The HINDU Notes – 05th May 2020 - VISION

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Tuesday, May 05, 2020

The HINDU Notes – 05th May 2020

📰 A grain stockist with a role still relevant

In the middle of the pandemic, the FCI holds the key to warding off a looming crisis of hunger and starvation

•For several years now, the Food Corporation of India (FCI) has drawn attention for all the wrong reasons. Set up under the Food Corporations Act 1964, in its first decade, the FCI was at the forefront of India’s quest of self-sufficiency in rice and wheat following the Green Revolution, managing procurement and stocking grain that supported a vast Public Distribution System (PDS).

•Over time, however, many began to see it as a behemoth that had long outlived its purpose. Its operations were regarded as expensive and inefficient, a perception that has come to be accepted as fact. Even in the 1970s and 1980s, poor storage conditions meant a lot of grain was lost to pests, mainly rats; diversion of grain was widespread, prompting a former chairman to declare that there was a problem with “human rats” as well. By the late 1990s, the FCI was often referred to as the “Food Corruption of India”, not entirely facetiously.

Why it is better placed

•Notwithstanding its dubious reputation, the FCI has consistently maintained the PDS, a lifeline for vulnerable millions across the country. Today, in the middle of the COVID-19 pandemic, it holds the key to warding off a looming crisis of hunger and starvation, especially in regions where lakhs of migrant workers have returned with little in hand by way of money or food. Before the lockdown, many experts had observed that with 77 million tonnes of grains in its godowns and on the eve of a new round of procurement — of a bumper harvest of wheat — the FCI was facing a serious storage problem. This was worrying not just because of a shortage of modern storage facilities but also because the FCI lacked a “pro-active liquidation policy” for excess stocks. Today, this concern has all but disappeared, even if only temporarily, and many have called for opening up the godowns to release food stocks to those affected by the lockdown.

•As of April 13, 2020, the FCI had already moved 3 million tonnes (post-lockdown), to States, including Uttar Pradesh, Bihar, West Bengal and Karnataka and those in the Northeast, where demand outstrips within State procurement and/or stocks. The FCI has also enabled purchases by States and non-governmental organisations directly from FCI depots, doing away with e-auctions typically conducted for the Open Market Sale Scheme (OMSS). With rabi procurement under way in many States, it seems that the country will secure ample food supplies to cope with the current crisis. Given the extended lockdown, the FCI is uniquely positioned to move grain across State borders where private sector players continue to face formidable challenges. With passenger rail and road traffic suspended, grain can move quickly without bottlenecks. Yet, there is a widespread sense that the FCI is simply not moving fast enough and could do much more.

•First, the FCI is overwhelmingly reliant on rail, which has several advantages over road transport. In 2019-2020 (until February) only 24% of the grain moved was by road. The FCI has, however, long recognised that road movement is often better suited for emergencies and for remote areas. Containerised movement too, which is not the dominant way of transporting grain, is more cost-effective and efficient. Now, more than ever, it is imperative to move grain quickly and with the least cost and effort, to areas where the need is greatest.

Positioning strategy

•Second, given that the coming months will see predictable demand of staples from food insecure hotspots where migrant workers have just returned or where work is scarce, one strategy that has been adopted widely in international food aid by the United States, for example, is “pre-positioning” shipments, where grain is stored closer to demand hotspots. The FCI already has a decentralised network of godowns. In the current context, it would be useful for the State government and the FCI to maintain stocks at block headquarters or panchayats in food insecure or remote areas, in small hermetic silos or containers; this would allow State governments to respond rapidly, not to mention the sense of assurance and psychological comfort that it will offer vulnerable communities. This is especially relevant for regions that are chronically underserved by markets or where markets have been severely disrupted.

•Third, there is a strong case for the central government to look beyond the PDS and the Pradhan Mantri Garib Kalyan Yojana and release stocks over and above existing allocations, but at its own expenses rather than by transferring the fiscal burden to States. Along with a prepositioning strategy, this would provide flexibility to local governments to access grains for contextually appropriate interventions at short notice, including feeding programmes, free distribution to vulnerable and marginalised sections, those who are excluded from the PDS, etc.; it also allows freedom to panchayats, for example, to sell grain locally at pre-specified prices until supply is restored. In many States, there is a vibrant network of self-help groups formed under the National Rural Livelihoods Mission (NRLM) which can be tasked with last mile distribution of food aid other than the PDS. Consultative committees presumably exist already in each State to coordinate with the FCI on such arrangements.

