Programme - Under this scheme, Ministry of CAF & PD releases allocation of rice at BPL rates, for KBK Districts (Bolangir, Kalahandi, Koraput, Malakangiri, Nabarangpur, Naupada, Rayagada & Sonepur) of Orissa State on monthly basis. Under this scheme, rice @ 7.5 kg/beneficiary/month is issued for 2 lakh beneficiaries. This programme is being run by the Ministry of CAF&PD. (k) Grain Bank - This scheme provides Grants for establishment of village Grain Bank to prevent deaths of Schedule Tribes specially children in remote and backward tribal villages facing or likely to face starvation and also to improve nutritional standards. The scheme provides funds for building storage facility, procurement of weights & measures and for the purchase of initial stock of one quintal of foodgrains of local variety for each family. The allocation of foodgrains was made by the GOI, Ministry of Tribal Affairs during the year 20022003. Under this scheme foodgrains are allotted to States at BPL rate. Since 2006-07 the scheme is being run by Ministry of CAF&PD. The cost of foodgrains as food component is being paid to FCI in advance at economic cost. State Govts. are lifting foodgrains free of cost from FCI. (l) National Food for Work Programme - this programme has been launched by the Prime Minister during November 2004 for providing foodgrains in identified 150 most backward districts of the country. The beneficiaries of this programme are labourers engaged by the State Govt. in development work. Foodgrains is given as part of wages under the scheme to the rural poor at the rate of 5 kg. per manday. More than 5 kg. foodgrains can be given to the labourers under this programme in exceptional cases subject to a minimum of 25% of wages to be paid in cash. Under this programme foodgrains ae issued to states/UTs free of cost. This scheme is mentored by Ministry of Rural Development. Since 2006-07 the scheme has withheld

V. Stock Management The Central Pool stock are maintained by FCI and State Govts. and their agencies. The total stock in Central Pool as on 28/02/2010 is 453.38(Figs. in Lakh MT) Stock in Central pool as on 28/02/2010 Foodgrains Rice* Wheat Total With FCI 137.94 76.29 214.23 With State Govt. / Agencies 128.55 104.31 232.86 Grand Total 266.49 180.60 447.09

* Unmilled Paddy with FCI & State agencies also shown in terms of Rice Stocks of Foodgrains & Sugar in Cenral Pool as on 28.02.2010 (Figs. in Lakh MT) In Storage 266.49 180.60 0.00 447.09 3.79 0.26 451.14 In Transit 3.01 3.28 0.00 6.29 0.00 0.16 6.45 Total 269.50 183.88 0.00 453.38 3.79 0.42 457.59

Rice Wheat Wheat lying in Mandies Total Coarse Grains Sugar Grand Total Position on 06/03/2010

Objectives of FCI
1) Effective price support operations for safeguarding the interests of the farmers.

The harvest season for wheat starts in the month of April while that for paddy in the month of October. FCI and the State Govt. agencies in consultation with the concerned State Governments establish large number of purchase centres throughout the state to facilitate purchase of food grains. Centres are selected in such a manner that the farmers are not required to cover more than 10 kms to bring their produce to the nearest purchase centres of major procuring states. Price support purchases are organized in more than 12,000 centres for wheat and also more than 12,000 centres for paddy every year in the immediate post-harvest season.

How does Government set Minimum Support Price The Union Government announces MSPs at which it guarantees open-ended purchase of whatever grain is offered by farmers. The Agricultural Prices Commission was set up in January, 1965 to advise the Government on price policy of major agricultural commodities with a view to evolving a balance and integrated price structure in the perspective of the overall needs of the economy and with due regard to the interests of the producer and the consumer. Towards this end, The MSP is announced before the sowing season on the basis of C2 cost of production (i.e., all costs including the imputed costs of family labour, owned capital, and rental on

