Relevance for UPSC:  GS Paper III – Food Security, Agriculture Marketing, Federal Finances

The Madhya Pradesh government’s recent request to exit the Decentralised Procurement (DCP) system and return to centralised procurement through the Food Corporation of India (FCI) is not just a bureaucratic change. It reflects the deeper stresses within India’s Public Distribution System (PDS) — a vast network where food security, fiscal discipline, and federal coordination meet.

To understand why a State like Madhya Pradesh is feeling the strain, it is important to see how the food procurement system functions and where its financial bottlenecks lie.

How India’s Public Distribution and Procurement System Works

1. Announcement of Minimum Support Price (MSP)
   Before every crop season, the Union government declares MSPs for major crops such as wheat and paddy to ensure that farmers get a remunerative price for their produce.
2. Procurement from Farmers
   Grain is procured at MSP by government agencies in designated mandis. This procured grain forms the backbone of India’s food security system.
3. Storage and Milling
   Once procured, the grain — especially paddy, which must be milled into rice — is stored and processed before being released for distribution.
4. Distribution under the Public Distribution System (PDS)
   The PDS, governed by the National Food Security Act (NFSA) 2013, provides subsidised foodgrains to about 81.35 crore people, roughly two-thirds of India’s population.
5. Two Procurement Models

• In the centralised model, the FCI directly procures, stores, and transports foodgrains across the country.
• In the decentralised model, the State government takes responsibility for procurement, storage, and distribution, and is later reimbursed by the Centre for the “economic cost” — which includes MSP and operational expenses such as transport, milling, gunny bags, handling, and interest.

The decentralised system was introduced to promote local efficiency and reduce FCI’s burden, but over time, it has exposed significant fiscal and operational weaknesses in several States.

Why States Face Financial Stress under Decentralised Procurement

Madhya Pradesh’s case highlights a set of recurring challenges that other DCP States also face.

• Front-loading of Cash
  States must pay MSP and operational costs upfront. To do this, they often rely on large bank borrowings, accumulating heavy interest costs even before receiving reimbursement.
• Delayed Reimbursements
  Reimbursements from the Centre follow detailed cost audits and verifications. This process can take months, creating severe cash-flow pressure during the procurement season.
• Cost-Sheet Mismatch
  The final cost approved by the Centre often differs from what States actually spend on the ground, leaving unfunded gaps that strain State finances.
• Operational Risks
  Storage losses, moisture-related rejections, and milling delays add further costs, which States must bear until they are reimbursed.

In Madhya Pradesh, wheat and paddy procurement have touched nearly 121 lakh metric tonnes combined, but the State has accumulated over ₹70,000 crore in dues and loans due to delayed reimbursements and high interest obligations.

The State has therefore asked to return to centralised procurement, allowing the Centre to bear financial and logistical risks while the State focuses on last-mile distribution.

The Larger Picture: A Food Security Chain Under Pressure

1. Public Distribution System Stress
   Under the NFSA and Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the government provides free foodgrains every month to around 81 crore beneficiaries. While transformative, this massive welfare programme requires uninterrupted procurement and storage. Any delay in reimbursements or stock movement threatens the system’s reliability.
2. Farmer Confidence in MSP
   When States face fiscal stress and delay payments to farmers, it undermines trust in MSP operations, pushing farmers towards distress sales to private traders — defeating the purpose of government procurement.
3. Fiscal Federal Balance
   The DCP model was envisioned to empower States, but as economic costs rise due to inflation and infrastructure gaps, it has led to fiscal pressure. India’s annual food subsidy now exceeds ₹2 lakh crore (Budget Estimate 2024–25), one of the largest expenditure items in the Union Budget.
4. Logistics and Stock Management
   The FCI ensures national grain flow, while DCP States depend on their own godowns, transport, and milling facilities. Weak infrastructure and limited storage make coordination difficult, especially under the One Nation One Ration Card (ONORC) system that enables grain portability across States.
5. Administrative Complexity
   Each transaction — procurement, storage, milling, and transport — must be documented and verified. Delays at any stage slow down reimbursements, affecting both farmers’ payments and ration distribution.

Systemic Issues Exposed by the Madhya Pradesh Case

• Cost Realism: Are local expenses and market fluctuations adequately accounted for in reimbursement formulas?
  
• Payment Timelines: Can States sustain heavy short-term borrowings without timely reimbursements?
  
• Quality Control: How can testing be standardised to avoid arbitrary rejection of grain?
  
• Audit Delays: Paper-based documentation and manual approvals slow down fund flows.
  
• Climate and Logistics Risks: Erratic weather and late harvests increase storage and transportation costs.
  

The Way Forward: Balancing Efficiency, Equity, and Fiscal Health

1. Time-bound Financial Settlement
   Introduce a rule-based system that mandates settlement of provisional cost sheets within 30 days, with interest payable on delays.
2. Hybrid Procurement Model
   Allow flexibility for States to adopt a hybrid approach—FCI handles large-scale procurement and movement, while States focus on local milling and PDS distribution.
3. Regional Grain-Shed Planning
   Encourage inter-State cooperation in storage and transport, similar to “airshed” management in environmental policy, to reduce duplication and logistics costs.
4. Infrastructure Modernisation
   Invest in modern silos, climate-resilient godowns, and digital tracking of grain movement to reduce losses and improve transparency.
5. Farmer-Centric Reforms
   Provide electronic receipts, ensure 48-hour payment after procurement, and set up moisture testing kiosks and grievance redress systems at mandis to make procurement transparent and farmer-friendly.
6. Demand-Side Efficiency
   Digitise the entire supply chain to curb leakages and link the PDS with nutrition-sensitive food baskets, including pulses and millets, aligning it with SDG 2 – Zero Hunger.

Key Concepts Explained 

• Public Distribution System (PDS): A nationwide network of fair-price shops supplying subsidised foodgrains to eligible households.
  
• Minimum Support Price (MSP): The minimum rate at which the government procures crops to ensure fair returns to farmers.
  
• Decentralised Procurement (DCP): State-led procurement, storage, and distribution, reimbursed later by the Centre.
  
• Centralised Procurement: FCI-led procurement where the Centre bears the main costs and logistics burden.
  
• Economic Cost: The total cost including MSP and operational expenses such as milling, transport, storage, and interest.
  
• One Nation One Ration Card (ONORC): Allows beneficiaries to access their food entitlements anywhere in India.
  

Linked Sustainable Development Goals

• SDG 1: No Poverty
  
• SDG 2: Zero Hunger
  
• SDG 12: Responsible Consumption and Production
  
• SDG 16: Strong Institutions
  

One-Line Wrap:

India’s food security chain will remain strong only if its financial flows are as efficient as its grain flows.

UPSC Mains Question

“Critically examine whether the decentralised procurement model enhances food security or overburdens State finances. Suggest reforms to create a balanced, transparent, and sustainable procurement architecture in India.”