•Fourth, typically, the FCI’s guidelines follow a first in, first out principle (FIFO) that mandates that grain that has been procured earlier needs to be distributed first to ensure that older stocks are liquidated, both across years and even within a particular year. It is time for the FCI to suspend this strategy, if it has not already, that enables movement that costs least time, money and effort.

•Fifth, today farmers across the country growing for markets are seeking to reach out to consumers directly, many out of sheer despair. In many places, farmer producer organisations (FPOs) have been at forefront of rebuilding these broken supply chains. The FCI along with the National Agricultural Cooperative Marketing Federation of India Ltd. (NAFED), is well placed to rope in expertise to manage the logistics to support these efforts. NAFED has already taken the initiative to procure and transport horticultural crops. Several State governments too have put in systems to procure horticultural crops. The FCI should similarly consider expanding its role to support FPOs and farmer groups, to move a wider range of commodities including agricultural inputs such as seeds and fertilizers, packing materials and so on.

•There are two major concerns that many articulate regarding the FCI’s role. The first is a long-term concern regarding the costs of food subsidy. An analysis of FCI costs spanning 2001-16 suggests, however, that on average about 60% of the costs of acquisition, procurement, distribution and carrying stocks are in fact transfers to farmers. Not all of what is counted as subsidy therefore represents a waste of resources, even if the distributional consequences and inefficiencies leave a lot to be desired. At the same time, the government needs to address the FCI’s mounting debts — an estimated ₹2.55 lakh crore in March 2020 in the form of National Small Saving Funds Loan alone — and revisit its current preference for not liquidating these in order to contain the Union government’s fiscal deficit. Some clarity on this aspect would enable the government to be bolder with deploying the FCI in the best possible way. A second concern is that extended food distribution of subsidised grain is akin to dumping and depresses food prices locally, in turn affecting farmers. These are legitimate concerns but perhaps only beyond the looming emergency this summer.

•When the pandemic is past, questions will once again surface on the relevance of the FCI. Even in 2015, the Shanta Kumar report recommended repurposing the organisation as an “agency for innovations in Food Management System” and advocated shedding its dominant role in the procurement and distribution of grain. There is no doubt that the FCI needs to overhaul its operations and modernise its storage. At the same time, the relevance of an organisation such as the FCI or of public stockholding, common to most Asian countries, has never been more strongly established than now, even as we contemplate its new role in a post-pandemic world.

📰 MPLADS, its suspension, and why it must go

There are five reasons why the Members of Parliament Local Area Development Scheme must be abolished

•All Opposition parties have been unanimous in their criticism of the government’s recent move to suspend the Members of Parliament Local Area Development Scheme (MPLADS) for two years, approved by the Cabinet. The government’s reason is this: to use these funds “to strengthen the government’s efforts in managing the challenges and adverse impact of COVID-19 in the country”.

•Such political unanimity is not very common but does happen whenever self-interest is involved. Under the scheme, each Member of Parliament “has the choice to suggest to the District Collector for works to the tune of ₹5 crores per annum to be taken up in his/her constituency”.

•It must be said upfront that notwithstanding the fact that unilateral decision-making is inappropriate in a democracy, the decision to suspend MPLADS for two years is a good first step. In fact, the MPLADs scheme should be completely abolished, and for the following reasons.

•First, the scheme violates one of the cardinal principles, which though not specifically written down in the Constitution, actually permeates the entire Constitution: separation of powers. Simply put, this scheme, in effect, gives an executive function to legislators (read legislature). The argument that MPs only recommend projects, but the final choice and implementation rests with the district authorities is strange; there are hardly any authorities in the district who have the courage or the gumption to defy the wishes of an MP.

CAG’s observations

•Second, implementation of the scheme has always left much to be desired. The details below, which are some of the observations made by the Comptroller and Auditor General (CAG) of India, in a report make it clear: Expenditure incurred by the executing agencies being less than amount booked. Utilisation of funds between 49 to 90% of the booked amount; Though the scheme envisages that works under the scheme should be limited to asset creation, 549 of the 707 works test-checked (78%) of the works recommended were for improvement of existing assets; Wide variations in quantities executed against the quantities specified in the BOQ (Bills of Quantity) in 137 of the 707 works test-checked. Variations ranged from 16 to 2312%. (“2312%” is the figure actually mentioned in the audit report); Use of lesser quantities of material than specified by contractors resulting in excess payments and sub-standard works; “no accountability for the expenditure in terms of the quality and quantities executed against specifications”; Delays in issuing work orders ranging from 5 to 387 days in 57% of the works against the requirement of issuing the work order within 45 days of the receipt of recommendation by the MP; Extensions of time granted to contractors without following the correct procedure; Register of assets created, as required under the scheme, not maintained, therefore location and existence of assets could not be verified; “The implementation of the scheme was marked by various shortcomings and lapses... These were indicative of the failure of internal control mechanisms in the department in terms of non-maintenance of records”.