owned land) on the recommendations of the Commission for Agricultural Cost and Prices (CACP). At this price the central government should undertake open ended purchase of FAQ grain to assure growers adequate return on cost. The central government may purchase above MSP in situations where market conditions warrant to make up any shortages in normative buffer stocks and to meet PDS requirements. This price should be determined by the FCI on the basis of market assessment in each year. And this should not form the basis of MSP for the next year. Apart from the above factors political factors such as election years tend to affect the MSP. Being an agrigarian economy, wheat and paddy farmers form a huge vote bank and thus influence the results. The incumbent government generally takes this factor into consideration when setting the MSP. __________________________________________________________________________________ Problems Due to the huge supply of wheat and paddy in the months of April and October it becomes difficult for the government to purchase all the supply available from the farmers. So, Private traders who pay in cash and give the option of purchasing the harvest directly at the farms seem more lucrative to the farmers even when the private traders may be offering lower purchasing prices. These private traders then hoard the produce in their godowns and create artificial supply shortages resulting inartificial price increases. They then slowly release the supply at the higher price thus causing Inflation. 2) Distribution of Food grains The national objective of growth with social justice and progressive improvements in the living standards of the population make it imperative to ensure that food grain is made available at reasonable prices. Public Distribution of food grains has always been an integral part of India s overall food policy. It has been evolved to reach the urban as well as the rural population in order to protect the consumers from the fluctuating and escalating price syndrome. Continuous availability of food grain is ensured through about 5 lakhs fair price shops spread throughout the country. A steady availability of food grains at fixed prices is assured which is lower than actual costs due to Govt. policy of providing subsidy that absorbs a part of the economic cost. The Govt. of India introduced a scheme called Targeted Public Distribution Scheme (TPDS) effective from June, 1997. The stocks are issued under this scheme in the following two categories:a) Below Poverty Line (BPL): Determination of the families under this category in various states is based on the recommendation of the Planning Commission. A fixed quantity of 35 Kg food grains per family per month is issued under this category. The stocks are issued at highly subsidized Price of Rs.4.15 per Kg. of wheat and Rs. 5.65 per Kg. of rice.

Antyodaya Anna Yojna - During the year 2000-2001 Govt. of India decided to release food grains under Antyodaya Anna Yojna. Under this scheme the poorest strata of population out of earlier identified BPL population is covered. Food grains are being provided to 2.5 crores poorest of the poor families out of the BPL families at highly subsidized rates of Rs.2/- per kg of wheat and Rs.3/- per kg. of rice by FCI. This is the biggest food security scheme in the world. b) Above Poverty Line ( APL) Families which are not covered under BPL are placed under this category. The stocks are issued at Central Issue Price of Rs. 6.10 per Kg of wheat and Rs. 8.30 per Kg of rice. 3) Maintaining satisfactory level of operational and buffer stocks of foodgrains to ensure National Food Security sFood prices in India are primarily determined by domestic demand supply factors and domestic price policy. India meets the bulk of its large food demand through domestic production, barring few commodities like edible oils and pulses where the import dependence is about 35 per cent and 15 per cent, respectively. In occasional shortage years, the country has also resorted to imports for wheat and sugar though it is generally an exporter in these commodities (Table 1). Indias occasional imports of such commodities translate into higher global food prices as the import demand is large. Hence, imports do not necessarily lead to domestic prices moving lower.

Table 1: Production-Consumption Gap in Major Food items in India (million tonnes) Rice Wheat Pulses Sugar Oilseeds 2004-05 2.3 -4.2 -0.9 -4.1 -4.6 2005-06 6.7 -0.4 -1.0 0.7 -1.9 2006-07 6.6 2.4 -1.6 8.3 -6.2 2007-08 6.2 2.2 -2.6 5.1 -4.0 2008-09 P 6.0 9.8 -2.2 -8.1 -4.7 2009-10 P -2.8 2.1 -2.3 -7.5 -6.0 P: Projected (-): Indicates shortage Source: Estimated from data from Ministry of Agriculture and US Department of Agriculture
One important determinant of prices of agricultural production in India has been the minimum support price (MSP) announced by the Government for procurement of various commodities. The high increase in MSP since 2007-08 has given an upward bias to agricultural prices (Table 2).

