Budget 2022: Modi Govt Is in a Tight Spot on Rising Food Subsidy Bill

The food subsidy bill is expected to cross Rs 4 lakh crore in the year 2022-23.

The food subsidy would continue to eat away the fiscal space and create serious financial difficulties for the government.

(Photo: Reuters)

The government funds its fiscal expenditures primarily from the tax revenues and the debt raised from people and businesses. Fiscal space is sustainable if borrowings are limited to 3% of GDP.

The government’s fiscal resources were estimated at Rs 35 lakh crore in the Budget 2021-22. It included Rs 15 lakh crore of debt at 6.8% of GDP. At 3% of GDP as debt, the government’s fiscal resources would be only Rs 28 lakh crore.

Considerable fiscal space is consumed by mandatory expenditures like interest, salary and pension payments, on which the government has no control (Rs 14 lakh crore in FY 2021-22), leaving much smaller usable fiscal space for all the expenditures on central sector schemes, centrally sponsored schemes and other central expenditures.

81.34 Crore People Receive Highly Subsidised Food

The government of India provides subsidised food (rice/wheat/coarse grains) at Rs 3, Rs 2 and Rs 1 per kilogram, respectively, under the National Food Security Act (NFSA) for two types of households – the Antyodaya Anna Yojana (AAY) and Priority Households (PHH). There are currently 2.38 crore AAY families with a count of 9 crore members. These families get 35 kg of food grains every month. There are 72.43 crore PHH families who get 5 kg per person per month. Together, a total of 81.34 crore persons are entitled to highly subsidised food under NFSA.

In terms of the rural-urban split, 64.49 crore persons in rural areas and 18.85 crore persons in urban areas are covered. The government allocates 54.93 million metric tons (MMT) of foodgrains under NFSA every year.

As a COVID-19 relief measure, the government started providing additional rice/wheat at 5 kg per member for PHH families and at 35 kg per AAY family under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) free of cost, doubling food entitlements.

In the pre-COVID-19 year 2019-20, the total rice and wheat offtake was 50.1 MMT. The offtake under NFSA was almost unaffected at 49.2 MMT in 2020-21.

The offtake under PMGKY was surprisingly lower than the normal NFSA in 2020-21 at only 29.70 MMT, roughly 60% of the normal TPDS offtake, with rice offtake at 70% and wheat at 47% of the normal NFSA offtake.

The PMGKY has been extended for 2021-22. The offtake trends are quite similar to 2020-21.

The government pays pre-declared Minimum Support Price (MSP) for procuring wheat and rice from farmers.

Besides the MSP paid to farmers, there are two other costs that make up the economic cost of food, termed procurement incidentals and distribution cost. The economic cost minus the price recovered by the Food Corporation of India (FCI) constitute the bulk of the food subsidy expenditure.

Procurement incidentals, per quintal, were Rs 306.61 for rice and Rs 141.47 for wheat in 2017-18, which are estimated to have risen to Rs 484.85 for rice and to Rs 319.84 for wheat in 2021-22. Likewise, the distribution costs, in 2017-18, were Rs 507.73 for rice and Rs 406.11 for wheat, per quintal, which are estimated to have risen to Rs 1,018.94 for rice and Rs 753.18 for wheat in 2021-22.

The NSSF Loans Route

While MSP has not risen much relatively in the last four years, the economic cost of rice and wheat has gone up quite sharply, from Rs 3,280.31 for rice and Rs 2,297.92 for wheat per quintal in 2017-18 to (estimated) Rs 4,293.79 for rice and Rs 2,993.80 for wheat in 2021-22.

Consequently, the FCI’s estimated under-recovery/consumer subsidy per quintal, for 2021-22, for rice is Rs 3,993.79 for NFSA and Rs 4,293.79 for PMGKY. Similarly, for wheat, it is Rs 2,793.80 under NFSA and Rs 2,993.80 for PMGKY.

