It is widely acknowledged among learned circles that a larger drawdown of inventory of stock of foodgrain (some of which rots) and corresponding subsidy payment is limited by current accounting policies of the government not shifting to an accrual basis.
Specifically, drawdown of foodgrain stocks by Food Corporation of India (FCI) and distribution to fair price shops is restricted to the provision of cash subsidy in the budget of food ministry. Out of a budget of Rs 88,000 crore as observed in the accounts for 2010-2011, expenditure on revenue account is Rs 66,328.99 crore (about 0.7 per cent of the GDP), of which the subsidy to FCI is Rs 50,729 crore and another Rs 12,200 crore is to state governments.
These payments are booked in the appropriation accounts of the government and constitute the backbone of food security for millions of citizens below the poverty line and are being sought to be enhanced in the Food Security Act (FSA).
Such expenditure contributes directly to fiscal deficit, as would all uncovered subsidy amounts, which strikes a paradoxical note since food subsidy leads to human capital formation and is desirable in our country, albeit with improved targeting and prevention of leakages.
For sale of foodgrains to identified persons under the system of fair price shops, the cash payment from the government to FCI is imperative. The current ‘Cash System of Accounts’ adopted by the government does not permit keeping any expenditure as ‘payable’ such that there would appear a ‘receivable’ figure for the same amount in the books of FCI, which uses an accrual system of accounting.
Any form of delayed payment or issue of IOU in lieu of cash, would still warrant recording a ‘payable’ in the books of the government in favour of FCI or increase indebtedness. This would still not reduce fiscal deficit pressures that operate on government and constrain increases in food subsidy, which on estimates of expenditure in 2012-13 is about 1 per cent of the GDP.
Soon the balance sheet of FCI would reflect a large receivable figure which would need to be cashed by FCI to continue its operations of procuring at MSP and selling at FSA prices.
The solution has to be one with no further adverse effects on the fiscal position of government and so the burden of payment would have to be borne by other entities.
Innovations in financing the food subsidy
Either an SPV (special purpose vehicle) funded by a consortium of public sector banks could buy the receivables or FCI with expert assistance could convert the receivables into ‘Rights for creation of Social capital’. These could be offered for sale to corporate India (for cash) in tranches, year after year.
Why would corporate India bite is the natural question?
Under CSR (corporate social responsibility), now mandatory, they could be induced to buy these rights that offer no return but can booked in the accounts of the corporate as “investment in social/ human capital of India”.
This investment could be allowed to be taken as an asset on the balance sheet of the corporate after allowing it to be deducted as an expense in its profit and loss account, thereby capitalising the subsidy paid to FCI.
Corporate India must effectively audit the distribution of foodgrains under its acquired rights at the last mile, given that it would help clean up the distribution system.
Further, we must allow the corporates to take publicity and mileage from the village that they are funding the subsidy so that they may target their investment to geographies of their preference. This may interfere with the mileage for the ruling party but those below the poverty line may welcome the additional benefits.
The government increases its food security net with zero effect on the fiscal deficit and could even escape subsidy if it abandons the subsidy payment to FCI altogether. What is assured is that the ambitious food security bill may secure additional sources of funding from the organized corporate sector.
The drawdown of foodgrains can be increased manifold to the extent of purchase of rights by corporate India. At worst, a guarantee may be invoked by FCI against government if the rights are not purchased. If proved successful the rights may also be auctioned on the exchanges.
Corporate India gets involved in building human assets for the nation under CSR. The spend under CSR is 2 per cent of profits become a limiting factor; given that the savings attributed to non-household private sector is 10 per cent of the GDP the CSR obligation may correspond to 0.2 per cent of the GDP. There would be a possible improvement in fiscal deficit to the same extent. But critically the human capital formation will slowly improve over the years. Corporate India could put its money where the others’ mouth is.
Food for thought
* Either a special purpose vehicle, funded by a consortium of public sector banks, could buy the ‘receivables’ or FCI, with expert assistance, could convert the receivables into ‘Rights for creation of Social capital’. These could be offered for sale to India Inc (for cash) in tranches
* Under CSR, now mandatory, India Inc could be induced to buy these rights that offer no return but can booked in the accounts of the corporate as “investment in social/ human capital of India”
* This investment could be allowed to be taken as an asset on the balance sheet of the corporate after allowing it to be deducted as an expense in its P&L, thereby capitalising the subsidy paid to FCI
* Thus government increases food security net with no effect on fiscal deficit and could even escape subsidy if it abandons the subsidy payment to FCI altogether
Author is a civil servant and ex-ED of Sebi; views are personal.?