Table 5: Agricultural Commodities Variations in MSP and WPI (per cent) Commodity Average Annual Growth Rate 2003-04 to 2006- 2007-08 to 200907 10 MSP 2.3 18.3 Paddy WPI 2.0 10.9 MSP 5.1 14.4 Wheat WPI 5.5 6.7 Tur MSP 1.7 18.0

WPI 3.9 26.3 MSP 3.4 23.2 Moong WPI 11.3 13.2 MSP : Minimum Support Price WPI for 2009-10 is averaged up to February 2010 Source: Ministry of Agriculture and Office of Economic Adviser, Ministry of Commerce and Industry.
Reduced availability of food grains also tends to keep food prices high. As per the Economic Survey 2009-10, per capita net availability per day of cereals and pulses has been lower than that observed in the previous four decades. The per capita daily availability of food grains was 447 grams in the 1960s and 1970s, which successively increased to 459 grams in the 1980s and 478 grams in the 1990s but came down to 446 grams during 2000-08 and stood still lower at 436 grams in 2008. Severe drought in major parts of the country during the current year has perceptibly worsened food availability further. In particular, the situation is far more worrisome for pulses: its per capita net availability per day has gone down from around 60-70 grams during the 1950s to around 30 grams currently. 4) Regulate prices vs free markets Since wheat and paddy are essential food items, Government determines the price of these commodities itself rather than leaving it to the free market mechanism. Free markets work in essential only when supply is at least marginally greater than demand. But in India there has been a lot of variation as in some year there has been excess supply and in some years excess demand. Thus in such a situation the government/FCI becomes a regulator and tries to maintain price levels by releasing supply whenever price goes high.

5) Distribution of food grains throughout the country for public distribution system The government has set up 1600 depots in 550 districts across India. Thus every district has approximately 3 depots on an average. The depots are maintained by the Central and State governments. The role of FCI is to stock at least 4 months demand across various warehouses in India and send the produce to the various PDS whenever required.

-----------------------------------------------------------------------------------------Farm Support in developed countries Although almost every country follows the MSP mechanism to procure food grains, it is considered very distortionary. This is because rather than allowing the market to decide the price of a good, the government is deciding the prices of goods and thus the supply of those products consequently. Hence farmers will produce only highly profitable goods and essential goods will be ignored.

Other problems faced by FCI and solutions Safe storage of food grains procured is the biggest problem faced by FCI.

Wastage of food grains is not an uncommon eventuality because India has deficient storage capacity and does not have a solid public distribution system so that the food grains reach the poor. India has godowns to store 16 million tones of food grains when it needs almost three times that. What that means is wastage in these times of shortage. The total storage capacity is 28 million tonnes. This leads to losses of 10 15 per cent. Translate this into value... that is 6 million tonnes of grains damaged, unfit for human consumption ... it amounts to Rs 8,000 to Rs 10,000 crores annually." Experts offer many solutions: increase allocation through PDS, give food grain through the NREGA, offload the excess stock in the market, but don't feed it to the rats. A conservative estimate would put the cost of food grains currently lying unprotected at a staggering Rs 28,000 crore, enough to feed at least 2 crore people for over one year.

Solutions like using Linear programming to optimize storage space and transportation have been looked into but there seems to be no solution to the problem in the near future as the high cost of land in the state discourages private players from offering land to FCI. Other solutions include using grain flow management and carefully deciding the distance at which to set up a new procurement centre. Also, FCI can decide to put a limit on how much graings to procure thus minimizing wastage. But the biggest option FCI is contemplating is whether it should look into a public-private parternship Model.

In 2005, NCDEX (National Commodity and Derivatives Exchange Limited) entered into a Memorandum of Understanding with Food Corporation of India (FCI). Under the terms of the MoU, FCI will carry out its procurement and sale of food grains from co-operative societies all over India with the help of NCDEX.
The government uses OMSS as a market intervention mechanism whenever it wants to cool prices of commodities. Normally, FCI carries out auctions of a minimum 100 tonnes and a maximum of 1,000 tonnes in wheat through a tender process, which could take 15 days to a month for stocks to offload in the open market. Selling through the electronic spot exchanges will accomplish the governments attempts to put a lid on price in a timely manner without its having to bother about stocks being lifted from warehouses and collecting payments for their stocks, which will be taken care of by the exchanges. Thus, this will lead to better and more efficient distribution.

