In the Union Budget for 2022-23, Modi – government has allocated Rs 207,000 crore for food subsidy which is Rs 79,000 crore less than the actual expenditure of Rs 286,000 crore during 2021-22 as per the revised estimate (RE).
Under the National Food Security Act (NFSA), 2013, the Union Government directs the Food Corporation of India (FCI) and other state agencies to procure food from the farmers at MSP (minimum support price) and organize its distribution to a mammoth population of 800 million people through an elaborate network of fair price shops (FPS) at the subsidized price (call it ‘issue price’) of Rs 2, Rs 3 and Rs 1 per kg for wheat, rice, and coarse cereals, respectively. Each person is eligible to receive 5 kg of cereals per month.
Considering that the cost of procurement, handling, and distribution is higher than these ridiculously low selling prices, the Centre reimburses the excess amount as ‘food subsidy’ to the FCI and other agencies and is paid from the Union Budget.
The three key factors impacting subsidy are the issue price, per unit cost of supply (MSP plus handling and distribution cost or HDC) and the quantity of food grain given to the beneficiaries. With these basics, the reduction in subsidy allocation for 2022-23 could either point towards increase in issue price or reduction in MSP/HDC or reduction in the quantity or a combination all three.
The current issue price of Rs 2/3/1 per kg was specified in the NFSA legislation. The law enacted in 2013 had frozen these rates for three years. In 2017, the then minister for consumer affairs, Ram Vilas Paswan promised not to revise the price for three years. The status quo continues till date. Given the political sensitivities associated with the low price and elections happening every now and then, it is unlikely that Modi will dare raise the price.
Coming to MSP, this being dependant on the cost of production, in the present environment of rising cost of agricultural inputs, this will only increase. Likewise, HDC will also increase especially in view of the diesel and petrol price remaining high.
As for the quantity, during 2020-21 and 2021-22, to mitigate the Covid, the government distributed free ration to all 800 million under Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). Although, the pandemic is waning, there is no certainty that this scheme will stop next year. In any case, subsidy boost from hike in MSP, increase in the quantum of purchase and increase in HDC is inevitable.
How will the government deal with such an eventuality? To get an idea, let us look at how it addressed similar situation in the past.
During 2019-20, the FM had made budget provision of Rs 184,000 crore. Against this, she released only Rs 109,000 crore being the revised estimate (RE) for the year. But, the actual requirement was Rs 219,000 crore. The deficit of Rs 110,000 crore was made up by FCI having to borrow the amount from the NSSF.
For 2020-21, the budget allocation was Rs 116,000 crore even as the government expected the FCI to borrow Rs 137,000 crore to fund a total requirement of Rs 253,000 crore. Add to this the Covid related burden of under PMGKAY about Rs 134,000 crore, the total liability came to Rs 387,000 crore. Against this, the FM actually gave Rs 525,000 crore, the balance was used to clear FCI dues to NSSF.
For 2021-22, Sitharaman made budget allocation of Rs 243,000 crore. Against this, she has finally given Rs 286,000 crore as per RE given in the budget for 2022-23.
Thus, during these years, the actual requirement was substantially higher than BE which was met in full either through facilitating loans from the NSSF (2019-20) or making additional provision through supplementary grants (2020-21/2021-22). This was made possible because of the very generous fiscal deficit (FD) of 9.2 percent of GDP or about Rs 18,00,000 crore during 2020-21 and 6.9 percent of GDP or Rs 15,90,000 crore during 2021-22.
In sync with this trend, when, it comes to 2022-23, there is no reason to worry as with FD of 6.4 percent of GDP or around Rs 16,60,000 crore, even if the subsidy demand turns out to be higher (albeit substantially) than the BE, the government will pay for it from the budget in full. But, it can’t continue the business as usual. Someday, it will have to get back to fiscal discipline? The reasons are:
First, with Covid fizzling out, it won’t have any justification to continue with the current fiscal splurge. Second, thanks to heavy borrowings during the last two years, already, Centre’s debt has zoomed to 60 percent of GDP against medium term target of 40 percent. Third, interest payments have shot up by 50 percent; currently these are more than a quarter of the budget and consume half of its net tax revenue.
So, what can the government do to trim food subsidy?
In the Economic Survey for 2019-20, the then Chief Economic Adviser (CEA), Krishnamurthy Venkata Subramanian had proposed limiting the scheme’s coverage and increasing the issue price. The present coverage is over 800 million or nearly 2/3rd of the population. Fundamentally, subsidized food is meant for the poor; in fact, heavily subsidized food (Rs 1/2/3 a kg) should be only for the very poor. To say that 2/3rd of Indians are very poor is absurd.
Unquestionably, the coverage should be drastically cut. The least government can do is to implement Shanta Kumar committee (2015) recommendation to slash persons eligible for subsidized food from present 67 percent to 40 per cent. Moreover, sans poorest of the poor under ‘Antyodaya Anna Yojana’, AAY (they can continue to pay @ Rs 1/2/3 per kg), others should pay 50 percent of MSP.
Denying subsidy to 27 percent of the population or around 380 million will result in saving of about Rs 64,000 crore annually (28x5x380x12). This calculation is based on a beneficiary taking all of his/her 5 kg monthly quota as wheat and subsidy @ Rs 28 per kg arrived at by deducting from the cost of supply or Rs 30/- (MSP: Rs 20/- plus HDC: Rs 10/-) the issue price or Rs 2/-.
The beneficiaries other than those under AAY are 320 million (total beneficiaries under NFSA or 820 million minus ‘those excluded’ from the scheme or 380 million minus ‘those under AAY’ or 120 million). On supplies to them, the issue price being Rs 10 per kg (50 percent of MSP), there will be saving of Rs 8 per kg which will yield annual saving of about Rs 15,000 crore (8x5x320x12).
The above two changes yield saving of close to Rs 80,000 crore annually. Additionally, if subsidy money is credited to the account of the beneficiary through DBT mode instead of the current practice of giving food at subsidized price, there will be more savings by curbing pilferage (rampant under the existing dispensation). This will also end the extant ‘cost-plus’ system for reimbursement of HDC expenses to FCI et al.
All put together, the government should be able to save at least Rs 100,000 crore annually.
But, the big question: in a politically surcharged atmosphere wherein, even a whisper of denying benefit leads to a big uproar, will Modi have the gumption to bell the cat?