Impact of FSA on the FMCG companies

The new flagship programme from the UPA government is the Food Security Act (FSA). The scheme proposes to provide BPL families with 25kgs of grain (Rice & Wheat) per month at Rs. 3 per kg. This is a bold step towards right to food for the poor.

Two major problems with this act now are:

1. Definition of a BPL family

There is no fixed definition of a BPL family. Everybody has their own definition for their own stakes.

2. Delivery

We all know the efficiency of our Public Distribution System (PDS) with leakages, corruption, and with lesser capacities. There is little trust that the existing PDS can deliver this to the needy.

Impact of FSA on the FMCG companies

The Food Corporation of India (FCI) will need substantially more wheat to supply three out of four Indian households, meet the new buffer stocking norms that stipulate larger quantities, and also keep aside a strategic reserve for emergencies. Unlike rice, wheat cultivation is limited to less than a dozen states.FCI already buys one out of every two bags sold by Indian farmers. In Punjab and Haryana, it buys virtually every kilo for sale. To meet its new obligations, FCI will have to redouble purchases across Uttar Pradesh, Rajasthan, Madhya Pradesh and Bihar.

When a commodity is in short supply, a bidding war breaks out with simple supply-demand economics. Companies would bid for the supplies and will be ready to pay more than the minimum support price (MSP), which the govt pays the farmers. This is one of the things expected to benefit the farmers, but it has to be executed well. Overall, the price rise is guaranteed with our faulty PDS, corruption, leakages, pests, unfavourable climate etc. One may say, we could increase the wheat production. This is not easy as our National Food Security Commission is yet to achieve its targets for the year, and from the last few years productivity has increased only by a margin. The only hope for production increase is that the farmers when paid well will invest in high-yield seeds that can increase the productivity per hectare.

Meanwhile, FMCG companies that manufacture biscuits, atta, and other food FMCG are under tremendous pressure. With already existing food inflation hitting them hard, most FMCG companies made a price increase. Most of the consumers for these categories are price sensitive and are switching to alternatives and the volumes are going low. With this status quo,the FMCG companies will be forced to increase the prices once again. This means you’re biscuits, packaged atta, and other food FMCG is going to become costlier.

Companies that are more lean and have a value perception are more likely to come out successful. This is a big challenge for the companies and it is to be seen who will emerge out of this battle.