This is to achieve FCIs policy of decentralised procurement. National Collateral Management Services Limited (NCMSL), a co company of NCDEX, is engaged in providing warehousing arrangements, quality testing, gradation and assessment for commodities and inventories and other services related to the commodity markets. FCI could also decide to make use of NCDEXs trading platform for procurement and sale of food grains and the two would work together and devise modalities for designing such contracts. FCI would work with NCDEX to promote online trading in foodgrains (both spot and futures) on mutually agreed terms. FCI would also share their warehousing space with NCDEX. Further, FCI has agreed to make available its testing laboratories to NCDEX and

NCMSL while it expects to use the services of NCMSL for third party audit of stocks and operations facilities of FCI. Speaking on the occasion, Mr VK Malhotra, Chairman, Food Corporation of India said, We are continuously trying to improve our working processes and this partnership with NCDEX and NCMSL will enable us to pool in our complementary skills and services. We would also be sending some of our officials for training/deputation to NCDEX/NCMSL to enhance our understanding of commodities trading which can be used to improve our own operations. Mr PH Ravikumar, Managing Director & CEO, NCDEX said, This MoU would lead to the creation of synergies between FCI and NCDEX. FCI is involved with probably the largest ever operation in food grains procurement in Asia while NCDEX is in the process of building a solid infrastructure for trading in commodities.

Methodology in developed countries a) Western View Conventional thinking in westernized countries is that maximizing the farmers profit is the surest way of maximizing agricultural production; the higher a farmers profit, the greater the effort that will be forthcoming, and the greater the risk the farmer is willing to take. Place into the hands of farmers the largest number and highest quality tools possible (tools is used here to refer to improved production techniques, improved seeds, secure land tenure, accurate weather forecasts, etc.) However, it is left to the individual farmer to pick and choose which tools to use, and how to use them, as farmers have intimate knowledge of their own land and local conditions. As with other businesses, a percentage of the profits are normally reinvested into the business in the hopes of increasing production, and hence increase future profits. Normally higher profits translate into higher spending on technologies designed to boost production, such as drip irrigation systems, agriculture education, and greenhouses. An increased profit also increases the farmers incentive to engage in double-cropping, soil improvement programs, and expanding usable area.

b) Food justice An alternative view takes a collective approach to achieve food security. It notes that globally enough food is produced to feed the entire world population at a level adequate to ensure that everyone can be free of hunger and fear of starvation. That no one should live without enough food because of economic constraints or social inequalities is the basic goal. This approach is often referred to as food justice and views food security as a basic human

right. It advocates fairer distribution of food, particularly grain crops, as a means of ending chronic hunger and malnutrition. The core of the Food Justice movement is the belief that what is lacking is not food, but the political will to fairly distribute food regardless of the recipients ability to pay. c) Food sovereignty A third approach is known as food sovereignty; though it overlaps with food justice on several points, the two are not identical. It views the business practices of multinational corporations as a form of neocolonialism. It contends that multinational corporations have the financial resources available to buy up the agricultural resources of impoverished nations, particularly in the tropics. They also have the political clout to convert these resources to the exclusive production of cash crops for sale to industrialized nations outside of the tropics, and in the process to squeeze the poor off of the more productive lands. Under this view subsistence farmers are left to cultivate only lands that are so marginal in terms of productivity as to be of no interest to the multinational corporations. Likewise, food sovereignty holds it to be true that communities should be able to define their own means of production and that food is a basic human right. With several multinational corporations now pushing agricultural technologies on developing countries, technologies that include improved seeds, chemical fertilizers, and pesticides, crop production has become an increasingly analyzed and debated issue. Many communities calling for food sovereignty are protesting the imposition of Western technologies on to their indigenous systems and agency. Those who hold a "food sovereignty" position advocate banning the production of most cash crops in developing nations, thereby leaving the local farmers to concentrate on subsistence agriculture. In addition, they oppose allowing low-cost subsidized food from industrialized nations into developing countries, what is referred to as "import dumping". Import dumping also happens by way of food aid distribution through programs like the USA's "Food for Peace" initiative.

Economically and socially sustainable European Agriculture Multi-functionality is at the heart of the European Model of Agriculture. This means that together with competitive food, fibre and energy production farming also delivers other services for society as a whole. These services, which are closely linked to food and fibre production, include safeguarding viable rural societies and infrastructures, balanced regional

