The finance ministry will soon make a strong pitch for imposing a ceiling on annual food subsidy expenses, the relentless rise of which has become an unsustainable fiscal obligation over the last few years. According to official sources, a Cabinet note being prepared by the ministry with this intent will suggest ending the open-ended nature of heavily subsidised grain supplies under the National Food Security Act (NFSA), 2013, and ways to bring down the rising economic costs of rice and wheat as incurred by the Food Corporation of India (FCI).
The ministry’s note, the sources said, will also point out that though the NFSA has a provision empowering the government to revise the issue prices of grains under NFSA starting July 2016 “from time to time, but not exceeding the minimum support price”, it has never been exercised. The issue prices of rice and wheat have remained unchanged at Rs 3 per kg and Rs 2 per kg, respectively, since the start of NFSA, whereas the economic costs of the grains have risen substantially (see chart).
The finance ministry’s move comes at a time when the expenditure on food subsidy this year is to set to exceeded the Budget Estimate of Rs 2.06 trillion by at least Rs 1 trillion. Any extension of the free ration scheme – Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) – beyond September 30 could raise the budget spending on the subsidy even further.
The budgetary food subsidy rose from Rs 92,000 crore in FY14, the year when NFSA was introduced, to Rs 5.2 trillion in FY21 when the government settled the loans of FCI and brought all food subsidy expenses into the Budget, ending the practice of off-budget financing of a part of the subsidy.
The sources said the ministry will highlight in the Cabinet note that food subsidy expenditure has been rising because of rising economic costs which includes payment of minimum support price (MSP) to farmers, transportation and distribution costs and levies imposed by state government on procurement of rice and wheat.
Since the MSP and the local levies are politically sensitive issues, it remains to be seen what stand the Cabinet would take on them. The ministry’s attempt clearly is to bring the issue of unsustainable food subsidy burden to the notice of the top echelons of the government.
According to food ministry officials, the government’s total expenses under the free ration scheme launched in April 2020 in the midst of the first wave of the pandemic have already touched Rs 3 trillion.
The NFSA, 2013, stipulates that subsidised foodgrain at Rs 3, Rs 2 and Rs 1 per kg for rice, wheat and coarse grains would be made available to states by the Centre for an initial period of three years. “Thereafter, prices were to be fixed by the central government from time to time, but not exceeding MSP,” it stated.
The Act mandates coverage of 75% of the population in rural areas and 50% in urban areas. Currently, it covers more than 800 million people.
However, a recent food ministry note states that it has been decided with the approval of the Prime Minister’s Office (PMO) to continue the existing CIP under NFSA until further orders.
Prior to the passage of NFSA, under targeted public distribution system (TPDS), issues prices to states for three entitled categories of beneficiaries – Antyodaya Anna Yojana (AAY), below poverty line (BPL) and above poverty line (APL) were Rs 3/kg, Rs 5.65/kg and Rs 7.95/kg, respectively, for rice. For wheat, the issue prices for wheat for AAY, BPL and APL were Rs 2/kg, Rs 4.15/kg and Rs 6.1/kg, respectively.
According to the Commission for Agricultural Costs and Prices’ (CACP) price policy for Kharif crops in the 2022-23 marketing year, states are levying a varying set of fees and taxes, resulting in high procurement incidentals and high economic cost of grains by FCI and state agencies. “Current food subsidy expenses are financially unsustainable, which may touch Rs 3 trillion this year and it needs immediate correction,” Ashok Gulati, agricultural economist and former chairman, CACP, told FE. He said the issue price in PDS should be fixed at 50% of MSP.
The FCI procures and distributes more than 70-80 million tonne of wheat and rice annually. The corporation manages procurement, storage and transportation of rice and wheat to states for distribution, mainly for NFSA and other welfare schemes.