A Case Study Report

On

Food Corporation of India

Submitted to:- Submitted by:-Prof. R.K. Vijaya Sarathy Rupesh KumarDirector, DSBS Bangalore Charu Chandra

Bajrang Agarwal Bikash Prasad

Contents

1. Introduction

1.1 Objective

1.2 SWOT analysis

1.3 Organizational chart

2 . Functions of FCI

3 . Public Distribution System

4 . Issues

5 . Conclusion

6 . Bibliography

Introduction

Food Corporation of India (Hindi: भा�रती�य खा�ग निगम) was setup on 14th

January 1965 under Food Corporation Act 1964 with authorized capital of almost

$600 million to implement the national policy for price support operations,

procurement, storage, preservation, inter-state movement and distribution

operations.

It operates through 5 zonal offices and a regional office in Delhi. Each year, the

Food Corporation purchases roughly 15-20 per cent of India's wheat output and 12-

15 per cent of its rice output. The losses suffered by FCI are reimbursed by the

Union government, to avoid capital erosion, and thus declared as a subsidy in the

annual budget. In 2007, such food subsidies were met by government bonds worth

almost $8 billion.

1.1Objective

The food corporation of India was setup in order to fulfill following objectives of

the food policy:-

1. Effective price support operations for safeguarding the interests of the

farmers

2. Distribution of food grains throughout the country for Public Distribution

System

3. Maintaining satisfactory level of operational and buffer stocks of food grains

to ensure National Food Security

   

Since its inception in 1965, having handled various situations of plenty and

scarcity, FCI has successfully met the challenge of managing the complex task of

providing food security for the nation. A strong food security system which has

helped to sustain the high growth rate and maintain regular supply of wheat and

rice right through the year. The efficiency with which FCI tackled one of the worst

droughts of the century not only cemented its role as the premier organization in

charge of food security in India, but also brought it accolades from international

organizations.

Today it can take credit for having contributed a great deal in transforming India

from a chronically food deficit country to one that is self-sufficient

1.2 SWOT Analysis

Strengths

1. Round the year availability of

materials

2. Support from central

government

3. Strong network of distribution

4. Excellent Storage Management

Weakness

1. High requirement of working

capital

2. Inadequate automation with

regard to information

management

3. Corruption at all level

4. Leakage

Opportunities

1. Vast Domestic market

2. Improvement in distribution

channel

3. Diversify into nontraditional

commodities / activities.

Threats

1. Rapid development

2. Shift in food habits

3. Entry of Retail Sector

1.3 organizational chart

Corporate Office

Zonal Offices [ 5 ]

Regional Offices [ 23 ]

District Offices [ 165 ]

Depots (incl. CAP) [ 1470]

With 1646 offices, FCI is one of the largest networked organizations in India

FUNCTIONS Of FCI

1. Procurement

Procurement is the acquisition of goods and/or services at the best possible total

cost of ownership, in the right quality and quantity, at the right time, in the right

place and from the right source for the direct benefit or use of corporations,

individuals, or even governments, generally via a contract, or it can be the same

way selection for human resource. Simple procurement may involve nothing more

than repeat purchasing. Complex procurement could involve finding long term

partners – or even 'co-destiny' suppliers that might fundamentally commit one

organization to another.

To nurture the Green Revolution, the Government of India introduced the scheme

of minimum assured price of food grains which are announced well before the

commencement of the crop seasons, after taking into account the cost of

production \ inter-crop price parity, market prices and other relevant factors.

The Food Corporation of India along with other Government agencies

provides effective price assurance for wheat, paddy and coarse grains.

FCI and the State Govt. agencies in consultation with the concerned State

Governments. establish large number of purchase centers throughout the

state to facilitate purchase of food grains

Centers 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

centers of major procuring states.

Price support purchases are organized in more than 12,000 centers for wheat

and also more than  12,000 centers for paddy every year in the immediate

post-harvest season.

Such extensive and effective price support operations have resulted in

sustaining the income of farmers over a period and in providing the required

impetus for higher investment in agriculture for improved productivity.

To name a few states about Rs.41,000 millions for paddy and 43,000

millions for wheat in Punjab and Rs. 45,000 millions for levy rice in Andhra

Pradesh is paid to the farmers/ millers during wheat / rice procurement

season.

India today produces over 200 million tonnes of food grains as against a

mere 50 million tonnes in 1950.