development and rural employment, maintenance of traditional rural landscapes, biodiversity, protection of the environment, and high standards of animal welfare and food safety. These services reflect the concerns of consumers and taxpayers. As European farmers provide these multifunctional services for the benefit of society as a whole, which often incur additional costs without a compensating market return, it is necessary and justified to reward them through public funds. In most European countries family farms are the key element in fulfilling the objectives of the European Model of Agriculture. However, there are significant differences in the production patterns, farm sizes and natural conditions and also production costs within and between the Member States. This consequently means that the sizes and types of production units also vary considerably in different parts of Europe. A key element in the European Model of Agriculture is that different production models should be allowed to co-exist along each other as long as they conform to the above-mentioned overall objectives of the European Model of Agriculture. In the European context the sustainable development aspects of farming are of special importance. The objectives of European agricultural policy include not only keeping the environment within the farm in a good environmental condition and reducing negative environmental effects of production but also maintaining traditional landscapes and safeguarding biodiversity and animal welfare. By optimizing the use of fertilisers and minimising the use of chemicals the implementation of the policy can lead to remarkable improvements of soil and waters. In fact many of the measures of the Community rural development policy and the cross compliance requirements in the Single Farm Payment system ensure safeguarding the environment, enforce animal welfare, food safety and quality, which are important for the European citizens and consumers. Sustainable development in agriculture also means that the economic conditions of farming are safeguarded. This also secures socially sustainable development of the sector. Even today about 56 % of the European population lives in rural areas. Maintenance of viable rural societies would be impossible, if the economic conditions would drastically change in a short period of time. This is especially true in remote, sparsely populated areas, which lack business potential and market opportunities. By maintaining farming and developing new activities and services in rural areas, society can better provide the public services for people living in rural areas as well as for the urban population seeking recreational opportunities. At the same time, European cultural heritage can also be maintained and social problems relating to migration from rural areas to cities avoided. Within this broader context the general acceptability of policy can be maintained in a more sustained and consensual manner. In the reformed CAP the principle that farmers should produce according to market demands is by now well established. Decoupled direct support for farmers gives them an increased freedom of choice in their production decisions. The situation on the markets should now have a central role in farmers' decision making. This should also mean a shift from quantity of production to quality of production. Consumers in Europe and worldwide are able to spend more on foodstuffs, but at the same time they will increasingly do so only if they are convinced by the taste, the nutritional value and healthiness, production method, origin and the safety of the product. However, a part of the population in Europe still has rather low income and they tend to put emphasis on the low prices of products. Consumers are also

becoming an increasingly heterogeneous group, each segment of which is demanding products with differentiated characteristics. Quality production and the use of traditional names can also give European production a competitive edge in the world markets. At the same time there are also problems in how the markets function. Consumers rather often state their expectations in the polls differently compared to their actual buying decisions in the shops. The competition between the retail trade chains stresses strongly the importance of price. This has led to a situation where differing of quality and quality pricing is of smaller importance. The price the farmer gets from a product may be almost the same regardless of its final presentation to the consumer. There is much room for improvement on how the correct market information reaches farmers and how information concerning products and their production methods reaches consumers. Improvements in this respect would benefit all the actors of the food chain. In the reformed CAP farmers can better adjust their production according to market demand. This applies also to possible alternatives to traditional agricultural production. The production of biomass for energy purposes can offer farmers a feasible alternative compared to traditional crop production in the future. Increased production of biomass may also have a positive impact on the agricultural commodity markets globally. The average size of a farm in the Member States has increased quite rapidly in the past years and will continue to do so. An increased role of market forces and technological developments have had a major impact on this development. For instance, prices have largely been adapted to world market levels and thus fluctuations of the world markets now tend to affect also the European producer prices more directly. On the other hand new laboursaving production methods have increased productivity and made the increase in the average farm size possible without putting an excessive load on the farm family work force. At the same time it has to be noted that the possibilities for structural change are different in different areas of Europe. In many areas of Europe a substantial proportion of farmers have had to give up their production. Diversification of production, quality production and the optimal use of market opportunities have allowed farmers to cope better with the economic changes in farming. It is therefore important to encourage farmers to take up new technologies, to adopt new innovations and to make new investments. It is also important to encourage setting up new businesses and to promote innovation in the rural areas as well as in the agribusiness sector. In promoting these actions the Rural Development measures are extremely important. Competitive, market-oriented production as well as quality production will mean that also in the future European agriculture can have a role to play in the world markets, where the growing population and the changing consumption habits create new marketing possibilities especially in the newly industrialised countries of the world. It has to be also recognized that there is a real need for simplification of the CAP and for a reduction in the administrative burden for farmers and administrations in order to reduce costs for businesses and ensure that the European citizens receive value for money. The Policy Evaluation Model (PEM) The starting point for such a model development is the PEM, a partial equilibrium model of the agricultural sector developed at the Organisation for Economic Co-operation and

