Union Budget 2021-22: The burgeoning food subsidy bill will be a key Budget worry

December 23, 2020 8:00 AM

Budget 2021 Expectations: The FM will have to resort to further borrowing from NSSF, possibly to the tune of Rs 150,000 crore, taking FCI's loan to Rs 4,50,000 crore

food subsidy Budget 2021 Expectations, Budget 2021 Expectations for food subsidyThe food subsidy burden has been increasing and has reached levels causing serious concerns to the finance ministry.

By T Nanda Kumar

Union Budget 2021-22 Expectations for food subsidy: The government has unambiguously stated that Minimum Support Prices (MSP) will continue undisturbed. Against the current scenario of the farmers’ unrest, any reform in MSP or Public Distribution System (PDS) is not possible. Even a discussion may be ruled out. This should cause some worry to the finance minister when it comes to Budget 2021-22.

While MSP is declared for 23 crops, the biggest financial burden comes from wheat and rice. Sugarcane is under a statutory minimum price regime, and the burden is passed on, in part, to the consumer by a minimum selling price and another part to the taxpayer. Other crops like pulses and millets are not big in volume in terms of procurement and the cost this entails.

The wheat and rice story revolves primarily around the operations of Food Corporation of India (FCI). FCI procures food grains from farmers and makes it available to the PDS. The quantum of procurement was more or less equal to the requirement of the PDS in earlier years. But, in recent times, procurement has increased significantly with states like MP, Chhattisgarh, Telangana and Odisha stepping up their efforts. Overall procurement of rice and wheat has gone up to 52 million tonnes and 39 million tonnes, respectively. The requirement of PDS and welfare schemes is about 60 million tonnes. This leaves a surplus of about 30 million tonnes, in addition to the carry-over stock of about 42 million tonnes (current)—far above the buffer and strategic reserve norms. Major states (except Punjab) have stepped up procurement over the last three years (see graphic).

While surplus stocks stood the government in good stead during the Covid-19 crisis, carrying over huge stocks continues to create serious problems of storage and disposal. A worrying issue is cost.

The subsidy burden for rice and wheat (2020-21) is estimated to be Rs 1.8 lakh crore; Rs 35,000 crore will be added on account of free/additional food distributed on account of Covid-19. Add another Rs 25,000 crore as interest on the loan (without repayment of principal) taken from NSSF, and this becomes Rs 2,40,000 crore.

What are the elements of this?

FCI procures wheat and rice at MSP (some states do so under the decentralised procurement & distribution scheme). They incur costs like market fees, labour charges, packing costs, transport, storage charges, etc. These are of the order of 9% for procurement, 9-11% for labour and transport, and 15-17% for distribution. The sale price is fixed at Rs 2 and Rs 3 per kg for wheat and rice, respectively, under the National Food Security Act. In addition, there are releases under LEAN (lower entitlements and higher costs compared to NFSA cards, but subsidised nonetheless) and Open Market Sales (OMSS). While the pooled cost (including the value of old stocks) of wheat is Rs 1,850 (2020-21), that of rice is Rs 3,727 per quintal. The sale value of wheat (including OMSS) during the period was Rs 812 per quintal and that of rice Rs 478 per quintal. This means a subsidy of Rs 1,872 per quintal for wheat and Rs 3,249 for rice. The economic cost is approximately 40% of the pooled cost. Cost of holding the buffer for a year is about Rs 5,500 per tonne. FCI is holding 39 million tonnes of rice and 55 million tonnes of wheat (July 2020) against the buffer/strategic reserve norm of 13.5 million tonnes of rice and 27.6 million tonnes of wheat, i.e., a surplus of 52 million tonnes. The cost of holding this stock works out to Rs 29,000 crore per year.

The fact that the system leaks has been acknowledged for more than a decade. Though recent estimates are not available, Gulati and Saini (ICRIER) estimated the leakage at 46.7% or 25.9 million tonnes for 2011-12. Efforts to plug leakages have been stepped up, using Aadhaar, PoS machines and better technology. Leakage has admittedly come down, but nobody has a case that these have stopped or are at an acceptable level.

The food subsidy burden has been increasing and has reached levels causing serious concerns to the finance ministry. It has not been able to allocate adequate funds to meet the full requirement of food subsidy. Under-provisioning on this account has been going on, and FCI was being given loans at 8% interest from the National Savings Scheme Fund (NSSF) since 2016-17 to continue its operations. The outstanding loan on this account (October 31, 2020) is Rs 2,93,000 crore.

This has meant FCI getting zero budgetary support against current subsidy claims since 2017, thereby, postponing the problem year after year (see graphic).

This is not all. The subsidy burden is rising (with MSP increasing every year, quantities going up and prices under PDS fixed), and is likely to cross Rs 2 lakh crore. If NSSF loans have to be paid back in the next 6-7 years, we may be looking at a subsidy burden of Rs 2.5 lakh crore plus from next year. The accompanying graphic (relating only to FCI) illustrates the point.

Does the FM have options this year? Probably not! She cannot reform either PDS or MSP, given the economic and political scenario. She will have to resort to further borrowing from NSSF, possibly to the tune of Rs 150,000 crore, taking FCI’s loan to Rs 4,50,000 crore! What happens next year? Wait and watch!

The author is Former Secretary Food & Agriculture, Govt of India. Views are personal

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