In the Union Budget for 2021-22, the Finance Minister, Nirmala Sitharaman has given a pleasant surprise. This has to do with the Government’s decision to discontinue with the decades old practice of so-called “off-budget liabilities”.
A technique used by successive regimes in the past, this is a fancy nomenclature to denote transfer of certain expenses incurred by the Union Government to the books of its agencies tasked with the implementation of its welfare schemes. This helps the former show lower expenses on its own books thereby helping it bring down fiscal deficit to the desired level. A typical case relates to the Food Corporation of India (FCI) through which it administers its mammoth program of delivering food subsidy.
Under the National Food Security Act (NFSA), over 800 million beneficiaries receive food grains, primarily wheat, rice, and coarse cereals, at the heavily subsidized price Rs 2, Rs 3, and Rs 1 per kg, respectively; this is a fraction of the cost of procurement, handling and distribution – 1/13 in the case of wheat and 1/12 for rice. The task is performed by the FCI on behalf of the Government, which reimburses the shortfall in realization from sale vis-à-vis the cost to the former. Termed food subsidy, reimbursement to the FCI is solely the liability of the Centre and is paid from the Union Budget.
If, in any given year, the reimbursement amount due to FCI is say ‘X’, the Government decides not to release a portion of this and merely keeps it pending (the extant method of accounting on cash basis i.e. expenses are recorded when actual payments are made helps it to do it). To keep its operations going, the agency borrows the ‘unpaid amount’ from the banks or any other source. These borrowings plus interest accrued remain on the books of FCI.
This disingenuous mechanism may help the Centre show that it is sticking to the fiscal consolidation road-map. But, this gives a misleading picture of Government’s finances and makes it complacent with regard to dire need for bringing about genuine and sustainable reduction in expenses. It also affects the financial health of the agency implementing welfare schemes (read: FCI).
In recent years, ballooning unpaid dues forced FCI to borrow from the National Small Savings Fund (NSSF). In 2016-17, when the former started borrowing from the latter, the Centre had committed to release the subsidy arrears to enable FCI to pay back the loans in subsequent years. But, that was not to be as subsidy arrears kept mounting, and FCI continued borrowing increasingly from NSSF. As on March 31, 2020, it owed a staggering Rs 300,000 crore to the Fund.
In the Budget for 2020-21, Sitharaman had estimated the requirement of food subsidy to be Rs 253,000 crore. Add to this the cost of free food given (in the wake of pandemic) to 800 million under NFSA as also to migrant labor during April-November, 2020. The total requirement comes to Rs 422,000 crore. Against this, the budget support was only Rs 126,000 crore (BE: Rs 116,000 crore plus Rs 10,000 crore given by way of supplementary grant). This would have led to an uncovered gap of close to Rs 300,000 crore.
Under a business as usual scenario, the FCI would have borrowed Rs 300,000 crore from the NSSF. However, doing a turn around, in the revised estimate (RE) for 2020-21, the FM has paid all of the food subsidy dues Rs 422,000 crore from the Budget. In other words, the Government has taken all of the expenses under this head on its balance sheet. The allocation for 2021-22 at Rs 242,000 crore is also more or less close to the likely requirement. This means that even during next year, there won’t be any unpaid dues.
Furthermore, considering that the FM has substantially relaxed the FD trajectory to reach 4.5% by 2025-26 (instead of 2.5% in 2022-23 as per NK Singh Committee on review of the FRBM), thereby implying a good cushion, one would expect Modi – Government to maintain its altered stance even beyond 2021-22. This is welcome as it will bring transparency and bolster the credibility of budget numbers. But, this alone won’t suffice.
There is urgent need to tackle the fundamental factors behind ballooning food subsidy viz. (i) ridiculously low price of food – almost scratching the surface – supplied to beneficiaries under NFSA; (ii) disproportionately high number of beneficiaries 800 million (who will believe India has such a large number of poor); (iii) inefficiency in public distribution system (PDS) and rampant misuse of subsidy. This is where almost every regime at the helm has failed.
In early 2015, a committee under Dr Shanta Kumar, senior BJP leader, had recommended a cut in the number of those eligible for subsidized food from 67% to 40% and restricting the benefit of Rs 1/2/3 per kg only to the poorest of poor people under the Antyodaya Anna Yojana, while increasing the supply to seven kg per person. Others should pay 50% of the MSP (minimum support price) paid to farmers. Those recommendations were quietly ignored.
The NFSA that came into force in 2013 provided for the sale price at Rs 1/2/3 per kg to continue for a period of three years only. Thereafter, even as there was no bar on increasing the price, the Government decided not to go for it. Far from that, in 2017, Ram Vilas Paswan the then Union Minister for Consumer Affairs had declared that there won’t any increase in the price for 3 years.
In the Economic Survey for 2019-20, the chief economic advisor (CEA), K Subramanian had recommended some reduction in food subsidy by limiting the scheme’s coverage and increasing the issue price of food grains which he has reiterated in the Survey for 2020-21. The Government has not paid heed to his advise.
Direct benefit transfer (DBT) of subsidy is a foolproof mechanism of helping poor consumers as amply demonstrated in case of LPG. It involves putting money in the account of beneficiaries who in turn, can use it to buy food from wherever they choose to. DBT has been on Government’s radar since 2012-13; yet all that we see is few pilot projects being run in some districts.
Now, in view of farmers demanding a law on guaranteeing MSP and if it is enacted, this will foreclose whatever little hope remains for launching DBT. This is because then the Government will be legally bound to purchase all crops (for which MSP is notified) and entire quantity that farmers offer to sell. In other words, the current system of procurement albeit at MSP and selling to beneficiaries at the subsidized price will stay. This implies, DBT will be off the table as subsidy can’t be given twice over – first by supplying food at subsidized price and then by transferring cash to beneficiary’s account.
To conclude, even as Modi – Government has mustered courage to give a truthful account of the money it spends on food subsidy, there is nothing on the horizon to indicate that this will be reined in. There is no dearth of prescriptions; but the irony is no one in the political class has the gumption to act.