Financial Daily from THE HINDU group of publications
Thursday, Oct 07, 2004
Agri-Biz & Commodities - Agricultural Institutions
Government - Politics
`Why engage McKinsey for FCI recast?'
Comprehensive studies already done, say critics
New Delhi , Oct. 6
THE practice of the Government hiring foreign consultants for policy-related projects is coming under increasing scrutiny, with critics calling it "superfluous expenditure of public money".
The latest consultancy contract mired in controversy is a `study' that the Ministry of Consumer Affairs, Food and Public Distribution has reportedly commissioned to McKinsey & Company.
The mandate: "To improve the functioning of the FCI (Food Corporation of India)". The fee: A sum of $1.15 million (Rs 5.30 crore) spread over six months, after factoring in a discount of over 40 per cent that the US consultancy firm has offered to "build the relationship".
The official reason for commissioning the study is that it conforms to the ruling United Progressive Alliance's (UPA) Common Minimum Programme, which promises to "bring about major improvements in the functioning of the FCI to control inefficiencies that increase the food subsidy burden".
The move has, nevertheless, invited criticism, and this time round, from quarters least associated with the Left.
The main grouse of the critics is that there are no dearth of existing studies, which have examined the entire gamut of FCI's operations and suggested concrete measures to reduce its economic cost of handling foodgrains. These include the report of the High-Level Committee on Long-Term Grain Policy (HLC) under Prof Abhijit Sen, which was submitted in July 2002.
This was preceded by a detailed 135-page study undertaken by the Hyderabad-based Administrative Staff College of India (ASCI) on `The costs of acquisition and distribution of foodgrains by the Food Corporation', submitted to the Ministry in May 2001. Subsequently, the ASCI even did a report for the Reserve Bank of India on the `Monetary and fiscal implications of excess stocks of foodgrains' (July 2002).
"It is surprising to hear about the Government commissioning yet another project, where there are already comprehensive studies on FCI's cost structure lying before the Ministry. One doesn't understand what purpose would an additional study on the same subject serve," Dr E.A.S. Sarma, former Principal of ASCI as also Secretary, Department of Economic affairs, told Business Line.
According to him, ASCI had conducted its study for just Rs 30 lakh, a fraction of the consultancy fees being charged by McKinsey.
But a more fundamental point being raised by others pertains to the fact that FCI's cost structure is largely determined by `policy' (read politics) rather than economic considerations. Take, for instance, the economic cost of wheat, estimated at Rs 924.82 per quintal for 2004-05. About 68 per cent of this is constituted by the Minimum Support Price (MSP) of Rs 630 per quintal fixed by the Government itself for the current year.
On this price, there are a host of statutory levies - a four per cent purchase tax, a two per cent rural development cess, a two per cent market fee and a 2.5 per cent `dami' charged by commission agents totalling another Rs 66.15 per quintal. If one adds to this, other `policy-induced' variables unlimited open-ended procurement of grains, mandatory use of jute bags for packaging, unionised labour, etc the scope for bringing down the economic cost through pure financial engineering is limited to just the residual 15 per cent-odd component.
And, on this count, some action has already been initiated, following the suggestions made by the HLC and the ASCI reports. Prominent among them is the decision to allow FCI to access cheaper market borrowings in place of the earlier regime, where it was obtaining credit from a consortium of banks at 11.65 per cent, despite enjoying a near-sovereign status.
"Everybody knows that the chief ingredient for bringing down FCI's economic cost is political will and legitimacy. Appointment of foreign consultants would only provide fodder for those wanting to scuttle the process," a former official pointed out.
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