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Free food grain scheme extension: Choice between welfare and rising subsidy

Employees of Food Corporation of India (FCI) inspect a godown of rice. Photo: PTI
A few weeks back, the Centre announced an additional allocation of Rs 65,000 crore towards fertiliser subsidy for the 2020-21 financial year, over and above the existing Rs 71,309 crore for 2020-21 Budget Estimates.

This extra outlay, if released as promised, would be good enough to clear all existing and pending fertiliser subsidy dues which are projected to be Rs 1.28-1.33 trillion for 2020-21. In other words, the total outlay would work out to Rs 1.36 trillion (Rs 71,309 crore existing subsidy plus additional outlay of Rs 65,000 crore), which will be good enough to ensure that the fertiliser industry starts the 2021-22 financial year on a clean slate.

However, the big daddy in the room, which is food subsidy, will require lot more effort and perhaps a deeper structural change in the manner in which it has been handled so far to completely eliminate pending dues or at least bring them to manageable levels.

Several experts have opined that cutting down the existing open-ended procurement system, under which the Centre picks up the entire quantity of wheat or rice sold by farmers irrespective of its requirement, could be revisited at some point of time.

“The result of the open-ended procurement policy is that every year we end up buying around 80-85 million tonnes of wheat and rice, while our requirement for PDS is 50-55 million tonnes,” a senior official explained.

Some experts have suggested a gradual 10-year programme adequately funded by the Centre and state governments to encourage farmers to shift from wheat and rice in the main producing states of North India to more profitable and in-demand items of maize, pulses and even oilseeds.

However, how far that can materialise remains to be seen, as touching the contentious issue of scaling down wheat and rice procurement has already enraged millions of farmers in Punjab, Haryana and west UP for the past few months.

Another option that could be immediately exercised to whittle down the inventories, is to further extend the free grain distribution programme under the Pradhan Mantri Garib Kalyan Anna Yojana by six months till May 2021.

Already, the extra withdrawal of about 32 million tonnes of wheat and rice from the Central pool, due to free grain distribution over and above the usual PDS allocation, has led to estimated savings of about Rs 18,000 crore for FCI in carrying costs in the first eight months, apart from clearing the mounting inventories.

According to sources, the carrying cost of buffer food grains for 2020-21 is estimated to be about Rs 540.30 per quintal, while as on June 8, 2020, FCI was holding some 81.25 million tonnes of grains in its warehouses. This had come down to around 68 million tonnes in October 1.

According to some reports, due to the extra food grain allocation, the gap between current and year-ago stocks too has narrowed from over 15 million tonnes to 1.5 million tonnes between June 1 and October 1.

June foodgrain stocks were about 98 per cent more than the required inventory levels of around 41 million tonnes, while on October 1, stocks of 68 million tonnes was more than requirement of 30.77 million tonnes.

Thus with the extra allocation of 32 million tonnes under the PM Garib Kalyan Yojana, FCI would have saved about Rs 18,000 crore in carrying cost along with much-needed drawing down of inventories.

Moreover, with fresh rice procurement from the 2020 kharif season starting on a brisk note October onwards, the additional free grains to the poor will provide much-needed head room to the government.

More than that, it will help millions of poor to tide over the hardships caused by the Covid-19 crisis.

Recently, a group of civil society activists under the Right to Food Campaign had written to Prime Minister Narendra Modi to extend the free food grain distribution scheme under Garib Kalyan Anna Yojana for another six months and also universalise the PDS as FCI has sufficient foodgrains in its warehouses.

“Estimates of available Food Corporation of India (FCI) stocks indicate that it is feasible to both universalise the PDS and simultaneously extend the PMGKAY for at least another six months,” the Campaign said.

It said that the Campaign demands not only the extension of the Pradhan Mantri Garib Kalyan Anna Yojana (for at least for six months till May 2021), with the provision of edible oil and pulses to each household, but also universalisation of the public distribution system to support all persons especially migrants’ workers, homeless, sex workers, trans people and all vulnerable communities even without ration cards

It also demanded expansion of PDS to provide millets and other nutritious commodities and food security allowance to at least 100 million Indians who have been excluded from the ration set-up.

Even before Covid-19 struck, Food Corporation of India (FCI), the government’s main designated agency to procure and supply millions of tonnes of cheap grains for the poor, had an outstanding loan of about Rs 2.54 trillion from National Small Savings Fund (NSSF) as on March 31, 2020.

NSSF loans have been the government’s default option to fund expenditure the past few years, as it tries to ensure that fiscal deficit is kept in check.

Officials said in a normal year, the actual food subsidy on the National Food Security Act (NFSA) is Rs 1.80 trillion (which includes subsidy to FCI and to decentralised procurement states).

However, this year, the subsidy will rise by another Rs 1.23 trillion due to expenditure on distributing free grain.

Thus, the government's total food subsidy bill in 2020-21 is thus estimated to be around RS 3.03 trillion (NFSA+ Garib Kalyan). 

In addition, it might have to make a provision for another Rs 20,000 crore at least towards pending payment dues for the decentralised procurement by states.

“Therefore, the central government will have to provide for over Rs 5.7 trillion from its own finances in 2020-21 if it wants to clear all its subsidy and payment dues accruing to FCI and others,” a senior official explained.

This looks improbable in the current context, and will mean that FCI will either have to increase its borrowings from NSSF or the market.

According to the FY21 Budget, FCI is projected to borrow around Rs 1.36 trillion from NSSF, or even more to meet the expenses of the free grain scheme.

Raising the off-budget borrowing or the quantum of loans will in turn add to the economic cost of wheat and rice in FY22.

According to some estimates, almost six per cent of the economic cost of rice and wheat in FY21 will be on account of interest on loans taken by FCI, which will rise if borrowings increase.

New subsidy 

Through two tranches of the PM Garib Kalyan Yojana and one of Atmanirbhar Bharat, the central government is projected to distribute around 32 million tonnes (mt) of additional grain in FY21 over and above the usual sale through the public distribution system (PDS) and other welfare schemes of around 55 mt of wheat and rice.

According to the government, it incurred expenditure of Rs 44,131 crore for distributing grain under the first phase of the Garib Kalyan Yojana, which ran from April to June and through which around 12 mt of wheat and rice were distributed for free to over 750 million beneficiaries.

The subsidy calculation has been arrived at assuming the economic cost of Rs 37.26 per kg for rice and Rs 26.83 per kg for wheat. In this, an expenditure of Rs 1,930 crore has been added towards transportation and dealers’ margins.

Thus, the total subsidy for free distribution comes to around Rs 46,061 crore for the first three months of April, May and June.

Now that the Garib Kalyan Yojana has been extended by five months, an additional subsidy of around Rs 76,000 crore will have to be borne by the government.

Therefore, the total subsidy implication will come to around Rs 1.23 trillion. 

Table: Food and fertiliser subsidies (in Rs cr)
Item 2020-21* 2019-20** 2018-19# 2017-18# 2016-17#
1,15,570  1,08,688  1,01,327  1,00,282 1,10,173 
Fertiliser 71,309  79,997 70,605 66,468 66,313 

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