Economic Survey 2020: Fudging food and fertiliser subsidy

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February 10, 2020 5:27 AM

Far from subsidy allocations coming down, as the Economic Survey had recommended, there is significant increase not reflected in govt balance sheets

Economic Survey 2020, K Subramanian, Union Budget for FY21, Food Corporation of India, NFSAEconomic Survey 2020: The food subsidy figure mentioned in the budget are reimbursements to FCI, and other state agencies engaged in similar operations on behalf of the Union.

Economic Survey 2020: In the 2020 Economic Survey, released on January 31, the chief economic advisor (CEA), K Subramanian had recommended some reduction in food subsidy by limiting the scheme’s coverage, and increasing the issue price of foodgrains. One was, therefore, looking forward to announcement of a major reform in this regard in the Union Budget for FY21 presented by finance minister Nirmala Sitharaman the following day.

While the speech was devoid of any such announcement, the revised estimate (RE) of food subsidy for FY20 stood at Rs 109,000 crore—a steep decline of 40% from the budget estimate (BE) of Rs 184,000 crore The BE for FY21 stands at Rs 116,000 crore. Meanwhile, the RE for fertiliser subsidy (another major resource guzzler) for FY20 is Rs 70,000 crore against a BE of `80,000 crore. For FY21, the BE is kept at Rs 70,000 crore.

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In the absence of any explicitly stated far-reaching reforms, such drastic reduction in food subsidy could only point towards ‘window dressing,’ in sync with what the mandarins in the finance ministry are used to, but attempted, this time around, at a much larger scale. At the outset, let us look at some basic facts.
Under the National Food Security Act (NFSA), over 800 million beneficiaries/consumers receive foodgrains, primarily wheat, rice, and coarse cereals, at the heavily subsidised price Rs 2, Rs 3, and Rs 1 per kg, respectively; this is a fraction of the cost of procurement, handling and distribution—1/12 in the case of wheat. The task is performed by the Food Corporation of India (FCI) on behalf of the government, which reimburses the shortfall in realisation from sale vis-à-vis the cost as subsidy to the former. The food subsidy figure mentioned in the budget are reimbursements to FCI, and other state agencies engaged in similar operations on behalf of the Union.

In the past, thanks to inadequate budgetary allocations (often prompted by the compulsion to keep the fiscal deficit under check), the government’s payments to FCI have fallen short, forcing the latter to
take recourse to working capital from banks to sustain operations. In recent years, FCI has even borrowed funds from the National Small Savings Fund (NSSF).

When, FCI started taking loans from NSSF in FY17, the Centre had committed to release the subsidy arrears to enable FCI to pay back the loans in subsequent years. But, that was not to be as subsidy arrears kept mounting, and FCI continued borrowing increasingly from NSSF. At the end of FY19, FCI’s cumulative borrowing from NSSF was Rs200,000 crore. This has continued into the current year as well.

Even though the subsidy requirement is Rs219,000 crore—Rs35,000 crore higher than the Rs184,000 crore BE—the RE is a much lower Rs109,000 crore. The difference of Rs110,000 crore is made up by FCI borrowing from NSSF. Far from subsidy allocations coming down, there is significant increase, which the FM has camouflaged while presenting the Budget numbers. For FY21, too, the ‘window dressing’ continues, with a BE of Rs116,000 crore—a mere Rs7000 crore higher than the RE for FY20—even as FCI is projected to borrow about Rs137,000 crore.

The gaps in fertiliser subsidy are no less glaring. Manufacturers sell fertilisers at a low price, unrelated to the high costs of production and distribution; government subsidy compensates them for the shortfall. Here, too, the payments have fallen short. Taking the FY20 BE at Rs80,000 crore, according to Fertiliser Association of India (FAI), the year would have ended with unpaid dues of Rs60,000 crore. With the Rs70,000 crore RE, unpaid dues would be even higher at Rs70,000 crore.

With the FY21 BE being Rs70,000 crore, clearing unpaid dues will exhaust almost the entire fund allocation, leaving nothing to pay for subsidy liabilities that may arise next year. In her speech, the FM eloquently said that she has mentioned the extra-budgetary resources (EBRs)—loans taken by FCI et al fall in this category—in an annexure. This is no consolation as long as these are kept
out of the government’s balance sheet (BS). In fact, this time, the situation is much worse, with a rise in the amount going off the BS—in the case of food subsidy, this went up to Rs110,000 crore in FY20, from Rs60,000 crore in FY19).

The expenditure secretary, TV Somanathan, sees nothing wrong with EBRs, saying the borrowings by FCI are against the assets it holds in the form of food stocks. This argument is flawed since loans are taken against subsidy receivable from the Centre. In case of wheat, for instance, on every kilo sold under NFSA, the subsidy is Rs23. The loan is given against this amount promised by the Centre. This liability can’t be adjusted against the food stock, which, on sale, can only fetch Rs2.

The secretary further argues that keeping these borrowings off-budget will prevent crowding out, and help the private sector borrow from the market at a lower interest cost. This needs to
be weighed against erosion in the credibility of fiscal consolidation, which is inevitable when a liability that is strictly of the Centre is kept off its balance sheet. A wrong (read EBRs) can’t be justified simply because the honest course of reflecting in the budget would lead to problems for private firms.

The government should get over its obsession with adhering to fiscal discipline by hook or by crook. It should reflect all off-budget liabilities in its balance sheet to project its real health (sans this, mere assertion that the government is committed to servicing these liabilities, as stated by the FM, does not carry conviction). This should be followed up by long-pending ‘expenditure reforms’ to bring about sustainable reduction in spending, particularly on major subsidies viz. food, fertilisers, fuel, etc, and resultant improvement in budgetary position.

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