Food subsidy: Centre’s unpaid bills to FCI to touch Rs2 lakh crore

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Published: August 27, 2019 2:42:54 AM

Food subsidies — as a percentage of GDP (0.9% in FY19) — have remained relatively stable for the last few years; yet subsidy payments were inadequate.

 

In fact, the Modi 2 government has already applied the brakes on the skyrocketing MSPs.

Steep hikes in minimum support prices (MSP) and lower realisation from sales of grains by the Food Corporation of India (FCI) have pushed the Centre’s food subsidy bill over the last few years, inflating its unpaid bills to FCI to a staggering Rs 2 lakh crore by the end of FY19.

As this is a ticking bomb, BofA Merrill Lynch Global Research said in a recent note that the actual food subsidy bill must now grow slower than the nominal GDP for the Centre to generate some room for this huge back-pay to be released. “In theory, the government should refrain from large MSP increases for the next few years,” the firm said.

The cash-strapped government has arranged loans to the tune of Rs 1.91 lakh crore for FCI from the National Small Savings Fund (NSSF) during the past three years to ensure that procurement and distribution operations under the food security programme are unaffected. Repayment of these loans, for sure, is the Centre’s obligation as FCI has no means of cash generation, independent of the support from the Budget.

In fact, the Modi 2 government has already applied the brakes on the skyrocketing MSPs. In early July, the Cabinet approved rather modest increases of 1-9% for 14 kharif crops for the 2019-20 season while sticking to the policy of these benchmark prices being at least 150% of the production cost. Last year saw one of the steeper hikes in kharif MSPs (4-52%) as a poll-bound government unveiled the new policy and MSPs 50-97% higher than the full paid-out costs (A2+FL). But for FCI to ward off the danger of a looming debt trap, it is crucial that it cuts its huge stocks and improve sales realisation through local sales and even exports.

FE had earlier reported that FCI and state government agencies among them were holding excess foodgrain stock (above the buffer norm) worth Rs 1.18 lakh crore (economic cost) on April 1 in the ‘central pool’. While offloading the excess stock appears to be a rational option for FCI rather than piling up more debt, it lacks a policy mandate to exercise that choice. Even if FCI was to sell the excess stock in the open market now, it would fetch some Rs 30,000 crore less than the cost incurred by it to create it. “The government has effectively used the FCI’s balance sheet to borrow additional amounts — while keeping headline fiscal deficits in check,” BofA said in the report.FCI sold 15% less foodgrain in FY18 than it did in FY14, leading to an increase in inventories, BofA noted.

According to former agriculture secretary Siraj Hussain, against the buffer norm for wheat for July 1 of 27.58 million tonne (mt), the actual stock was as high as 47.6 mt. On April 1 this year, the central pool had rice and wheat stocks of 39.83 mt and 17 mt, respectively, against buffer+strategic reserves levels of 13.58 mt and 7.46 mt.

The Centre’s procurement of wheat has increased from lows of about 25% in FY17 to more than 35% in FY19 while food consumption is increasing at a modest pace of 2-3% per annum, BoFA said. “Political pressure to deliver economic/income upside to rural India — where a majority of Indian voters still reside — will push governments to deliver annual increases to purchase prices for cereal,” BofA said. Food subsidies, which have doubled over the past six years, will limit MSP increases in near term, leading to lower tailwind for rural income, it added.

Food subsidies — as a percentage of GDP (0.9% in FY19) — have remained relatively stable for the last few years; yet subsidy payments were inadequate. “This goes back to budget pressures. The government has increased expenditure on a few other schemes (in addition to the rise in costs driven by the pay commission revision) over the last few years, crowding out space for subsidies,” BofA Merrill Lynch said.

Tax revenues — as a percentage of GDP — have disappointed in FY19, further adding to cash flow pressure of the government.
Against the revised estimate of Rs 1.71 lakh crore food subsidy in FY19, the Centre released only Rs 1.01 lakh crore or 59% of the estimate. The Centre bridged the gap by arranging a fresh loan of Rs 70,000 crore from NSSF.

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