Gaps in utilisation

•Third, there are wide variations in the utilisation of the MPLAD amount in various constituencies. A report published in IndiaSpend has some very interesting insights based on data made available to it by the Ministry of Statistics and Programme Implementation. Some of these are: “A year after they took office, 298 of 542 members of the 16th Lok Sabha — India’s lower house of parliament — have not spent a rupee from the ₹5 crore that is set aside annually for them to develop their constituencies”; 508 MPs (93.55%) did not, or could not, utilise the entire MPLADS amount from May 4, 2014 till December 10, 2018, in 4 years and 7 months. Only 35 MPs of the Lok Sabha utilised the entire amount of MPLADS during this period; Though ₹1,757 crore had been released for MPLADs, only ₹281 crore had been utilised by all the 543 MPs till May 15, 2015. This means only 16% of the money had been spent in one year by all the MPs put together, because the Lok Sabha was constituted in May 2014; Since the MPLADS began in 1993, ₹
5,000 crore was lying unspent with various district authorities by May 15, 2015.

•It is clear from the details above, as well as later experience, that most MPs use money under MPLADS quite haphazardly, and a significant portion of it is left unspent.

•Fourth, added to the data above is fairly widespread talk of money under MPLADS being used to appease or oblige two sets of people: opinion-makers or opinion-influencers, and favourite contractors. Sometimes these two categories overlap. An often-heard tale is that of the contractor being a relative, close friend, or a confidant of the MP, and the contractor and the MP being financially linked with each other.

•Finally, we come back to the legality or constitutionality issue which was mentioned earlier. The constitutional validity of MPLADS was challenged in the Supreme Court of India in 1999, followed by petitions in 2000, 2003, 2004, and 2005. The combined judgment for all these petitions was delivered on May 6, 2010, with the scheme being held to be constitutional.

•With due respect to the top court, it must be said that the Court does not seem to have been able to appreciate the situation in totality. It seems to have placed an unquestioned trust in the efficacy of the scheme of implementation of MPLADS drawn up by the government without an assessment of the situation prevalent in the field, evidence of which is available in audit reports wherein gross irregularities and infirmities in implementation have been pointed out. The possibility that implementation of a lot of schemes bears no relationship to how the schemes were intended to be implemented, seems to have completely escaped the attention of the Court. Common experience does not support this because of large, yawning gaps being found in actual implementation.

Cases of misuse

•Reports of underutilisation and misutilisation of MPLADS funds continue to surface at regular intervals but there seems to have been no serious attempt to do anything about it till now. There are innumerable instances of misuse of these funds; one prominent example is the construction of a fountain in the open space of an unauthorised settlement, or a jhuggi jhopdi colony, which did not have provision of drinking water. The general belief in the settlement was that the contractor who bagged the contract to build the fountain was related to the local Member of Parliament.

•Therefore, it would be in order to convert the two-year suspension into the complete abolition of this undesirable and unconstitutional scheme.

📰 COVID-19 and India’s fiscal conundrum

While the case for an aggressive fiscal stimulus is clear, the options to finance it are not straightforward

•As the COVID-19 pandemic continues to ravage economies across the world, policymakers are desperately seeking effective ways to mitigate its economic effects. The immediate future appears dire for large emerging markets including India, which recently saw its growth forecast for 2020 slashed by the International Monetary Fund (IMF) to 1.9% from the previously estimated 5.8%. In April, the World Bank estimated that India would grow 1.5% to 2.8% in 2020-2021, the lowest since the start of the 1991 economic reforms. Dim as these projections are, what is of concern is that these are already starting to look overly optimistic considering that India has extended the lockdown.

Fiscal stimulus efforts

•Given the severity of the crisis, the Reserve Bank of India (RBI) has responded proactively and aggressively to ease liquidity concerns although the credit easing policy does not seem to have been transmitted yet to many firms. It has also granted regulatory forbearance relating to asset classification to support economic activity, though some socialisation of losses might be inevitable over time.

