Procurement

Also called: Public procurement of foodgrains, Government procurement, Procurement of foodgrains, Fair price procurement · Topic: Agricultural Marketing, MSP, Buffer Stocks and PDS · NCERT: Class 10, Ch 2 "Sectors of the Indian Economy"; Class 11, Ch 2 "Indian Economy 1950-1990"; Class 11, Ch 5 "Rural Development"

Meaning

Procurement means the government buys farm produce from farmers at the MSP (Minimum Support Price, the price the Centre announces before sowing and promises to pay). It buys mainly wheat and rice, through the FCI and state agencies. The grain goes into the central pool, which supplies the PDS (Public Distribution System, the network of ration shops) and holds buffer stocks for times of shortage. Since 2018, pulses, oilseeds and copra are also bought at MSP, under PM-AASHA.

It matters for two reasons:

• It gives farmers a price floor, so their income does not crash after a good harvest.
• It gives the state the grain it needs for food security.

In economic theory, MSP backed by procurement is a price floor set above the market price. So the government must buy the surplus:

Surplus = Quantity supplied at MSP − Quantity demanded at MSP

Explanation

How procurement works

• The agency: the Food Corporation of India (FCI) was created under the Food Corporations Act 1964 and set up on 14 January 1965.

• Why it was set up: in the mid-1960s India was short of food and depended on imported wheat (PL-480 wheat from the USA). The government needed its own agency to buy, store and move grain.

• FCI's four jobs:

• Procure (buy) grain from farmers.
• Store it in godowns (warehouses).
• Move it from surplus states to deficit states.

• Distribute it to states for the PDS, and hold buffer stocks.

• Open-ended procurement: for wheat and rice, the government buys all the grain offered at MSP, as long as it meets FAQ ("fair average quality") standards. There is no quantity limit.

• Timing: wheat is bought in the Rabi Marketing Season (RMS). It normally starts on 1 April each year [4].
• Green Revolution link (NCERT, Class 11): higher output "enabled the government to procure sufficient amount of food grains to build a stock which could be used in times of food shortage".

Modes of procurement

Mode	How it works	Merit	Limitation
Centralised procurement	FCI buys for the central pool, either directly or through state agencies. FCI stores the grain and moves it across states.	The same control across the whole country	High transport and handling costs, because grain travels long distances
Decentralised procurement (DCP) (from 1997-98)	The state buys, stores and distributes grain under the PDS itself. The Centre reimburses its costs. Any extra grain goes to FCI.	Saves transport costs. Brings procurement to more states. Local grain goes to local ration shops.	Depends on each state's capacity and money

• Physical procurement vs deficiency payment:
• Under the Price Support Scheme (PSS), NAFED and NCCF actually buy pulses and oilseeds.
• Under the Price Deficiency Payment Scheme (PDPS), there is no buying. The farmer sells in the market, and the government pays the gap between MSP and the market price.

Why procurement piles up stock: MSP as a price floor

• Price floor: a legal minimum price set above the equilibrium price (the price at which demand equals supply).
• What happens:
• At the higher price, farmers grow and sell more, but buyers want less.
• This leaves a surplus.

• The government must buy that surplus. If it does not, the market price falls back below MSP.

• Worked example (illustrative numbers):

• Equilibrium wheat price = ₹2,000/quintal. MSP = ₹2,400/quintal.
• At ₹2,400, farmers offer 1,100 lakh tonnes, but private buyers want only 800 lakh tonnes.

• Surplus = 1,100 − 800 = 300 lakh tonnes. FCI must buy this, and it goes into the central pool.

• Lesson: a high MSP plus open-ended buying automatically builds very large stocks.

What decides how much is procured

• The MSP level: the higher the MSP is above the market price, the bigger the surplus the state must buy.
• The size of the harvest: a good crop means more grain is offered at MSP.
• Where purchase centres are: most procurement happens in Punjab, Haryana, MP, Telangana, Chhattisgarh and Odisha. These states have mandis, many purchase centres and a long habit of selling to the government.
• Farmer access: small surpluses, low awareness, few purchase centres outside the core states, and distress sales to traders all keep many farmers out.

In India

• Institutions: the FCI and state agencies procure wheat and rice. Under PM-AASHA's PSS, the central nodal agencies NAFED and NCCF buy pulses, oilseeds and copra through state agencies [8].
• Central pool: the combined stock of wheat and rice held by FCI and state agencies for the Government of India.
• Latest scale: FCI procured 266 LMT (lakh metric tonnes) of wheat in RMS 2024-25 [4].
• Buffer norms (in force since January 2015): these set the minimum rice plus wheat that must be in the central pool on 1 April, 1 July, 1 October and 1 January.
• Each norm has two parts:
  • Operational stock: grain for the monthly PDS and welfare schemes.
  • Strategic reserve: extra grain for emergencies, of 30 LMT wheat + 20 LMT rice [3].

• The 1 July norm is the highest, because rabi wheat has just been bought: rice 135.40 + wheat 275.80 = 411.20 LMT [2].