In the last two decades, foodgrain procurement by Government agencies

have witnessed a quantum jump from 4 million tonnes to over 25 million

tonnes per annum.

Foodgrains are procured according to the Government - prescribed quality

standards.

Each year, the Food Corporation purchases roughly 15-20% of India's wheat

production and 12-15% of its rice production.

This helps to meet the commitments of the Public Distribution System and

for building pipeline and buffer stock.

The Deppt. of Food, GOI has recently formulated aforesaid policy for involving

Central Govt. Undertaking /State Govt. undertakings/for the Central Pool and

expanding the scope of MSP operations in the areas where FCI/State agencies

infrastructure for potential of procurement is weak and existing Govt. Agencies

(FCI and State Agencies) are not able to carry out MSP operations in such areas

where procurement exists to ensure that farmers are not denied the benefit of

MSP. 

2. Storage

Another facet of the corporation is manifold activities is to provision of scientific

Storage for the millions of tones of foodgrains procured by it. In order to provide

easy access in deficit, remote and inaccessible areas, the FCI has a network of

storage depots strategically located all over India. These depots include Silos,

Godowns and an Indigenous method developed by FCI, called Cover and Plinth

FCI has 24.18 million tonnes (owned & hired) of storage capacity in over 1451

godowns all over India.

In order to reduce storage and transit losses of foodgrains and to bring additional

resources through Private Sectors participations., Govt. of India had announced a

National Policy on Handling Storage and Transportation of Foodgrains in June,

2004 for Bulk and conventional godowns.In the Ist phase,after a series of

deliberations, it was approved that total capacity of lakhs MT  be created at the

identified based depots and feild depots through private sector participation on

Build-Own & Operate (BOO) Basis. RITES were appointed as consultants for

the project. A letter of acceptance of proposal of  the project in two circuits has

been awarded to M/s. Advani Exports Ltd. , the lowest bidder to complete the

Project in 3 years from the date of  execution of the service agreement. 

3. Preservation

The Food Corporation of India has an extensive and scientific  stock preservation

system. An on-going programme sees that both prophylactic and curative treatment

is done  timely and adequately. Grain in storage is continuously scientifically

graded, fumigated and aerated by qualified trained and experienced personnel.

Food Corporation of India's testing laboratories spread across the country for

effective monitoring of quality of foodgrains providing quality assurance as per

PFA leading improved satisfaction level in producers (farmers) and customers

(consumers).

 The preservation of foodgrain starts, the minute it arrives in the godowns. The

bags themselves are kept on wooden crates/poly pallets to avoid moisture on

contact with the floor. Further till the bags are dispatched/issued, fumigation to

prevent infestation etc. of stocks is done on an average every 15 days with

MALATHION  and once in three months with DELTAMETHRIN etc. on traces of

infestation, curative treatment is done with Al. PHOSPHIDE.

FCI's testing laboratories spread across the country (188) ensure that the stored

food grains retain their essential nutritional qualities as per FAQ.

4. Transportation

Ensuring accessibility to food in a country of India's size is a Herculean task. The

foodgrains are transported from the surplus States to the deficit States.

The foodgrain surplus is mainly confined to the Northern States, transportation

involves long distance throughout the country. Stocks procured in the markets and

purchase centers is first collected in the nearest depot and from there dispatched to

the recipient States within a limited time.

FCI moves about 250 Lakh tonnes of foodgrains over an average distance of 1500

Kms.

5. Distribution

The national objective of growth with social justice and progressive improvements

in the living standards of the population make it imperative to ensure that

foodgrain is made available at reasonable prices. Public Distribution of foodgrains

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

foodgrain is ensured through about 4.5 lakhs fair price shops spread throughout the

country.

TPDS

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:-

1. 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. foodgrains 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.

2. 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.

6.

Stock

The Central Pool stock are maintained by FCI and State Govts. and their agencies.

The total stock in Central Pool as on 31/07/2009 is 501.27(Figs. in Lakh MT).

