Economics of Stockpiling

Economics of Stockpiling

Subject : Economy

Context:

Accumulating large reserves of forex and food has helped India immensely.

Why stockpiling?

• There has been a consistent monetary policy tightening (rate of interest rise) on the backdrop of rising inflation in developed countries like-USA —leading to large scale dollar flight and depreciation of domestic currency.
• Shortage of dollar and depreciation of domestic currency likely to make import expensive and supply shortages– especially of food and fuel.

Cost of stockpiling:

• In food-cost of holding and maintaining stocks above the operational requirement for the PDS.
• In forex-RBI’s purchase of excess dollars leads  in exchange of domestic currency.
  • Causes inflation
  • If RBI sterilizes this rupee liquidity leads to selling government bonds.
  • If the interest payable on these bonds exceeds what the RBI earns from deploying its forex assets in overseas securities and banks, there is a fiscal cost to reserve build-up.

Concept:

Agriculture Supply Chain

• The Government policy of procurement of Food grains has broad objectives of ensuring MSP to the farmers and availability of food grains to the weaker sections at affordable prices.
• Food Corporation of India –FCI, along with other State Agencies undertakes procurement of wheat and paddy under price support scheme . 
  • Coarse grains are procured by State Government Agencies for Central Pool as per the direction issued by Government of India.
• FCI and the State Government/its agencies ensure that the farmers are not compelled to sell their produce below support price.
• Procurement at MSP is open ended–whatever foodgrains are offered by the farmers, which conforms to the quality specifications prescribed by Government of India, are purchased at MSP by the Government agencies including FCI for central Pool.
  • Some States also declare State bonus on wheat and paddy over and above MSP.
• To facilitate procurement of food grains, FCI and various State Agencies in consultation with the State Government establish a large number of purchase centers at various mandis and key points. 
• If the farmers get prices better than the support price from other buyers such as traders / millers etc The farmers are free to sell their produce to them.

Centralized and Decentralized procurement systems:

• Centralized (Non-DCP) procurement system:
  • The procurement of foodgrains in Central Pool is undertaken either by FCI directly or by State Govt. Agencies (SGA).
  • Quantity procured by SGAs is handed over to FCI for storage and subsequent issue against GOI allocations in the same State or movement of surplus stocks to other States.
  • The cost of the foodgrains procured by State agencies is reimbursed by FCI.
•  Decentralized (DCP) Procurement
  • The State Government/ its agencies procure, store and distribute rice /wheat/coarse grains within the state.
  • The excess stocks (Rice & wheat) procured by the State /its agencies are handed over to FCI in the Central Pool.
  • The expenditure incurred by the State Government on procurement, storage and distribution of DCP stocks are reimbursed by Government of India on the laid down principles.

Food stockpiling:

• Storage plan of FCI is primarily to meet the storage requirement for holding stocks to meet the requirements of Public Distribution System and Other Welfare Schemes undertaken by the Government of India and ensuring food security of the nation.
• Adequate scientific storage is prerequisite to fulfill the policy objectives assigned to the Food Corporation of India for which FCI has a network of strategically located storage depots including silos all over India.
• Besides having its own storage capacity, FCI has hired storage capacities from Central Warehousing Corporation, State Warehousing Corporations, State Agencies and Private Parties for short term as well as for guaranteed period under Private Entrepreneurs Guarantee Scheme.
• New Godowns are being constructed by FCI mainly through Private Participation under Private Entrepreneurs Guarantee Scheme.

Foreign Exchange Reserves stockpiling:

• The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934.
• It closely monitors the developments in the financial markets at home and abroad and it intervenes in the market by buying or selling foreign currencies.
  • The market operations are undertaken either directly or through public sector banks.
• RBI purchases excess dollars in exchange of domestic currency. 
  • In addition to the traditional instruments like forward and swap contracts, the Reserve Bank has facilitated increased availability of derivative instruments in the foreign exchange market.
• The Reserve Bank of India Act permits the Reserve Bank to invest the reserves in the following types of instruments:
  • Deposits with Bank for International Settlements and other central banks
  • Deposits with foreign commercial banks
  • Debt instruments representing sovereign or sovereign-guaranteed liability of not more than 10 years of residual maturity
  • Other instruments and institutions as approved by the Central Board of the Reserve Bank in accordance with the provisions of the Act
  • Certain types of derivatives