Development (OECD, 2001), which has been used to model transfer efficiency and welfare impacts in a number of OECD countries, as well as other issues, such as production responses to policy changes and the impact of risk on farmers decisions.2 The PEM is a market model, where output and factor markets are linked, and distributional effects are determined by the impacts that policies have on factor incomes and by households command over those incomes. In the PEM, supplies of agricultural commodities are represented by aggregate production functions, in which factors (land, labor, capital) and other intermediate inputs combine to produce output. Supply can be seen as originating from a single producer for each agricultural commodity, or equivalently, many identical ones. Similarly, the demand for agricultural goods is aggregate, represented by a single demand function for each good (either a single consumer or many identical ones). In equilibrium, supply must equal demand to clear all markets. If prices are determined in world markets, net exports fill the gap. Otherwise, domestic prices adjust to ensure that the supply- demand equilibrium is achieved. Similar equilibrium conditions apply to the supply and demand of factors, whose equilibrium prices are determined within the economy. Agricultural producers are price takers who, given their technologies, select the levels of output and derived input demands that maximise profits. This implies producing where the marginal cost just equals the market price of output, and the marginal value product of each input equals the per unit price. Demand is the sum of all consumer demands and intermediate input demands for agricultural output inside (and outside) the economy. In the PEM, it is represented as a single demand equation for each commodity. If, at a given price, the supply of an agricultural commodity exceeds the demand, either the price will fall (provoking an adjustment in farmers production decisions) or the surplus will be exported onto the world market, at the given world price. The converse applies for the case where the demand exceeds the supply. In this adjustment process, all related markets are affected. For example, a decrease in agricultural price will trigger a reduction not only in output but also in the demand for labour, land, and other inputs. Each of these input markets, in turn, will adjust, and their equilibrium quantities and prices will change. In this way, changes in agricultural prices create repercussions in other parts of the agricultural economy. The PEM was designed to pick up the aggregate effects within the agricultural sector. A Computable General Equilibrium (CGE) model would take this one step further, by effectively nesting the PEM within a model of the rest of the national economy, capturing rural-urban linkages and other economy-wide effects. In order for the market for a good to be well defined and depicted by a single aggregate supply and demand function, the good as well as those producing and consuming it must be relatively homogeneous. The PEM assumes that each agricultural good is homogeneous, as are all inputs with the exception of land. Land is assumed to be heterogeneous but can be transferred (imperfectly) from one use to another. In practice, the farmer (or many identical farmers) in the model can allocate and reallocate land across different uses, including wheat, coarse grains, oilseeds, rice, other arable uses, milk pasture, beef pasture and other agricultural uses. The possibilities for transforming land from one use to another are represented by elasticities of transformation. The possibilities are bracketed by two extremes. It is possible that a given

hectare of land (say, in rice) cannot be converted to a different use (say, oilseeds). In this case, the elasticity of transforming land from rice to oilseeds is zero. At the other extreme, it is conceivable that a farmer could easily shift a given hectare of land from corn to sorghum that is, that land is readily transferable between these commodities. In this case, the elasticity of transformation would be large. There is a wide range of possible elasticities in between these two extremes. The elasticity of transformation of land from one activity to another is extremely important for policy analysis, because it is a key to farmers ability to adjust to price shocks. The developers of the PEM made an effort to obtain the most realistic estimates available of aggregate elasticities of transformation for land, drawing from studies by experts in each of the six OECD countries for which the PEM was developed (Canada, the European Union, Japan, Mexico, Switzerland and the United States). Factor shares required to calibrate the constant elasticity of transformation (CET) functions used in the model were also obtained from expert studies, along with price elasticities of factor supplies and commodity demands. This way of modelling land allocations is a major strength of the PEM. It avoids making the unrealistic assumption that land is perfectly transferable across activities or that land is fixed within activities. Its reliability obviously depends on the extent to which the elasticities used in the model approximate the true substitutability of land across production activities. In contrast to land, capital (cows and other farm-owned) is assumed to be perfectly substitutable across crop activities but not substitutable between beef and dairy production and other activities. Purchased factors, including labour, are generally assumed to be perfectly substitutable across activities. The exceptions are concentrate feed, which is used only in livestock activities, and chemicals and irrigation, which are not used for livestock. Agricultural household models In its dual role as producer and consumer, the household makes production, labour allocation and consumption decisions that may be interdependent upon one another. In its most general conceivable form, the households objective is to maximise a discounted future stream of expected utility from a list of consumption goods including home-produced goods, purchased goods, and leisure, subject to what may be a large set of constraints. In practice, research focus, analytical tractability, and available data result in significant simplifications of both the objective function and the constraints. Most agricultural household models are static and assume that prospects are certain or, equivalently, that households are risk neutral. Constraints typically include cash income, family time and endowments of fixed productive assets, and production technologies (all of which may be combined into a single fullincome constraint if markets function smoothly; see Singh, Squire and Strauss, 1986), and prices of inputs, outputs, and non- produced consumption goods. Price-related constraints either fix prices exogenously (the case of household tradables with perfect markets) or, in the case of missing markets, determine an internal shadow price, at which the households demand for a good equals its output. The solution to a household-farm model yields a set of core equations for outputs, input demands, consumption demands, and either prices (for household non-tradables) or marketed surplus (for household tradables). In the case of produced goods, marketed surplus is output minus household consumption. In the case of labour, it is the households labour demand minus its labour supply, or net wage-labour supply. The solution to the household-farm