The FCI sells some rice and wheat in the market at prices lesser than the basic procurement cost. For example, wheat was sold in 2020-21 at Rs 2,000 per quintal. The difference between the economic cost and FCI’s realisation from its market operations is also charged to the government as consumer subsidy.

The subsidy bill of the government has been constantly going up. To save its fiscal space for its other expenditures, the government decided in 2016-17 to shift a good part of food subsidy off-Budget by providing to the FCI food subsidy shortfall in the form of NSSF loans.

In 2016-17, the government’ actual food subsidy bill was Rs 2,04,835 crore, which was discharged by Rs 1,05,673 crore from the Budget and Rs 70,000 crore as NSSF loan. This practice continued until 2019-20, when the subsidy bill of Rs 1,74,108 crore was cleared by net NSSF loans of Rs 65,600 crores and Rs 1,08,508 crore from the Budget.

With free foodgrains under PMGKY and the rising economic cost of FCI, the actual food subsidy bill was bound to go up sharply in FY2020-21.

The original food subsidy Budget provision for 2020-21 was only Rs 1,88,467, crore to be discharged through Rs 1,15,320 crore from the Budget and Rs 73,147 crore from NSSF loan. The food subsidy provision was hiked to ₹4,22,415 crore in the revised estimates.

The revised budget provision of Rs 4,22,415 crore was intended to be used for enabling the FCI to make net repayment of Rs 1,18,712 lakh crore to the NSSF and for the full food subsidy bill of Rs 3,03,703 crore for the year 2020-21.

This rejigging marked the end of off-budget payments of food subsidy to FCI after following this pernicious practice for four years.

The Bill May Cross 4 Lakh Crore This Year

The government provided an amount of Rs 2,42,616 crore in the Budget 2021-22 for food subsidy.

This smaller provision was made probably on the assumption that PMGKY additional free foodgrain supply would stop at some point in the year. The government, however, continued with the additional PMGKY free ration for the entire 2021-22.

The offtake has remained strong during 2021-22 for both the NFSA and the PMGKY. The total wheat and rice distribution under the two is expected to cross 85 MMT. This would cost the government more than Rs 3 lakh crore. The FCI continues to carry ever-increasing stocks despite the NFSA and PMGKY distribution and sell the same in the market at below the MSP cost. The Food Secretary is already on record indicating that the food subsidy bill would be in excess of Rs 4 lakh crore for 2021-22.

Tough Policy Choices

Despite distributing 80-90 MMT a year in the last two years under the NFSA and PMGKY, the FCI’s stocks have risen in 2020-21 and 2021-22. Typically, the total stock in the central pool is the least at the end-January and the highest at the end-June. The June stock rose from 68.12 MMT in 2018 to 90.0 MMT in 2021. The January stock has also risen from 35.93 MT in 2018 to 55.3 MMT.

COVID-19 is expected to wane significantly in 2022-23. The government may well like to discontinue PMGKY from April 2022. However, 35-40 MMT of wheat and rice, if not disposed of through this scheme, would remain in storage, with the FCI still requiring the government to foot the bill. The FCI has no real option to sell this in the market or to export it.

Hobson's Choice for the Govt

In this tough situation, the government is likely to either continue PMGKY for a few more quarters or enhance the normal allocation under NFSA to, say, 8/10 kg per person and 50/70 kg per AAY family. Alternatively or additionally, there are still 50 crore Indians who don’t receive foodgrains under government schemes. The government might bring a scheme to provide subsidised ration, perhaps at a relatively higher price, say, Rs 5 per kg of wheat and Rs 8 per kg of rice. Whatever the government does, the food subsidy bill is unlikely to be less than Rs 3.5/4 lakh crore for the year 2022-23.

With tax revenues growth expected to moderate in 2022-23 and the government not being in a position to run large fiscal deficits of 6% or more anymore, the food subsidy would continue to eat away the fiscal space and create serious financial difficulties for the government.

(The author is an economy, financial and fiscal policy strategist and former Finance Secretary of the Government of India. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)