To shield millions of poor against devastation caused by Covid – 19, on March 26, 2020, the finance minister, Nirmala Sitharaman had announced that the government would give 5 kg of rice or wheat per person per month for ‘free’ to around 80 crore people through the public distribution system (PDS) for 3 months; it would also give for ‘free’ one kg of preferred and region specific choice of pulse per household for 3 months. This was in addition to 5 kg of cereals per person per month, 80 crore persons are already getting at a heavily subsidized price of Rs 3 per kg rice, Rs 2 per kg wheat & Rs 1 per kg under the National Food Security Act (NFSA).
As the deadline for the free supplies ended on June 30, 2020, on the same day, Modi announced the decision of his government to extend the scheme for five months till November 30, 2020. Along with providing 5 kg free rice or wheat per person per month, it will also provide 1 kg chana for free to each family per month.
Enumerating a spate of festivals during this period (July – November, 2020), when the requirement for food normally increases, Modi exhorted that it was necessary to continue with additional supply (albeit for free) to ensure that people are not hard-pressed. He also thanked ‘farmers’ and ‘tax payers’ for helping the government make it possible, former for increasing food production and the latter for garnering necessary resources (by paying taxes) to subsidize supplies to the poor.
But, the Prime Minister forgot to thank the future generation of tax payers who will also be contributing (rather forced to contribute) heavily to pay for it. This may sound bewildering but it is true. To get to the bottom of this mystery, let us check out some facts.
Under the NFSA, the supply of wheat, rice and coarse cereals to the beneficiaries/consumers at a price of Rs 2/3/1 per kg is a fraction of the cost of procurement, handling and distribution (e.g. 1/12 in case of wheat). The supplies are made by the Food Corporation of India (FCI) and other state agencies on behalf of the union government who reimburses to them an amount equal to ‘the difference between the cost and the sale price multiplied by the quantity sold’. This reimbursement amount is known as food subsidy and is funded from the Union Budget wherein bulk of the receipts is by way of tax revenue.
Over the years, food subsidy has increased by leaps and bounds. From a few thousand crore in the 90s, currently it is in hundreds of thousand crore. During 2019-20, the budget allocation (BE) was Rs 184,000 crore. In her budget for 2020-21 presented on February 1, 2020, Sitharaman showed the revised estimate (RE) for 2019-20 as Rs 109,000 crore. From this, one gets a sense that the government brought about a saving of Rs 75,000 crore. But, the reality is far from it.
The government didn’t pay to the FCI Rs 110,000 crore which latter borrowed from National Small Savings Fund (NSSF). Including this, food subsidy bill for 2019-20 was Rs 219,000 crore. This was Rs 35,000 crore higher than BE. For 2020-21, though BE has been kept at Rs 116,000 crore (a mere Rs 7000 crore higher than the RE of 2019-20), including likely borrowings by FCI about Rs 137,000 crore, the projected spend will be Rs 253,000 crore.
This projection was made before the Covid – 19; hence, it does not include the impact of free food given during the three months ending June 30, 2020 as also for the extended period till November, 2020. As per official estimate, government’s total expenditure on it will be about Rs 150,000 crore (Rs 60,000 crore during April–June, 2020; Rs 90,000 crore during July–November, 2020). This will take the total food subsidy for the current year to Rs 403,000 crore. The calculation assumes no further extension beyond November, 2020 (if it happens, then the bill will inflate further).
Given the extremely tight resource position, it is unlikely that the government will spend any amount higher than provided for in the budget i.e. Rs 116,000 crore. This means that the FCI will have to borrow Rs 287,000 crore from the NSSF.
In the past, thanks to inadequate allocation in the budget, the government had been making short payments to FCI forcing the latter to borrow from banks to sustain operations. When, FCI started taking loan from NSSF in 2016-17, the centre had committed to release the subsidy arrears to enable it pay back in subsequent years. But, that was not to be. The subsidy arrears kept mounting and FCI kept on borrowing more and more from NSSF. As on March 31, 2019 cumulative borrowing by former from the latter was Rs 200,000 crore.
Include the borrowings Rs 110,000 crore during 2019-20 and estimated borrowings Rs 287,000 crore during the current year, the total loan of FCI from NSSF would be Rs 597,000 crore. Though kept outside its balance sheet, the fact remains that this amount is entirely the liability of the union government and will need to be serviced from its tax collections in the future.
The Indian food subsidy regime remains fundamentally vulnerable even as Covid – 19 crisis has aggravated the concerns. If, things reach a point whereby the government is forced to tap savings of millions of small savers (read: NSSF) for financing revenue expenses, this is unconscionable.
The supplies under NFSA at low [albeit subsidized] price at 5 kg per person per month barely covers 50% of requirement of a person which is 10 kg per month estimated by National Sample Survey Organization [NSSO]. This forces him/her to buy the balance quantity from the market at much higher price which in case of rice, is at least Rs 35 per kg being linked to the cost of supply. Thus, for buying 10 kg, the poor has to spend a total of Rs 190/- (5kg @Rs 3 per kg plus 5kg@35 per kg). The effective price paid is Rs 19/- per kg instead of Rs 3/- per kg – a sense one gets by a plain reading of the NFSA. Put simply, even the poor is not getting full justice.
Unless the subsidy imbroglio is addressed and payments brought down to sustainable level, India runs the risk of falling into a debt trap. Broadly, there are three major factors behind high and ever increasing food subsidy viz. high cost of supply, low issue price and an ocean of beneficiaries.
The cost of supply includes minimum support price (MSP) paid to farmers besides handling and distribution cost. While, the former is computed as cost of cultivation plus 50% of this as profit, the latter is reimbursed to handling agencies on ‘actual’ basis. This system of paying on ‘actual’ devoid of any norm in regard to efficiency in operations lies at the root of both being on a rising trajectory at all times.
The price at which grains are issued to the beneficiaries i.e. Rs 2/3 per kg for wheat and rice are almost close to ‘zero’. The gap between the cost of supply and issue price is huge, over Rs 30 per kg for rice. That has to be filled by subsidy. Besides, this opens the floodgate of black marketing which can’t be reined in even by the most alert surveillance machinery. A lot of subsidy is siphoned by dubious traders and corrupt politicians/bureaucrats.
Finally, the beneficiaries getting food at near ‘zero’ price are over 80 crore. Are we to infer that India is home to that many poor which is nearly 2/3rd of the population. There is something seriously amiss as the official word on number of poor is no more than 25-30%. Yet, if over 80 crore persons are eligible for food virtually for free, the subsidy bill is bound to become unsustainable.
In early 2015, a committee headed by Shanta Kumar, senior BJP leader had addressed all the three anomalies. It recommended (a) cut in beneficiaries from 67% to 40%; (b) restrict the benefit of Rs 1/2/3 per kg only to the poorest of poor persons under Antyodaya Anna Yojna [AAY] while increasing supply to 7 kg per person; (c) making the rest pay 50% of MSP paid to farmers. The government can make a beginning by implementing those recommendations.
Even after this, the problems of inflated cost, misuse of subsidy etc will remain. Tackling these will require deeper reforms. The government should withdraw from buying and selling food; instead restrict its role only to giving subsidy directly to the poor. This will also be in sync with the big bang reforms introduced by the Centre giving unfettered role to private sector in agri-marketing. The state agencies may continue but strictly as a commercial entity on par with private players.
This will bring into play competitive market forces which will be beneficial to both farmers and consumers including a vast majority of the poor. At the same time, the government will save hugely on subsidy.