Even as the Govt 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
In the Union Budget for 2021-22, Finance Minister (FM) 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” this time around. “Off-Budget liabilities” is a fancy nomenclature used by governments 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 the Centre administers its mammoth programme 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 subsidised price of Rs 2, Rs 3 and Rs 1 per kg, respectively, which is a fraction of the cost of procurement, handling and distribution.
The task is performed by the FCI on behalf of the Government, which reimburses the shortfall in realisation from sale vis-à-vis the cost to the former. Termed as food subsidy, reimbursement to the FCI is solely the liability of the Centre and is paid from the Union Budget.
If any given year the reimbursement amount due to the 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 this). 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 the 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 the Government’s finances and makes it complacent with regard to the dire need for bringing about genuine and sustainable reduction in expenses. It also affects the financial health of the agency implementing welfare schemes. In recent years, ballooning unpaid dues forced the 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 releasing subsidy arrears to enable the FCI to pay back the loans in subsequent years. But that was not to be, as subsidy arrears kept mounting and the FCI continued borrowing increasingly from the NSSF. As on March 31, 2020, it owed a staggering Rs 3,00,000 crore to the fund.
In the Budget for 2020-21, Sitharaman had estimated the requirement of food subsidy to be Rs 2,53,000 crore. Add to this the cost of free food given (in the wake of the pandemic) to 800 million beneficiaries under the NFSA as also to migrant labour during April-November, 2020. The total requirement comes to Rs 4,22,000 crore. Against this, the Budget support was only Rs 1,26,000 crore (Budgetary Expenditure Rs 1,16,000 crore plus Rs 10,000 crore given by way of supplementary grant). This would have led to an uncovered gap of close to Rs 3,00,000 crore. Under a business as usual scenario, the FCI would have borrowed Rs 3,00,000 crore from the NSSF. However, doing a turnaround, in the Revised Estimate (RE) for 2020-21, the FM has paid all of the food subsidy dues Rs 4,22,000 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 2,42,000 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 Fiscal Deficit trajectory to reach 4.5 per cent by 2025-26 (instead of 2.5 per cent in 2022-23 as per the NK Singh Committee on review of Fiscal Responsibility and Budget Management), thereby implying a good cushion, one would expect the 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 an urgent need to tackle the fundamental factors behind the ballooning food subsidy, like the ridiculously low price of food —almost scratching the surface — supplied to beneficiaries under the NFSA; the disproportionately high number of beneficiaries that is pegged at a whopping 800 million (who will believe India has such a large number of poor); inefficiency in the Public Distribution System (PDS) and rampant misuse of subsidy. This is where almost every Government has failed.
In early 2015, a committee under senior BJP leader Shanta Kumar had recommended a cut in the number of those eligible for subsidised food from 67 per cent to 40 per cent and restricting the benefit of Rs 1/2/3 per kg only to the poorest of the poor under the ‘Antyodaya Anna Yojana’, while increasing the supply to seven kg per person. Others should pay 50 per cent of the Minimum Support Price (MSP) 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 would not be any increase in the price for three years.
In the Economic Survey for 2019-20, the Chief Economic Adviser (CEA), Krishnamurthy Venkata 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 Economic Survey for 2020-21. The Government has not paid heed to his advise.
The Direct Benefit Transfer (DBT) of subsidy is a foolproof mechanism for helping poor consumers as was amply demonstrated in the 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. The DBT has been on the Government’s radar since 2012-13; yet all that we see are a few pilot projects being run in some districts.
Now, in view of the farmers demanding a law on guaranteeing the MSP and if it is enacted, this will dash whatever little hope remains for launching DBT. This is because then the Government will be legally bound to purchase all crops (for which the MSP is notified) and the entire quantity that farmers offer to sell. In other words, the current system of procurement albeit at MSP and selling to beneficiaries at the subsidised price will stay. This implies, that DBT will be off the table as a subsidy can’t be given twice over, first by supplying food at a subsidised price and then by transferring the cash to the beneficiary’s account.
To conclude, even as the 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.
The writer is a New Delhi-based policy analyst. The views expressed are personal.