model represents all dependent or endogenous variables as functions of exogenous variables (prices of tradables, farm assets, household time constraint, other household characteristics), usually including some that may be influenced by policy (e.g., market price supports). The form of this solution, particularly the interactions between production and consumption that are a trademark of household-farm models, are extremely sensitive to assumptions about the extent to which households are integrated into product and factor markets. Comparative Statics in an Agricultural Household Model A key motivation for developing agricultural household models has been to analyse agricultural policies in a less- developed country context. Like with the PEM, such analysis is based on comparative statics with parameterised models. Ideally, the parameters are estimated econometrically using household-farm survey data. Analytically, agricultural household models resolve the apparent paradox of a positive ownprice elasticity of demand for food in farm households, as well as the puzzle of sluggish marketed-surplus responses to food-price changes in less-developed countries. Empirical models, using micro-survey data, have made it possible to estimate the magnitude of supply and marketed-surplus elasticities in a number of different country settings, while confirming quantitatively the importance of using household-farm, rather than simply household or farm, models to analyse rural economies. We can illustrate comparative statics in a basic household-farm model as follows: Consider an increase in the (market or policy-determined) price of staples. The immediate effect of the price increase is to raise the marginal product of all inputs, including labour. The standard profit-maximizing rules that apply to the firm also apply to the household as producer: both hire inputs at the point where the marginal value product of the input equals the input price. Thus, the higher marginal value product of labour results in increased labour demand for staple production. In a household that uses its labour both to produce on the family farm and to sell on the labour market, an immediate effect of the staple-price increase is to allocate more labour to on-farm production and less to wage work, because the opportunity cost of labour on the farm has gone up. Alternatively (and, in the basic model, equivalently), it may continue to supply labour to the market while hiring workers needed to expand staple production and maximise profits. In any case, the on-farm production effect for the crop whose price has increased is unambiguously positive, given the usual assumptions of production economics. As a consumer, the household now faces a higher staple price; however, it also experiences an increase in its income due to higher profits from farm production, leading to a positive income effect competing with the negative Stutsky effects outlined above. The effect on household consumption of the crop whose price has risen becomes ambiguous; it depends on the slope of the households utility function as well as the magnitude of the profit effect. In the case of a staple-price increase and perfect hired-labour market, there is no ambiguity on the labour side: the opportunity cost of leisure remains the same, equal to the market wage; the initial increase in the marginal value product of labour on the farm, due to the staple price change, is erased by the increased demand for labour on the farm (due to the assumptions of a fixed wage plus decreasing marginal physical product of labour); and the increase in income, due to higher profit from staple production, unambiguously increases leisure demand (reducing family labour supply), assuming that leisure is a normal good.

