Bloated food subsidies push record Rs 43k-cr payment to next year

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The subsidy demand for this year would be close to the budgeted amount of Rs 90,000 crore (Reuters) The subsidy demand for this year would be close to the budgeted amount of Rs 90,000 crore (Reuters)
SummaryThis would be a record roll-over amount, much higher than last year’s Rs 32,650 crore

At least Rs 43,000 crore in food subsidy costs may be carried forward to the coming years’ budgets, as the Centre is determined to keep this year’s accounts within budgeted limits. This would be a record roll-over amount, much higher than last year’s R32,650 crore.

According to official sources, the revised estimate for fertiliser subsidy for FY14 would be kept at roughly the same level as the budget estimate of R90,000 crore. This is despite the fact that the amount of R41,560 crore released by the finance ministry till September being used largely to pay the arrears that have accumulated. The food security law (for which a need-based additional outlay of R10,000 crore is envisaged) is not going to make any impact on this year’s Budget.

The tight budget regulation is despite the relentless surge in subsidy claims by the state-run Food Corporation of India and other agencies implementing the subsidised foodgrains schemes. A widening difference between the sale price at ration shops and the minimum support prices paid to farmers and the open-ended procurement policy that have jacked up the cost of stocking grains with FCI warehouses have increased the subsidy costs.

Here is how the R43,000-crore roll-over amount is arrived at. The subsidy demand for this year would be close to the budgeted amount of R90,000 crore (R5,000 crore higher than last year), according to the finance ministry. Since only R8,900 crore of this year’s subsidy costs have been met during the first half, bills of R33,000 crore (marginally higher than last year’s) will be left unpaid. Add to this R3,000 crore interest cost incurred by the FCI on borrowings to meet its operational costs in FY13 that was left unpaid and a similar cost it is likely to incur on account of deferment of payments for this fiscal, and the carry-over works out to be around R39,000 crore. “We have not disbursed last year's interest payments (by FCI) and we are unlikely to provide for interest payments this year as well,” a senior finance ministry official told FE.

Conventionally, the finance ministry pays some 5% less than the RE as fertiliser subsidy, to adjust for the audited FCI accounts that come with a lag.

So some Rs 4,000-4,500 crore accounted for in the RE may not actually be paid this fiscal, taking the roll-over amount to Rs 43,000-43,500 crore. It would be left for the government that takes over after the polls to foot this bill.

The government buys grains from farmers at MSPs and supplies the commodities through ration shops at subsidised rates. The difference between the economic cost — which includes the entire cost of procurement, storage and transportation — of the grains and the sale price at ration shops (also known as central issue price) is incurred by the Centre. This, and the cost of maintaining a strategic grain buffer stock and running some other welfare programmes, form the government's food subsidy bill.

So while the MSPs of paddy and wheat are fixed at Rs 1,310 per quintal and Rs 1,350 per quintal, respectively, this season, people below the poverty line are sold rice (after milling the paddy) at Rs 565 and the winter grain at Rs 415 per quintal. Importantly, the central issue prices of rice and wheat have been kept unchanged for BPL families since 2000, although the MSP of paddy has since been raised 257% and wheat 235%.

In June 2012, grain stocks with the government had reached a peak at 82 million tonnes (mt), which was nearly four times the requirement. At the start of November 2013, the stocks (mostly consisting of rice and wheat) had reached 51 mt against the norm of 21 mt.

“These are early days but there can’t be any doubt that the subsidy burden would be huge this year. The finance minister has said that while the fiscal deficit target will be met, managing of the deficit will be a challenge,” Shubhada Rao, senior president and chief economist with Yes Bank, said.

With the sharp rise in outstanding dues, the FCI, sources said, would shortly raise short-term loan of Rs 20,000 crore for meeting its cash flow requirement.

To meet the gap between government's allocation towards food subsidy and the actual cost incurred by FCI, the government took a series of measures to improve cash flow for the corporation, which distributes subsidised grains to more than 40 crore people under the targeted public distribution system (TPDS). Besides, FCI also depends on the cash credit limit of Rs 54,495 crore from 62 public sector and scheduled banks for its operations. The cash credit limit is fixed annually by the finance ministry in consultation with the food ministry.

Recently, the finance ministry turned down an FCI proposal to raise Rs 8,000 crore through bonds that would have reduced its borrowing cost and increased cash flows. Food ministry sources told FE that the finance ministry has stated that the limits for giving government guarantee for such bonds for the current fiscal have already been exhausted.

FCI had earlier raised Rs 5000 crore in March 2013 through taxable bonds. Officials say that the annual interest saving through issue of these bonds would be Rs 200 crore.

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