•In contrast, the Indian government’s fiscal stimulus efforts have paled in comparison to the rest of the world’s initiatives. India’s fiscal stimulus to date, estimated at ₹1.7 trillion, is less than 1% of the country’s GDP, which is paltry compared to the magnitude of stimulus injections undertaken by many East Asian countries such as Japan (20%), Malaysia (16.2%) and Singapore (12.2%).

•With the Indian economy in the ICU, there has understandably been a lot of criticism regarding the gross inadequacy of the government’s fiscal response to date. Several observers have emphasised the need for India to roll out a revival package of at least 5% of the GDP (₹10 trillion) to support the health and economic well-being of the most vulnerable (slum dwellers and migrant workers) as well as micro, small and medium-sized enterprises (MSMEs).

•Some other lower-income countries have been reluctant to impose nationwide lockdowns as they recognise that this policy works best in countries that are sufficiently well endowed to offer appropriate compensatory resources to the most vulnerable.

Relief packages in Asia

•While the case for an aggressive fiscal stimulus is clear in these exceptional circumstances, the options to finance it do not appear to be straightforward. On the one end, most advanced economies can manage such financing by issuing bonds given their global demand. On the other, over 50 struggling low-income countries with limited resources to tackle the crisis have turned to the IMF for help. The G7 countries have in principle agreed to offer debt relief to low-income countries by suspending their debt service payments.

•The ones caught in between are mostly the middle-income emerging markets in Asia and elsewhere, like India. To date, the Asian Development Bank and the World Bank have committed to offering relief packages worth $1.5 billion and $1 billion, respectively, to India, while there are reports that the country has sought further multilateral assistance from the Asian Infrastructure Investment Bank. While certainly helpful, these would be a drop in the bucket as such assistance can at best only be supplementary to the larger underlying stimulus package that India may need to roll out. However, with a government debt of around 72% of GDP, which is comparatively higher than all other emerging markets in the region, India’s fiscal room to opt for a massive stimulus appears much more limited. Any aggressive stimulus spending will not only result in a surge in India’s gross public debt but will also negatively impact its credit ratings, highlighting the country’s fiscal conundrum.

•Even if the Fiscal Responsibility and Budget Management constraints are relaxed, given India’s limited demand for domestic bonds, there is a need to seek capital flows to finance its additional stimulus by encouraging foreign investment in government securities. However, it is unclear how much the recently liberalised norms in this area will be of help, given the heightened risk aversion and short-term capital outflows from India and other emerging markets. In fairness to the government though, other large middle-income Asian emerging markets like Indonesia have also lagged in their fiscal response, despite being hard-hit by COVID-19.

•Some richer countries in the Asian region like Singapore have managed to tap into their deep reserve kitty benefiting from the significant role played by their sovereign wealth funds. While India does not have that luxury, it has been suggested that some of the country’s $476 billion of foreign exchange (FX) reserves be used towards this purpose. However, this is an extremely risky option in light of India’s sizeable current account deficits and heavy dependence on short-term capital inflows. Given the likely pressure on its balance of payments moving forward, utilising FX reserves does not seem to be viable at the moment.

•A radical financing option would be to monetise the deficits by allowing the RBI to print money to buy the government bonds as long as inflation remains under check, though this might set a dangerous precedent (something the RBI stopped doing in 1997) moving forward. India has worked hard to move away from such money-financed fiscal stimulus polices that led to weak budget constraints and macroeconomic instability.

Adequate fiscal space

•Although it is important to do whatever it takes to moderate the meltdown, offer disaster relief and eventually kick-start the economy, there are valid concerns that unless there is proper governance of any massive fiscal spending, even a very well-intentioned policy may end up doing more harm than good. Even countries like China have been guarded in their fiscal responses so far. In China, this was partly to avoid a rise in its shadow banking activities, which turned out to be one of the perverse side-effects of its massive stimulus post the global financial crisis.

•Countries with higher initial public debt levels like India need to be particularly concerned as they also happen to possess the least state capacity to make tough decisions to return to a trajectory of fiscal credibility. This crisis has made clear the critical importance for countries to build adequate fiscal space to manage future economic distresses. Given the acute constraints on fiscal policy in India, there is clearly a need to start re-prioritising expenditures away from low-priority, unproductive areas towards greater spending on health and social safety nets for low-income households.