Why McKinsey alone can't fix FCI

While the ministry of consumer affairs, which controls the Food Corporation of India (FCI), is planning to engage global consultants McKinsey & Company to carry out a study to make FCI more efficient at a cost of around Rs 5 crore, it is unclear as to what exactly McKinsey’s study will recommend since a host of studies have already detailed what needs to be done.

The Bureau of Industrial Costs and Prices (BICP) did one such exercise in 1989, another was done in 2001 by the Administrative Staff College of India (ASCI), there was a High Level Committee on Long Term Grain Policy headed by Professor Abhijit Sen (now a member of the Planning Commission) that also looked at FCI in 2002, and yet another was done a month ago by former food secretary Arun Sinha.

McKinsey’s spokesperson at the Delhi office declined to comment on whether it had been awarded the study, or therefore, on the mandate of the study citing client confidentiality.

Authors of previous studies, like Sen and Sinha, are sceptical of what another study, any study, can achieve. Over 90 per cent of all FCI’s costs, says Sinha, are determined by various government policies — in the event, Sinha’s report puts the maximum savings in a business-as-usual scenario at around Rs 500 crore annually, assuming a 10 per cent saving in the Rs 5,000 crore or so of expenditure that he estimates can be controlled by FCI, the balance Rs 58,000 crore being determined by government policy.

Sen believes improvements in handling and storage techniques could yield savings of around Rs 1,000-1,500 crore, but adds that ‘this isn’t an awful lot compared to what could be saved through good government policy.’

Apart from the issue of the government fixing very high minimum support prices (MSP), Sen says huge savings of around Rs 1,000 crore a year, could be made if the government paid FCI in time instead of forcing it to borrow at above the prime rate (it borrows at 9.1 per cent despite being a zero-risk borrower).

According to data in the Sen report, government-dictated costs (the MSP, statutory charges, administration charges to states and so on) add up to 86 per cent of the economic cost of wheat in 2002-03 and 89 in the case of rice.

In both cases, that’s a 10 percentage point hike over a decade ago.

Interest and freight costs add up to another 6-8 per cent, though wage costs are under 2 per cent for an organisation that procures, stores and moves 40 million tonnes of grain annually. Even arhatiya margins, of around 2.5 per cent, are fixed by the government.

The real big savings, each study suggests, will come only if the government changes its functioning.

Despite Yashwant Sinha saying that the government would get states to do procurement on their own several years ago, this has not happened.

As a result, Sinha’s report says, FCI has to move grain all across the country at an additional cost of Rs 800 crore or so a year.

According to Sinha, if this is done, it will have another very important effect of allowing FCI to become more efficient in its existing operations.

‘With so many lakh tonnes of procurement over a very short period, during which grain has to be assessed, weighed, bagged and transported to godowns, it’s difficult to keep a check on what’s happening.

There could be theft and issues like that … I’m not saying they don’t happen, but once you’ve got rid of the excessive volume-pressures, it’s easier to check the theft as well as pay attention to grain quality.’

Another serious problem faced by FCI is that of shrinkage since rice shrinks once and huge moisture content in paddy dries up.

While there are norms for purchases, political pressures result in higher moisture paddy being purchased regularly. While the ASCI report categorically says paddy should not be procured at all, Sinha’s report suggests two alternatives.

One, delay the procurement season so that the paddy dries up and two, encourage rice mills to buy the paddy (so they deal with the moisture content) and buy polished rice from them.

Since there are transit/storage losses (1 per cent in the case of rice and 0.5 in the case of wheat), Sinha suggests the railways be forced to take some responsibility for such losses, though decentralised procurement will reduce the problem dramatically.