In the Economic Survey [2019-20] released on January 31, 2020, the chief economic advisor [CEA], K Subramanian had recommended some reduction in food subsidy by limiting coverage of the scheme as also by increasing issue price of foodgrains. In this backdrop, one was looking forward to announcement of a major reform in this important area in the Union Budget for 2020-21 to presented by the Finance Minister [FM], Nirmala Sitharaman on the following day.
Even as the speech was devoid of any such announcement, however looking at the numbers, one comes across the revised estimate [RE] of food subsidy for 2019-20 at Rs 109,000 crore – a steep decline of 40% from the budget estimate [BE] of Rs 184,000 crore The BE for 2020-21 is put at Rs 116,000 crore. Meanwhile, the RE for fertilizers subsidy [another major guzzler of tax payers’ money] for 2019-20 is Rs 70,000 crore against BE of Rs 80,000 crore. For 2020-21, the BE is kept at Rs 70,000 crore.
In the absence of any far reaching reforms – stated explicitly – such drastic reduction in food subsidy could only point towards ‘window dressing’ in sync with what the mandarins in finance ministry are used but attempted this time around on a much bigger scale. At the outset, let us look at some basic facts.
Under National Food Security Act [NFSA], foodgrains primarily wheat, rice and coarse cereals are given to beneficiaries/consumers [over 800 million] at heavily subsidized price Rs 2/3/1 per kg which is a fraction of the cost of procurement, handling and distribution [e.g. 1/12 in case of wheat]. The task is performed by the Food Corporation of India [FCI] – an undertaking wholly owned by the union government – on behalf of the latter who reimburses the shortfall in realization from sale vis-à-vis the cost as subsidy to the former. The food subsidy figure mentioned in the budget are reimbursements to FCI and other state agencies engaged in similar operations on behalf of the union.
In the past, thanks to inadequate allocation in the budget [often prompted by compulsion to keep fiscal deficit under check in the face of ever increasing gap between receipt and expenditure], the government has been making short payments to FCI forcing the latter to take recourse to working capital from banks to sustain operations. In recent years, the FCI has even borrowed funds from the National Small Savings Fund [NSSF].
When, the FCI started taking loan from NSSF in 2016-17, the centre had committed to release the subsidy arrears to enable the corporation to pay back the loans in subsequent years. But, that was not to be as subsidy arrears kept mounting and FCI kept on borrowing more and more from the NSSF. At the end of financial year 2018-19, cumulative borrowing by former from the latter was Rs 200,000 crore.
The above anomalies have continued during the current year as well. Even as the subsidy requirement is Rs 219,000 crore – Rs 35,000 crore higher than the BE of Rs 184,000 crore – the RE is shown much lower at Rs 109,000 crore. The difference of Rs 110,000 crore is made up by borrowing of FCI from NSSF. Far from reduction, there is significant increase which FM has camouflaged while presenting the numbers. For 2020-21 also, the ‘window dressing’ continues with BE Rs 116,000 crore [a mere Rs 7000 crore higher than the RE of 2019-20] even as FCI is projected to borrow about Rs 137,000 crore.
In fertilizers too, the gaps are no less glaring. The manufacturers sell fertilizers at a low price unrelated to the cost of production and distribution which is higher. The government compensates them for the shortfall as subsidy. As for food subsidy, herein also it has been making short payments. For 2019-20, taking BE at Rs 80,000 crore, according to Fertilizer Association of India [FAI], the year would have ended up with unpaid dues of Rs 60,000 crore. With RE at Rs 70,000 crore, the unpaid dues would be even higher at Rs 70,000 crore.
With BE for 2020-21 put at Rs 70,000 crore, almost the entire fund allocation would get exhausted in clearing unpaid dues leaving nothing to pay for subsidy liabilities to arise next year.
In her speech, Nirmala Sitharaman eloquently stated that she has mentioned the extra-budgetary resources [EBRs] [loans taken by FCI et al fall in this category] in an ‘annexure’. This is no consolation as long as these are kept out of government’s balance sheet [BS]. In fact, this time the situation is much worse with splurge in the amount going off the BS [food subsidy: Rs 110,000 crore during 2019-20 up from Rs 60,000 crore during 2018-19].
The expenditure secretary, TV Somanathan sees nothing wrong in the practice [read: EBRs] saying the borrowings by FCI are against the assets held by it in the form of ‘food stocks’. The argument is flawed as loans are taken against ‘subsidy receivable’ from the government. In case of wheat for instance, on every kg sold under NFSA, the subsidy is Rs 23/-. The loan is given against this amount promised by the centre. This liability can’t be adjusted against the food stock which on sale can only fetch Rs 2/-
The secretary further argues that keeping these borrowings off-budget will prevent ‘crowding out’ and help private sector borrow from the market at lower interest cost. This needs to be weighed against erosion in credibility of fiscal consolidation which is inevitable when a liability strictly that of the centre is kept off its BS. A wrong [read: EBRs] can’t be justified simply because the honest course of reflecting in the budget would lead to problems for private firms.
The government should get over its obsession with adhering to fiscal discipline by hook or crook. It should reflect all off-budget liabilities in its BS to project its real health [sans this, mere assertion that the government is committed to service these liabilities, as stated by FM, does not carry conviction]. This should be followed up by long-pending ‘expenditure reforms’ to bring about sustainable reduction in spending particularly on major subsidies viz. food, fertilizers, fuel etc and resultant improvement in budgetary position.