McKinsey can't help

There is little to be said in favour of the appointment of McKinsey & Co. to fix the problems of the Food Corporation of India (FCI).

This is a reflection, not on McKinsey’s ability but on the fact that there already exist various studies on how to fix FCI, and there is almost no suggestion that has not been made by these committees, which range from the Bureau of Industrial Costs and Prices in 1989 and the Administrative Staff College of India in 2001, to one headed by Professor Abhijit Sen (now a member of the Planning Commission) in 2002 and then the latest, a couple of months ago, by former food secretary Arun Sinha.

If there’s one thing all these reports bring out, it’s that there is little wiggle room at FCI—between 90 and 95 per cent of its costs are determined by the government’s orders on various matters. Take procurement, which is one of the areas McKinsey has been asked to help streamline.

It is well known that FCI’s stocks have been double the buffer stocking norms in the past, but this is not because FCI is stupid, it’s because it has been forced to buy at all costs—indeed, Professor Sen’s report brings out the fact that government-mandated procurement prices in rice comprise 81 per cent of FCI’s costs for this item (it’s 67 per cent in the case of wheat).

Mandi charges and other statutory charges make up another 6 per cent in the case of rice (11 per cent in the case of wheat) and these too are determined by the government, which, by the way, also fixes the commission to be paid to the middleman or arhatiya at 2.5 per cent!

McKinsey has also been asked to come up with some advice on labour policies, perhaps a voluntary retirement scheme. This may be a good idea, but the savings on this front can at best be minuscule, given how labour costs comprise just 2 per cent of FCI’s turnover.

The larger issue plaguing FCI is that it does too much procurement and so cannot possibly run efficient systems. These include checks on moisture levels in paddy (a big source of loss since paddy loses weight while stored) since procurement has to be done in a very short span of time.

This is addressable if the states do more procuring on their own account—FCI estimates it will save Rs 800 crore a year on just transport as it will have to move less grain—but despite this being announced three years ago in the Budget, nothing has happe ned.

The government, both at the Centre as well as in the states, is FCI’s real problem and it’s unclear how McKinsey will cause this to change.