• Excess stock: on 1 July 2025, the central pool held 736.61 LMT against a norm of 411.20 LMT. That is about 1.8 times the norm [2].

Grain	Actual stock (LMT)	Norm (LMT)	Excess (LMT)
Rice	377.83	135.40	242.43
Wheat	358.78	275.80	82.98
Total	736.61	411.20	325.41

• Why excess stock hurts:
• Carrying costs rise. These include storage, interest on the money locked up in grain, and losses in storage.
  • → All of this is paid through the food subsidy, so the subsidy bill grows.
• Grain rots when godowns are full and grain is kept under CAP (Cover and Plinth, meaning open storage under tarpaulin).
• The government has to sell the extra grain. It does this under the OMSS (Open Market Sale Scheme), which sells central-pool grain to traders and processors to cool prices.

• Crop choices get distorted. Assured buying of rice and wheat pulls land and groundwater away from pulses and oilseeds.

• Pulses and oilseeds under PM-AASHA (2018):

• The Cabinet continued the scheme in September 2024 with ₹35,000 crore, up to 2025-26 [5].
• It now has four parts: PSS, PSF, PDPS and MIS [5].
• PSS ceiling for tur, urad and masur:
  • Raised from 25% to 40% of state production in 2022 [6].
  • Removed in 2023-24 [7].
  • Set at 100% of state production in 2024-25 [8].
  • Kept at 100% up to 2028-29 in Budget 2025, to make India self-sufficient in pulses [9].

• Other notified pulses and oilseeds: up to 25% of state production from 2024-25 [8].

• Who benefits: the Shanta Kumar High Level Committee (2015) found that only about 6% of farmers sell to a procurement agency at MSP.

• NCERT (Class 11, Rural Development): "Famines became events of the past; we have now achieved food security which is reflected in the abundant buffer stocks of grains."

Don't confuse with

• MSP: MSP is the price the Centre announces. Procurement is the actual buying at that price. Without procurement, MSP is only a signal, and market prices can fall below it.
• Buffer stock: the buffer stock is the grain held in the central pool. Procurement is the flow of buying that fills it. Buffer norms are checked on four fixed dates.
• PDPS (deficiency payment): PDPS involves no physical procurement. The farmer is paid MSP − modal price (the most common mandi price), with the Centre's share capped at 15% of MSP [5]. Its model was MP's Bhavantar Bhugtan Yojana (2017).
• Centralised vs decentralised procurement: in centralised procurement, FCI buys and moves the grain. In DCP (from 1997-98), the state buys, stores and distributes the grain, and the Centre reimburses the cost.

Prelims Hooks

• FCI was set up under the Food Corporations Act 1964, on 14 January 1965.
• Open-ended procurement (no quantity limit on buying FAQ grain at MSP) applies to wheat and rice, not pulses. For pulses, PSS has a share-of-output ceiling. Tur, urad and masur can be bought up to 100% of state production until 2028-29 [9].
• Buffer norms are checked on 1 April, 1 July, 1 October and 1 January. The 1 July norm is the highest, at 411.20 LMT [2]. The strategic reserve is 30 LMT wheat + 20 LMT rice [3].
• DCP began in 1997-98. States procure, store and distribute, and the Centre pays the cost.
• Trap: among the four PM-AASHA parts (PSS, PSF, PDPS, MIS) [5], PDPS involves no buying of grain. PSS buying is done by NAFED and NCCF, not FCI.
• Shanta Kumar HLC (2015): only about 6% of farmers sell to procurement agencies at MSP.

Mains Points

• Open-ended procurement creates excess stock and a fiscal burden (GS-III):
• The central pool held 736.61 LMT against a norm of 411.20 LMT on 1 July 2025 [2].
• → Carrying costs and the food subsidy rise.
• → Paddy–wheat monoculture continues, and groundwater falls in Punjab and Haryana.

• Link this to fiscal prudence and crop diversification.

• Few farmers benefit (GS-III):

• Buying is concentrated in a few states, so only about 6% of farmers sell at MSP (Shanta Kumar HLC).

• Remedies: wider DCP, more purchase centres in eastern states, and PDPS-type deficiency payments where procurement is weak. The HLC suggested these payments.

• Physical procurement vs cash support (the MSP-guarantee debate after 2020):

• The new approach for pulses is 100% PSS for tur, urad and masur, plus 40% PDPS coverage for oilseeds [5][9]. It aims to cut imports and correct the cereal bias of MSP.
• But losses and the problem of selling off stock now shift to NAFED and NCCF.
• PDPS saves storage costs and distorts the market less. However, it needs good price data and farmer registration, and it gives no grain to the PDS.

Related concepts

• Buffer stock
• Buffer stock norms
• Operational stock
• Strategic reserve
• Open-ended procurement
• Centralised procurement
• Decentralised procurement
• Price support scheme
• Price deficiency payment
• Market intervention scheme

Read more

• Procurement and buffer stocks: FCI, the central pool and non-cereal support