Even as the union finance minister, Arun Jaitely exudes confidence that the government will be able to stick to the fiscal deficit target for the current year, it is battling the consequences of ballooning food subsidy. In particular, it is making all possible efforts to shield the former from the negative effects of the latter.
The food subsidy arises because of the overarching commitment of the government under the National Food Security Act [NFSA] to provide food to over 2/3rd of the population at heavily subsidized price of Rs 1/2/3 per kg for coarse cereals, wheat and rice. The cost of procurement, storage and distribution being much higher, the differential amount represents the subsidy.
The Food Corporation of India [FCI] – an undertaking of the Government of India [GOI] – conducts procurement and handling operations under the NFSA on latter’s behalf. The excess of the expenses incurred in these operations over the sale price [albeit subsidized] is reimbursed to FCI as subsidy.
Every year, the government makes a provision for food subsidy in the budget and the same is approved by the parliament [during the budget session]. The provision is generally short of the requirements forcing it to go for supplementary authorization during the course of the year. Even after this, any amount remaining unpaid at the end of the financial year is carried forward to next year.
The food subsidy has increased phenomenally; the increase being particularly steep in recent times when the payments were consistently above Rs 100,000 crore each year. The budget provision being substantially short of the actual requirements all these years, this has resulted in ever increasing dues to the FCI from Rs 61,000 crore in 2015-16, Rs 81,000 crore in 2016-17 and Rs 135,000 crore during 2017-18. During the current year, this is expected to cross a mammoth Rs 200,000 crore.
At the same time, to ensure that the agency does not run short of money and is able to run in its operations without interruption, the government has arranged funds from other sources. So, it prevailed upon banks to extend cash credit facilities to FCI. Since, 2016-17, it has taken the unprecedented step of releasing funds from the NSSF [National Small Savings Funds].
During 2016-17, FCI got a loan of Rs 70,000 crore from NSSF. This was done with an affirmation that the funding was merely a stop-gap arrangement and an understanding that the union government will pay the interest and amortize the loan. Yet, instead of paying back, it arranged for another loan of Rs 65,000 crore during 2017-18 to service the previous loan besides funding the shortfall in budget allocation for that year.
During the current year, the situation has reached a nadir due to a massive surge in subsidy caused by increase in minimum support price [MSP] [due to implementation of Dr Swaminathan commission recommendation], coverage of 23 crops under MSP program [as against wheat/rice/coarse cereals covered normally] and servicing of the previous loans from NSSF. As a result, the centre is now staring at unpaid amounts of over Rs 200,000 crore and a third loan from NSSF may be in the offing.
Logically, the government should make adequate allocation in the budget to fully pay for all subsidy bills in an year [while, small carry forward of 5-10% may be allowed, unpaid bills of the magnitude seen are unconscionable]. But, doing so would result in fiscal deficit [FD] getting out of control. For instance, if the finance ministry were to pay all of Rs 200,000 crore during 2018-19 itself, this would result in slippage of over 1% vis-à-vis the target of 3.3%.
The inability of government to stick to fiscal discipline has a cost in the form of increase in debt, interest burden, downward revision of the sovereign rating [and consequential increase in borrowing cost], higher inflation etc. But, to make off-budget sources fund pending bills is unsustainable. This is sheer window dressing to somehow show that our macro-economic fundamentals are strong whereas in reality, these are not.
Asking public sector banks [PSBs] to lend tens thousands of crore to FCI was bad enough [their funds could have been utilized for other productive purposes]. But, to draw money from a pool contributed by small savers [read: NSSF] is preposterous. The government may argue that being backed by sovereign guarantee, the money is absolutely safe. But, the million dollar question is: why touch these funds in the very first place?
A bigger question is: why has the food subsidy been allowed to proliferate? Has the government ever thought through factors which contribute to increase in it? Does it have any plans to contain it within a level that the budget can afford?
The key factors behind ballooning subsidy are (i) huge coverage; (ii) rock bottom selling price of food; (iii) reimbursing expenses to FCI on actual basis.
Under NFSA, the coverage is a mammoth about 800 million persons. This number is much higher than the number of poor about 250 million who alone should be eligible to receive subsidized food. This needs to be brought down drastically [as recommended by Shanta Kumar committee too].
Second, the selling price at Rs 2/3 per kg for wheat/rice almost touches zero as against cost of supply being many time more viz. Rs 25/33 per kg. While, this is fine for persons in extreme poverty [say, those covered by Antyodaya scheme], to give the benefit to a vast majority cannot be justified.
Third, the handling, storage and distribution expenses are reimbursed to FCI on ‘actual’ basis. This is an open invitation to all sorts of inefficiency, cost inflation/padding and even payment for so called ‘fictitious/fabricated expenses. All of these pass muster under the garb of food subsidy.
Thus far, Modi – government has only focused on eliminating leakages from public distribution system [PDS] and achieved a good measure of success. But, there is an urgent need to attend to the above three major guzzlers of public money. The implementation of necessary measures in this regard will help in reducing subsidy to a level that can be accommodated within prudential limits as per fiscal consolidation road-map.
Or else, it will be business as usual which has the potential of landing the union government into a debt trap.