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

LEGEN DS CGM GM Fin IR-L A/CS M&P CPF QC S&C P&IR Chief General Manager General Manager Finance Industrial RelationLabour 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

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 postharvest 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 Food 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 MSP 1.7 18.0 Tur 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 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