Buffer Stock and Food Security

Buffer Stock and Food Security

1. Buffer Stock

Buffer stock refers to a reserve of a commodity that is used to offset price fluctuations and unforeseen emergencies. Buffer stock is generally maintained for essential commodities and necessities like food grains, pulses etc. Due to shortage of Onion in market NAFED is maintaining buffer stock of it. Recently it has released around 1 lakh MT of onion in market to stabilize its rising price. In India, buffer stocking of food grains is conceptually seen as a vehicle to deliver strategic food and agricultural domestic support policies through which the government caters multiple objectives such as providing famine relief, ensuring food security to consumers and providing production incentives to farmers.

Buffer stock from economics point of view

How purchase and sale is done to stabilize the price

• The Government of India has given the task of procuring buffer stock to National Agricultural Cooperative Marketing Federation of India Limited (NAFED), Food Corporation of India (FCI) and Small Farmers Agri-business Consortium (SFAC)

1.1 Objective/Aim of Buffer Stock:

Buffer stock of food grains in the Central Pool is maintained by the Government of India (GOI) / Central Government for

• Food Security: Meeting the prescribed minimum buffer stock norms for food security,
• Welfare Schemes: Monthly release of food grains for supply through Targeted Public Distribution System (TPDS) and Other Welfare Schemes (OWS),
• Emergency use: Meeting emergency situations arising out of unexpected crop failure, natural disasters, etc., and
• Price Stability: Price stabilisation or market intervention to augment supply so as to help moderate the open market prices.

1.2 What are Buffer Norms?

• The Cabinet Committee on Economic Affairs fixes the minimum buffer norms on quarterly basis: i.e as on 1st April, 1st July, 1st October and 1st January of every financial year.
• In addition to buffer norms, Government of India has prescribed a strategic reserve of 30 lakh tonnes of wheat w.e.f. 01.07.2008 and 20 lakh tonnes of rice w.e.f. 01.01.2009.
• At present, GoI prefers to use the term – Foodgrain stocking norms – which refers to the level of stock in the Central Pool that is sufficient to meet the operational requirement of foodgrains and exigencies at any point of time. Earlier this concept was termed as Buffer Norms and Strategic Reserve.
• Presently, stocking norms fixed by Government of India on 22.01.2015 comprise of:

1. 1. Operational stocks: for meeting monthly distributional requirement under TPDS and OWS.
   2. Food security stocks/reserves: for meeting shortfall in procurement.

• While four months requirement of food grains for issue under TPDS and OWS are earmarked as operational stocks, the surplus over that is treated as buffer stock and physically both buffer and operational stocks are merged into one and are not distinguishable.
• According to the present practice, the GOI treats the food stock over and above the minimum norms as excess stock and liquidates them from time to time through exports, open market sales or additional allocations to states. The buffer stock figures are normally reviewed after every five years

Food Stock available in the central governments’ pool is the stock held by:

1. State Government Agencies (SGAs)
2. States which are taking part in the Decentralised Procurement Scheme
3. Food Corporation of India(FCI)

As of now, the stocking norms for buffer stock decided by the GoI comprises of:

1. Operational Stocks

The stock required to meet the monthly requirements for welfare schemes.

2. Food Security Stocks

The reserves to meet the procurement shortfall. The food grains for issue under welfare schemes are considered as operational stock, whereas the surplus is considered as buffer stock and operational stock both. The stock which is over the minimum stockpiling norms is treated as excess stock and it is exported from time to time, extra allocations for some states or through open market sales.

1.3 Advantages of buffer stocks

1. Stabilizing Prices: Stable prices help maintain farmers incomes. A rapid drop in prices can make farmers go out of business, which leads to structural unemployment.
2. Enhancing Investment: Price stability encourages more investment in agriculture.
3. Reducing Inflation: Target prices help prevent excess prices for consumers and help reduce food inflation. This might be important for households living in poverty, who may struggle to pay high prices during years of shortage.
4. Consistent Supply: It helps to maintain food supplies and avoid shortages.
5. Welfare Schemes: Helps welfare state to run welfare schemes through Public Distribution schemes in an effective manner.

1.4 Problems of buffer stocks

1. Cost: Multiple cost are involved in procurement of grains by FCI for maintain Buffer Stock, MSP is being also increased by government which is raising the overall cost of procurement. Food subsidy bill is continuously increasing

2. Absorbing Excess Supply: Minimum prices and buffer stocks could encourage oversupply as farmers know any surplus will be bought. It could even encourage excess use of chemicals to maximise yields because farmers know any excess supply can be sold – even if the market doesn’t want it.
   • As of June 2020, the FCI had 832.69 lakh tonnes of rice and wheat in stock. This is considerably more than what the FCI needs to maintain, as both operational as well as strategic stock — 210.40 lakh tonnes as of 1 April every year, which goes up to 411.20 lakh tonnes as of 1 July. The current stock of rice and wheat is the highest that the FCI has maintained since 2005. The last time the stocks were near such high levels was in June 2012, when the total amount of rice and wheat in the godowns of the FCI was 823.17 lakh tonnes
   • Shanta Kumar Committee Recommendation for Buffer stock

• So at present buffer stock is way higher than required limit

3. Inventory Cost: As procurement is more than required it leads to rise in maintain the inventory cost of grains. As storage machinery is not so vast and efficient it leads to wastage of food grains and it rots. To compensate this FCI go for Open market sale scheme (OMSS) to reduce its carrying cost. This selling to private players is called open market operations (OMOs), however, OMOs are much less compared to what is needed to liquidate excessive stocks. Similarly Onion stock maintained by NAFED leads to lot of wastage as onion have shelf life of 3-3.5 months.
4. Poor Managerial Efficiency: Government agencies may have poor information e.g. what price to set, how much to buy? is there really a surplus? In practice, it can be difficult to know whether there is a surplus until later in the year.