Public Distribution System

PDS means distribution of essential commodities to a large number of people

through a network of FPS on a recurring basis. The commodities are Wheat,Rice,

Sugar, Kerosene . PDS evolved as a major instrument of the Government’s

economic policy for ensuring availability of foodgrains to the public at affordable

FoodgrainsWith FCI With State Govt. /

Agencies

 

Grand

Total

Rice* 138.95 43.57 185.52

Wheat 101.28 212.78 314.06

Total 240.23 256.35 496.58

       

* Unmilled Paddy with FCI & State agencies also shown in terms of

Rice

prices as well as for enhancing the food security for the poor. It is an important

constituent of the strategy for poverty eradication and is intended to serve as a

safety net for the poor whose number is more than 330 million and are nutritionally

at risk. PDS with a network of about 4.99 lakh Fair Price Shops (FPS) is perhaps

the largest distribution network of its type in the world.

PDS is operated under the joint responsibility of the Central and the State

Governments. The Central Government has taken the responsibility for

procurement, storage, transportation and bulk allocation of foodgrains, etc. The

responsibility for distributing the same to the consumers through the network of

Fair Price Shops (FPSs) rests with the State Governments. The operational

responsibilities including allocation within the State, identification of families

below poverty line, issue of ration cards, supervision and monitoring the

functioning of FPSs rest with the State Governments

Targeted Public Distribution System

In June 1997, the Government of India launched the Targeted Public Distribution

System (TPDS) with focus on the poor. Under the TPDS, States are required to

formulate and implement foolproof arrangements for identification of the poor for

deliver.y of food grains and for its distribution in a transparent and accountable

manner at the FPS level.

Under TDPS, BPL and APL were divided according to 13 parameters. In its tenth

five-year plan (2002-2007) survey, BPL for rural areas was based on the degree of

deprivation in respect of 13 parameters, with scores from 0-4: landholding, type of

house, clothing, food security, sanitation, consumer durables, literacy status, labor

force, means of livelihood, status of children, type of indebtedness, reasons for

migrations, etc.

The Planning Commission fixed an upper limit of 3.26 lakh for rural BPL families

on the basis of simple survey. Accordingly families having less than 15 marks out

of maximum 52 marks have been classified as BPL and their number works out to

3.18 lakh. The survey was carried out in 2002 and thereafter but could not be

finalised due to a stay issued by the Supreme Court of India. The stay was vacated

in February 2006 and this survey was finalised and adopted in September 2006.

This survey formed the basis for benefits under government of India schemes. The

state governments are free to adopt any criteria/survey for state-level schemes.[1]

In its tenth five-year plan BPL for urban areas was based on degree of deprivation

in respect of seven parameters: roof, floor, water, sanitation, education level, type

of employment, and status of children in a house. A total of 1.25 lakh upper

families were identified as BPL in urban area in 2004. It has been implemented

since then.

Issues

Question 1

FCI was set up to act as an apex organization for equitable distribution of food

grains to the lower end of society. However, it ended up with losses and incurred

huge inventory costs. What were the flaws in the operations of FCI? How could it

be improved to achieve its objectives effectively?

Answer

Food Corporation of India was setup on 14th January 1965 under Food

Corporation Act 1964 with authorized capital of almost $600 million to implement

the national policy for price support operations, procurement, storage, preservation,

inter-state movement and distribution operations. But there was many flaws in the

system, some of them are:-

1. Resistance from farmers to give wheat to FCI because of higher prices

offered by private trade. Farmers' expectations with regard to price

have to be met.

2. Low quality of foodgrains – A World Bank report (June 2000) states

that of FCI’s grain stocks is at least two years’ old, 30% between 2 to

4 years and some grain as old as 16 years.

3. Changes in Food Consumption Pattern. Dramatic changes in food

consumption patterns have taken place in India in the post Green

Revolution period. Between 1972-73 and 1993-94,the food basket has

become much more diversified, with the share of cereals seeing a

dramatic decline of ten percentage points in most regions. At the all-

India level, cereal consumption in the rural areas declined from 15.3

kg per capita per month in 1972-73, to 13.4 kg per capita per month in

1993-94.The corresponding decline in the urban areas was more

modest — from 11.3 kg to 10.6 kg over the same period. At the same

time, consumption of milk and meat products as well as vegetables

and fruits has increased. Such changes are a natural outcome of

economic development.

4. For APL there was low difference between the open market prices and

PDS prices.

5. The benefit of food subsidy was not accruing to the rural masses but

more to the farmers.

6. High procurement prices led to high PDS prices making it

unaffordable to poor, so this increased the cost of maintenance of

inventory.

7. The stock were damaged by rodents which contributed to the rotting

away of stocks and a large volume was also wasted during

transportation through mishandling.

