Balancing welfare and fiscal responsibility

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Balancing welfare and fiscal responsibility

Thursday, 15 February 2024 | Uttam Gupta

Balancing welfare and fiscal responsibility

The Centre should go for a complete overhaul of its food subsidy programme. It should exclude from the beneficiaries’ list those who are better off

Seen in the backdrop of 250 million persons coming out of poverty during the last nine-and-a-half years of incumbent government (as per a recent report released by Niti Aayog), Prime Minister Narendra Modi has faced flak from the opposition parties for his decision to continue with supply of free ration under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) scheme for five years (it was announced by Modi during a poll rally in Chhattisgarh late last year). They question the logic of supplying free food even to those who have crossed the poverty line. Modi has taken strong exception to it.

While replying to the debate on the Motion of Thanks to the President’s address in the just concluded budget session of the Parliament, he opined that one can’t rule out the possibility of such persons slipping back into poverty and leaving them in the lurch by denying access to food (albeit free) in such a scenario could have devastating consequences for their ability to meet both ends meet. Hence, he asserted, there was a dire need for retaining them in the beneficiaries’ list. The argument suffers from infirmities. 

 At the outset, let us look at some facts. Prior to April 2020, the Union government was giving food mainly wheat/rice/coarse cereals at a heavily subsidized price of Rs 2/3/1 per kg to around 820 million beneficiaries covered under the National Food Security Act (NFSA). There were two types of beneficiaries.

As part of the Antyodaya Anna Yojana (AAY), the poorest of the poor households (HH) got 35 kg of food grains per HH each month or 7 kg per person per month taking 5 members per HH. There being 24 million AAY HHs, persons getting 7 kg a month were 120 million (24x5). The rest 700 million people got five kg a month. In addition to this, from April 2020 – December 2022, each of the 820 million beneficiaries got 5 kg per month for free under the PMGKAY to mitigate the hardship inflicted by the Corona – pandemic.      

From January 2023, even as the additional 5 kg for free under the PMGKAY has been withdrawn, all 820 million persons are getting their eligible quota (120 million AAY beneficiaries: 7 kg a month; 700 million non-AAY beneficiaries: 5 kg per beneficiary a month) under NFSA for free. This will continue till 2028. 

The 820 million beneficiaries include 250 million who have come out of poverty. The Prime Minister doesn’t want to exclude them. He bases it on the premise that ‘something could go wrong in the future’ pushing them into poverty and therefore, need continued support. This will be tantamount to extending the benefit perpetually as a day will never come when the government would think otherwise.

 Analyzing the factors contributing to 250 million persons coming out of poverty, the Niti Aayog has opined that the supply of subsidized/free food under the NFSA was a major factor. In other words, the former is largely predicated on continuing with the latter. And, the moment the supply of free food is withdrawn, these persons will automatically slip into poverty. Is this what Modi was alluding to in the Parliament?     

Another scenario could be: that a certain number say ‘X’ have genuinely come out of poverty; that their income is now adequate to enable them to buy their food needs at market-determined higher prices; hence they no longer need free supplies under NFSA. In such cases, the government must not retain them in the beneficiaries list merely on the presumption that ‘something could go wrong’.

There are millions of undeserving beneficiaries under the NFSA. This was recognized way back in 2015 by the Shanta Kumar Committee which had recommended that the people eligible for subsidized food under NFSA shouldn’t be more than 40 per cent of the population against the extant coverage of 59 per cent. The excess of 19 per cent comes to around 270 million. But, the government hasn’t done anything to exclude them. 

Sadly, a large number of poor do not have access to free food. The present list of beneficiaries is based on the 2011 Census even as the 2021 Census hasn’t been done yet. If one were to go by the Supreme Court directive to take into account the population during 2021 instead of the present coverage, the government would have to give free food to 100 million more persons.            

Doing a back-of-the-envelope calculation, giving free food to a million persons increases food subsidy by Rs 200 crore per annum. Adding 100 million to the beneficiaries list will entail an additional subsidy burden of Rs 20,000 crore annually. A rational move would be to exclude the undeserving beneficiaries to make way for those who are waiting in the queue so that subsidy is kept in check. But, in view of the stance taken by Modi, this is highly unlikely.   

There is also a lingering question of what the beneficiaries should pay. The NFSA legislation enacted in 2013 required them to pay Rs 2/3/1 per kg for wheat/rice/coarse cereals. It froze these rates for three years. Since 2016, there has been no legal bar on increasing the price. Yet, not only the price hasn’t been increased, but Modi - the government has reduced it to zero. Are these mammoth persons (read: 820 million) so poor that they can’t pay even a fraction of the cost of making it available (in the case of wheat at Rs 2 per kg, it was 1/15th)?

There are concerns over the manner of administering the food subsidy scheme. Under the existing mechanism, the Union government directs the Food Corporation of India (FCI) and other state agencies to procure food from the farmers at MSP and organize its free distribution to the beneficiaries through a network of fair price shops (FPSs) spread all over the country.

When over 60 million tons of food grains (quantity distributed through the FPSs) are available in the supply chain with zero price tag (prior to January 2023 also the price was ridiculously low at Rs 2/3/1 per kg) it is an open invitation to dubious operators to siphon off and sell in the open market raking in a moolah. The PDS scam in West Bengal involving diversion including smuggling to neighbouring countries of subsidized or free food grains meant for NFSA beneficiaries worth tens of thousands crore currently under investigation by the central agencies provides a classic example.

This mechanism also enables the government to use state agencies to extend price support to farmers. Under an ‘open-ended’ procurement system, it buys from farmers unlimited quantities - far in excess of the requirement under NFSA - at MSP. This leads to burgeoning stocks with the agencies, high carrying costs, ballooning food subsidy bills and hassles of defending our subsidies at the WTO. 

The Centre should go for a complete overhaul of its food subsidy program under NFSA. It should exclude from the beneficiaries list those who are better off. It can update the list at regular intervals to adjust for their changing income status (this should take care of Modi’s concern in relevant cases). To address other major problems of misuse, storage, high cost and so on, it should disband the existing system of purchase, handling and distribution by the state agencies; instead, transfer the subsidy to the beneficiary’s account using the DBT (direct benefit transfer) mechanism. 

(The writer is a policy analyst, views are personal)

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