1.5 Shanta Kumar High Level Committee

The Central government set-up a high level committee to study the core issues of FCI and make suitable recommendations to restructure FCI to improve its operational efficiency and financial management. As per this only 6% Indian farmers could sell their produce to Government agencies and 45% of PDS food grain is black marketed

Key Recommendations of  Shanta Kumar Committee

1. Transfer of Responsibility (Decentralisation):FCI should transfer all procurement operations atleast to states who have considerable experience and infrastructure. These are Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab. FCI should instead procure only the surplus which is contributed to the Central pool by these states to support farmers in distress due to small landholdings and thus have to settle with a sale price far below the MSP in states like UP, Bihar, West Bengal, Assam. In addition, it should channelize this surplus for various subsidy acts like NFSA.
2. Rational Procurement: There should be uniformity and rationality in procurement operations
   • The Centre will not accept any additional/surplus food-grains from states who give subsidy/bonus to farmers above the MSP. Such states will have to bear all costs (storage and distribution) themselves.
   • Uniform statutory levies among all states around 3 or 4% of MSP.
   • Stringent quality checks at the when accepting food grains for Central pool.

3. NWRS: Encourage and speeden the Negotiable Warehouse Receipt System (NWRS) under which farmers can park their produce in registered warehouses and even get upto 80% advance from banks at MSP. This will considerably reduce the storage costs and responsibility of the government.
4. Diversify the Pool: Prioritise pulses and oilseeds and their MSP should be taken seriously and implemented uniformly across the country. MSP has been largely operational in wheat and rice and that too only in some select states, while the other important food-grains have suffered in their backdrop. Also, Government should streamline trade policy and MSP.
5. Digitalisation: NFSA should be revised with no subsidy to be offered to states which don’t have computerised the list of beneficiaries ( which can be verified) and have not set up vigilance committees to check pilferage. This has been done to plug leakages in the PDS whose range in some states has gone upto 70%.Complete end-to-end computerisation of the food management system in India.

Thus, though the recommendations may seem to plug-in many loopholes but such massive restructuring will not bear much fruit as the main issue of food pricing and storage are not done by suo moto decisions of FCI. Also, with NFSA in place it is highly unlikely that government can roll-back subsidies for the time-being. MSP has brought in obligations for better storage facilities. The underlying question is thus, how far these recommendations will be adopted, in face of stiff reluctance from some states.

6. Limits under NFSA:The coverage of NFSA should be brought down from 67% population to 40%. This will comfortably cover the BPL population and even some above that. Also, the targeted beneficiaries must be given 6 months ration in advance, right after the procurement season draws to a close. This will bring down storage overheads borne by government and procurement agencies.
7. Outsourcing: FCI should outsource its food-grain stocking operations to agencies like CWC, SWC, private warehouses etc.
8. DBT: Direct Cash Transfers to farmers to help them raise productivity and overall food production in the country. This will empower them and reduce their dependence on money-lenders.Another landmark recommendation is the introduction of cash transfers in PDS in cities with a population of over 1 million. These can be done via Aadhaar numbers of Pradhan Mantri Jan DhanYojana.
9. Efficiency of FCI: must be increased by rationalising its overall structure like giving VRS to higher officials, outing permanent labours and hiring contractual labours.
10. Easing the burden: The panel had recommended liquidation of government’s grain stocks via OMSS or in export markets, whenever stocks go beyond the buffer norm.

1.6 Can Private firms be given responsibility?

The entire grain management system is fully controlled by the government that edges out private players. Allowing private players in buffer stock management could bring the market forces in the system that in turn could increase the overall efficiency of the system. Continuously rising food security bill and need for improving the efficiency in the system calls for a review of the buffer stock management policy to involve private traders in procurement whilst the government retains total control on the whole stock management process. The government can set buffer stock targets keeping 3-5 years’ timeframe in sight and some select stockists can be licensed by them to participate in buffer stock management with quantity allocation.

Benefits

• Since all costs and prices are transparently determined, there is no scope for price manipulation.
• Private players are stocking the grains so government does not have to tie-up the funds for the same. Also it does not have to incur losses due to damages and handling.
• Further, stockists could be allowed to hedge their price risks through suitable futures contracts.

1.7 Way Forward

Any significant improvement in agricultural productivity, simply using MSP as a policy tool to incentivise farmers is not helping the cause lately. An increase in MSP to offset the rising input cost is triggering food inflation and not doing so is translating into rural distress

There is a need for evaluation and rationalisation of buffer stock management policy so as to reduce the burden on the central and state exchequers and to promote efficiency in the system. Involving private players in the same will create greater competition, promote the desired efficiency and growth in the ecosystem.