8. Corruption at all levels ensured that a fair amount of food grains did

not reach the desired segment of the population.

9. Dealers sell their quota of grains to the rice dealers, because they got a

higher price for the rice than they earned as commission by selling it

to ration card holders.

Some of the measures that should be taken to achieve the objectives of FCI are as

follows:-

Restructuring of PDS

The following points need to be taken into consideration in order to make the

implementation of TPDS more effective:

Kerosene oil is also supplied through PDS and is intended for the poor but alarge

part is used in adultery with Diesel. Subsidies on this should be reduced.

The coverage of TPDS and food subsidy should be restricted to the BPL

population. For the APL population, which has the purchasing power to buy food,

the Government needs to only ensure the availability of food grains at a stable

price in the market. However, in the current situation, where the FCI has huge

surplus stocks of foodgrains, it may be necessary to continue supply of cereals

under PDS to the APL population at below economic cost as a temporary measure.

Ration cards should not be used by the administration as an identification card for

various purposes. That role should be assigned to multi-purpose identity cards.

Food Stamps and Food Credit Cards

Under the system of food stamps or food credit cards, the State Governments could

issue a subsidy entitlement card (SEC) instead of issuing ration cards. The SEC

should show, among other things, the number of members in a poor family and

their age and indicate their entitlement level for food stamps. Each family would

collect its monthly quota of food stamps from prescribed distribution centres on

showing their SEC. They could then use these food stamps at any food supply shop

to buy food grains (rice and wheat) at a price (Rs x) below the market price. The

retailer will then be reimbursed by the State Government. There would be less

corruption as FPS owners cannot lie that they have sold so and so much of items.

Decentralization of Operations

One possibility that could be considered is that based on the net consumer subsidy

spent on providing food through the PDS, the Central budget should make a

provision for a national food subsidy. This subsidy can be distributed among the

states according to a prescribed formula based on the latest available data and

updated poverty ratios. It would then be left to individual State Governments to

determine the quantum of food subsidy based on the contribution they get from the

Centre and their own contribution. The Centre could also agree to enhance the

quantum of its contribution to compensate for any increase in prices. The new

system will also result in a more equitable distribution of the benefits of food

subsidy among different states. However, it needs to be ensured that the food

subsidy distributed by the Centre is utilized for the purpose for which it is meant

and not diverted for other purposes.

Operation of Buffer Stocks and FCI

The high level of market prices of wheat now prevailing in India are primarily due

to the rise in procurement prices over the past three years and taxes and charges on

cereals imposed by state governments. The difference between the economic cost

of FCI and the market price also contributes to the higher price. Notwithstanding

the criticisms against FCI, it has to be admitted that it does play an important role

in the country’s food economy. The contribution of the FCI would be enhanced if

there were greater competition in food trade from other public, co-operative and

private organisations. While the provision of food subsidy is an important element

of the food security system in India, the food procurement and buffer stock

operations play an equally important role. Since agricultural production tends to

fluctuate due to climatic factors, it is necessary to maintain an adequate level of

buffer stock to ensure stability in food grain prices

Private Trade in Foodgrains

The FCI should gradually hand over its role of MSP-related procurement to private

trade. This requires a comprehensive reform of policies, rules and procedures to

strengthen the role of the modern private sector in the matter of storage,

distribution and processing of foodgrains. Various restrictions that inhibit private

initiatives in this regard need to be removed so that the private sector has an

incentive to make huge investment in grain handling operations and food

processing. There is urgent need to upgrade market infrastructure, cold storage

facilities, mandi facilities and roads, areas in which the private sector should be

encouraged to make productive investment.

Grain Bank Scheme

Grain banks were earlier launched in some ststes like Madhya Pradesh, under the

new scheme Grain banks can be set up in remote and isolated areas beyond the

reach of PDS and in regions where there is inadequate employment generation

such as in tribal and forest areas. In order to be successful, the grain bank scheme

has to be combined with a food for work programme, so as to ensure generation of

income, which is necessary in order to ensure repayment of borrowed grain by the

beneficiaries.

Question 2

FCI procured around 20 to 25 % of the productions of wheat and rice however,

despite having an adequate quantity of food grains, it was unable to cater to the

needy masses effectively. How was the public distribution system responsible for

this inefficiency? Suggest some measure to improve the PDS in India.

