Foodgrain stocks with the Food Corporation of India (FCI) reached a record high of 91 million tonnes as of 1st July. Of the 91 million tonnes of stocks, a third of the total stocks were those of Rice and the remaining of Wheat. Both Rice and Wheat stocks rose 10% YoY.
Stocks are large, whichever way one looks at them
As per the buffer stock norms set up by the Government, the stocks at this time of the year ought to be 41 million tonnes. So, the current stocks are more than 2x the buffer stock norm. This is true in the case of both rice and wheat.
India’s annual production of rice and wheat is approximately 230 million tonnes. So, the current stocks are ~40% of annual production. In the case of rice, the current stocks are approximately 25% of annual production while in the case of Wheat the stocks are 55% of annual production. These percentages are slightly misleading since the Wheat crop has just had its harvest while in the case of Rice the sowing season is about to start.
The offtake of Foodgrains under the various food security schemes in FY21 was 61 million tonnes. So, the current stocks are 150% of annual offtake. In the case of Rice, the stocks (just before the crop are 80% of annual offtake while in the case of Wheat current stocks are over 2x the annual offtake.
Higher Procurement, Lower Offtake
The reason for this build-up of stocks is a combination of higher procurement by the FCI and lower offtake under the various Food Security schemes. In the last 2 years, Rice and Wheat procurement has grown in the low teens on an annualised basis. In contrast, offtake of Rice has been almost stable while that of Wheat has declined 5%.
What is the problem with higher stocks?
There are three issues with the FCI holding such large stocks. First, FCI makes its purchases at the officially announced MSP. When such large purchases (that eventually result in high stocks) happen at MSP, it ends up distorting the market prices. Price signals are important for farmers to decide on which crops to produce. Artificially high prices of Rice and Wheat signals more production of these crops at the expense of other crops. Second there is a cost associated with holding such stocks. And that cost is borne by the taxpayers. Third, FCI’s ability to hold such stocks without them getting damaged/wasted is itself an open question.
At this rate, unless offtake picks up meaningfully (and it is unlikely), the Government will either have to curtail procurement sharply in the current crop season or resort to open market sales to reduce the level of inventory. This will depress market prices, the opposite of the Government's objective.