The structure of markets in which the household is embedded is critical in shaping the response to exogenous policy and other shocks. A key assumption of most agricultural household models is that the household can obtain perfect substitutes for family labour in local labour markets and conversely, that it can sell its own labour at a given market wage. This permits the household to decouple production from leisure: in response to a policy or market change, it can increase production (and demand more labour) while at the same time consuming more leisure, by hiring workers to fill the resulting excess demand for labour. Estimated household-farm models have been used to analyse a multitude of policy issues relating to agricultural development. The early uses were concerned primarily with farm price policy. The level at which agricultural terms of trade are set has wide implications for both efficiency and equity. Structure of a DREM The households in a DREM might include: (1) commercial farms on large landholdings, which behave more like firms than like households; (2) net-surplus producing family farms on medium and small holdings, typical of small owner-operated farms of medium productivity; (3) subsistence and infra-subsistence household farms, typical of small- scale, low productivity agriculture, frequently operating under marginal conditions and incomplete markets; and (4) landless rural households. This typology works well to describe the socioeconomic landscape of many rural economies. Each household type has its own production technologies and access to outside markets (i.e., transaction costs), as well as its own consumption demands. DREMS may include different technologies to produce grain, from subsistence methods using ox-and-plough technology to relatively capital-intensive commercial production. Households often engage in other production and labour market activities that vary from one household to another. They have different access to domestic and/or international migration. Finally, while commercial farmers are integrated with outside markets, subsistence farmers are isolated from markets by high transaction costs for their produce. Agents in a PEM are commercial farmers who maximise their profits. Those in a DREM are households assumed to maximise their utility from consumption goods, both home-produced and purchased, subject to cash income, technologies, time, access - to-migration, and selfsufficiency constraints that set consumption equal to production for subsistence maize households. The solution yields a set of demands for labour and land inputs into each activity, including migration, and consumption demands. For commercial maize households, the price of maize is given by outside markets. For subsistence households, maize production and demand are guided by an internal shadow price that follows from the subsistence constraint. DREMs explicitly model interactions among households and add a third type of price: prices exogenous to individual households but determined by the interaction of supply and demand in local markets. Endogenous prices result when transaction costs are high outside but not within the rural economy. Land rents and wages often are endogenous in a DREM. In the textbook farm household model (Singh, Squire and Strauss, 1986), land is a fixed input and thus implicitly has a shadow price that varies across households. This may be a reasonable assumption when policies, customs or other considerations impede the smooth functioning of local land markets, as often is the case in developing countries. However, it is not reasonable when there is significant activity in local land rental markets, as in most OECD countries.

Often, there is significant variation in the agricultural wage across the countryside and between rural and urban areas, suggesting endogenous rural wages or at least wage rigidities. Where migration is an option, access to migrant labour markets may not be uniform but rather geographically concentrated and shaped by networks of family contacts at migrant destinations and other local and household-specific variables (Munshi, 2003). Daily agricultural worker wages in Mexico ranged from 50 to 140 pesos in summer 2002. Where farm households face high costs of market access to sell their output and/or purchase consumption goods or inputs, the prices of these goods and inputs may also be endogenous. Both land rents and wages are treated as endogenous in a PEM. However, differences in land rents and wages among rural household groups are ignored, as is the possibility that different farm households have different market access and thus face different prices. Endogenous local prices are incorporated into the model through general-equilibrium constraints for non- tradables. These constraints equate the local supply and demand. A nonbinding constraint would imply trade at an exogenous market price. Potential impacts of policy shocks in a DREM are complex because of the large number of interacting agricultural households, each with its own production technology, market access, and consumption demands. They involve direct effects (e.g., the effect of price changes on production by commercial farms) as well as indirect effects (changes in the commercial farm households demand for goods and services from other households, or effects transmitted to subsistence households through local land and labour markets). Signing as well as quantifying the total impacts of policy shocks cannot be done analytically; it requires a programming approach. The solution to a DREM includes, for each household group, a set of core equations for outputs, input demands, migration, consumption demands, and either prices (for nontradables) or marketed surplus (for tradables). It also includes aggregate outcomes, as in a PEM. However, the aggregate outcomes are shaped by interactions among households that are not captured by the PEM. As in a PEM, once the base model is created, it becomes the starting point for policy experiments.

Other problems faced by FCI Safe storage of food grains procured Using Linear programming to optimize storage space and transportation Grain flow Management Deciding the distance at which to set up a new centre Should they privatize certain verticals Decide how much to procure thus minimizing wastage

Appendix

Speech by RBI Executive Director Deepak Mohanty