Answer

With a network of more than 400,000 Fair Price Shops (FPS), the Public

Distribution System (PDS) in India is perhaps the largest distribution machinery of

its type in the world. PDS is said to distribute each year commodities worth more

than Rs 15,000 crore to about 16 crore families. This huge network can play a

more meaningful role if only the system is able to translate into micro level a

macro level self-sufficiency by ensuring availability of food grains for the poor

households.

The problem facing the country today is not one of shortage of foodgrains but of

managing the surplus. Ironically, even as the godowns of the FCI are overflowing,

stray cases of starvation deaths are still being reported. A civilised society in the

21st century cannot allow this to happen. Therefore, while there is need to produce

adequate food grains domestically, supplementing with imports whenever required,

it is also necessary to look at the food grain distribution network. The Public

Distribution System (PDS) in the country facilitates the supply of food grains to

the poor at a subsidised price. However, doubts have been raised about the efficacy

and cost-effectiveness of the PDS, especially in the light of the growing food

subsidy and food stocks. The PDS needs to be restructured and there is a need to

explore the possibility of introducing innovative ideas such as smart cards, food

credit/debit cards, food stamps and decentralized procurement, to eliminate hunger

and make food available to the poor wherever they may be in cost-effective

manner.There are two aspects to the paradox of overflowing godowns and

vulnerable sections of society not consuming adequate food. One is the issue of

having enough purchasing power or income to buy food and the other is the access

to food in terms of physical availability of food.

Dealership and even membership of vigilance committees are seen as positions

where money can be made The procedure to appoint them is highly politicised,

and mostly clients of MLAs are appointed. Sub-district infrastructure to handle

food grains is poor. The Civil Supplies Corporation has no working capital to buy

from Food Corporation of India; vans are in poor condition or have no money for

petrol, staff does not receive salaries for months

On the whole, only Government staff, agents and retailers benefit from the

Scheme. Problems of lack of infrastructure and shortage of funds with Government

agencies are not unique to Bihar; most States suffer such handicaps except for a

few in 239 the West and the South. The Centre should ensure adequate

infrastructural capacities in districts and at block levels to plug leakage of scarce

resources which reportedly helps only contractors and corrupt government staff

and keeps the poor and the needy away. One study claimed that each fair price

dealer has to “maintain” on an average nine government functionaries. It is

significant that the allocation to poorer states like UP, Bihar and Assam got more

than doubled after the switch-over to TPDS, but the off take by the States was poor

and by actual BPL beneficiaries even poorer. The scheme has not made any impact

on nutrition levels in those States.

Recommendations

a. Items other than rice and wheat need to be excluded from the purview of TPDS.

Attempts to include more commodities under food subsidy cover should be

resisted.

b. Sugar supply through PDS draws well-to-do families to the system.

c. Coarse grains are basic commodities purchased by the poor . These grains in

any case are available to the poor at low prices. There seems no additional need to

supply them through PDS and bring them under the cover of food subsidy.

d. Kerosene oil is also a commodity supplied through PDS and is intended for the

poor. But there occurs large scale illicit diversion of this item and benefits meant

for the poor are cornered by others. Subsidised kerosene is used for adulteration

with diesel. Subsidy on kerosene should be gradually phased out and alternate

avenues of marketing it needs to be explored.

e. The coverage of TPDS and food subsidy should be restricted to the population

below poverty line. For others who have the purchasing power, it would do merely

to ensure availability of grains at stable price in the market -- no need for food

subsidy to this population.

f. Ration cards have tended to be used as ID cards to establish people’s identity.

Many get ration cards issued only for this purpose.

Conclusion

Despite the huge stock of food grains available in FCI godowns, stray cases of

hunger deaths are still being reported. The food distribution system, therefore,

needs to be reformed and made more efficient. The present system could be

replaced by a system of food stamps and eventually by a food credit card system.

The excess stocks of food grains that have accumulated with the Government is

partly a result of the high MSP which often exceeded the levels recommended by

the CACP. There is,

therefore, a need to adhere to the recommendations of the CACP in this regard.

The MSP should encourage diversification of agricultural production.

Bibliography

WEB

www.wikipedia.com

www.fciweb.nic.in

www.fcinez.com

www.fixya.com

www.books.google.co.in

www.scribd.com

BOOKS

Sales Management/Still Cundiff Giovini

Principles Of Marketing/Philip kotler/12th Edition