Free Ration Scheme Debt trap? FCI dues to NSSF to jump by 40% in FY21

Published: May 22, 2020 12:01:40 AM

The Food Corporation of India’s indebtedness to the National Small Savings Fund (NSSF) is set to rise to an alarming level of Rs 3.5 lakh crore in FY21 from Rs 2.5 lakh crore at the end of FY20.

Measures were discussed to continue the transportation of foodgrains and vegetables in Mumbai, he said. (Representative image)The relentless rise in the NSSF loan, however, is a serious threat to the fiscal management efforts.

By Prabhudatta Mishra

The Food Corporation of India’s indebtedness to the National Small Savings Fund (NSSF) is set to rise to an alarming level of Rs 3.5 lakh crore in FY21 from Rs 2.5 lakh crore at the end of FY20. This will be the steepest annual spike in these loans, which are increasingly being resorted to by the Centre to keep the food grain procurement operations going, and meet the enhanced obligations of highly subsidised PDS food supplies under the National Food Security Act (NFSA).

NSSF loans are under sovereign repayment guarantee; these are an off-budget expenditure item with attached contingent liabilities for the government. The relentless rise in the NSSF loan, however, is a serious threat to the fiscal management efforts.

The food subsidy component routed via the FCI under the NFSA is estimated to increase to Rs 1.75 lakh crore, from an earlier estimate of Rs 1.4 lakh crore. This is because the government decided to distribute three months of ration to 81 crore NFSA beneficiaries free of costs during April-June under the Prime Minister Garib Kalyan Yojana (PMGKY), at a cost of Rs 43,000 crore, of which Rs 35,000 crore is to be routed via FCI.

The NSSF route has been used by the Centre since FY17 to reduce the immediate fiscal burden on account of the mounting food subsidy. The loans are serviced by the Centre, at interest rates above 8%. The PMGKY commitment will necessitate a fresh NSSF loan by FCI.

In the current fiscal, the budget outlay (BE) for FCI for food subsidy is fixed at Rs 77,983 crore while another Rs 1.36 lakh crore has been provisioned under NSSF loan. As much as Rs 68,400 crore out of the NSSF loan has been accounted for, to re-pay arrears and the balance Rs 67,600 crore is meant for meeting this year’s requirements.

“After meeting this year’s subsidy costs from borrowings and the additional requirements under PMGKY, which is most likely to be provided as loan, a fresh debt component (NSSF) of Rs 1 lakh crore may be required this fiscal,” an official source said. The arrears to be paid by the government to FCI were Rs 2.43 lakh crore as on April 1, 2020.

The Centre was considering privatising food stock management to bridge the deficit in India’s public capacity for food grain storage and cut the carrying cost of FCI that inflates the food subsidy bill. However, the plan could not take off due to overflowing granaries near the agency’s warehousing capacities.

However, the liquidation of stocks (additional 15 million tonne over and above regular NFSA offtake) amid the Covid-19 lockdown leaves rooms for fast-tracking the plan to reduce subsidy, besides carrying out other long pending reforms, analysts feel. The opportunity must be seized to end financially non-viable open-ended procurement scheme and extend the direct benefit transfer system to all parts of the country, to meet the government’s NFSA obligations.

Under a plan earlier initiated by Niti Aayog, the revenue generated from the leasing of FCI’s covered warehouses to private players was to be used by the agency to create greenfield warehousing infrastructure. The idea was that private players, to be selected through competitive bidding, would get fees for carrying out the stock holding and maintenance operations.

The FCI’s annual carrying cost is roughly 12-13% of the economic cost of grains, and is estimated to have risen 43% to Rs 16,411 crore in FY20. Under the proposed scheme, FCI’s covered warehouses were to be leased out to private parties and simultaneously storage capacity was to be enhanced by 50%.

Officials reckon stock management by the FCI has been poor even though it has high-cost manpower. Private players could have halved the manpower cost, they feel. Given the NFSA and the government’s plan to double farmers’ income by FY23, the costs of procurement and storage of grains could rise further in the coming years as every year the minimum support prices (MSPs) of paddy and wheat have been raised by about 5%. Of course, poor economic management is one reason for the FCI’s cost escalation which has forced it to tap NSSF loans in a big way in recent years, as the fiscally-stressed government often defers the release of subsidy amounts to the corporation.

While offloading the excess stocks appears to be a rational option for the FCI rather than pile up more debt, it lacks a policy mandate to exercise that choice. The central pool stocks had record 73.85 million tonne (MT) of food grains – 49.15 MT of rice and 24.7 MT of wheat – as on April 1, which is three-and-a-half times the buffer norms (including strategic reserves) of 21.04 MT. Since FCI has a total storage capacity (own and hired) of 75.85 MT— 62.64 MT under covered godowns and 13.2 MT covered and plinth (CAP) for the central pool, it had not lifted 25.24 MT of unmilled paddy (rice equivalent of 16.91 MT) lying with millers.

As the gap between the subsidy amounts released to the FCI and its actual operational expenses widened over the years, it used to be bridged with the agency taking short-term (90 days) loans and cash credit to meet its expenses. In FY17, the government chose to end this ad hoc mechanism by arranging a five-year loan from the NSSF of Rs 70,000 crore at a high rate of 8.8% per annum at its own cost. Although the idea was to clear the arrears to the FCI, that did not materialise and the Centre had to take another NSSF loan of Rs 65,000 crore in FY18 at an 8.4% interest to not only meet FCI’s expenses but also to service the previous loan.

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