India’s food subsidy bill continues to rise despite budget projections suggesting otherwise. Without structural reforms in procurement and distribution, the financial strain on the exchequer is set to escalate, raising concerns about the long-term sustainability of India’s food security programmes

In the Union Budget for 2025-26, Finance Minister Nirmala Sitharaman has allocated Rs 203,420 Crore for food subsidy which is a marginal three per cent increase from the revised estimate (RE) for the current financial year (FY) at Rs 197,000 Crore. The RE for FY 2024-25 by itself is lower than the budget estimate (BE) of Rs 205,250 Crore she had fixed while presenting that budget on July 23, 2024.

Food subsidy payments during FY 2023-24 and FY 2022-23 were Rs 211,394 Crores and Rs 287,000 Crore respectively. From these numbers, one gets a sense that since FY 2022-23, food subsidies have been on a downward trajectory. This may not reveal the true picture.

Under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the Centre asks the Food Corporation of India (FCI) and other state agencies to procure food and organize its distribution to around 820 Million people for free. The entire cost i.e. MSP (minimum support price) paid to farmers plus handling and distribution cost (HDC) is reimbursed to the FCI or other state agencies as a subsidy. The money comes from the Union Budget's allocation for 'food subsidy'.

While, the PMGKAY has been in force since January 1, 2023, before that, the Centre was giving food to 820 Million persons (seven kg of cereals per person per month to 120 Million poorest of the poor persons covered under the Antyodaya Anna Yojana or AAY families and five kg of cereals per person per month to the remaining 700 million) at a heavily subsidized price of Rs 2/3/1 per kg for wheat/rice/coarse cereals under the National Food Security Act (NFSA).

In addition, since April 2020, it has been giving five kg of food per person per month for "free" to all 820 Million beneficiaries under PMGKAY to mitigate the consequences of Covid-19 pandemic. From January 1, 2023, it merged the free part of PMGKAY with the regular food security schemes under NFSA. This arrangement will continue for five years till the end of CY 2028 as per the announcement by Prime Minister Narendra Modi in November 2023. Against this backdrop, FY 2022-23 was an unusual year as 700 Million beneficiaries got five kg of cereals each per month for free under the PMGKAY. In addition, during April - December 2022, they got five kg of cereals each at a throwaway price of Rs 3/kg and Rs 2/kg for rice and wheat, respectively under the NFSA.

Likewise, beneficiaries under the AAY received five kg each per month under PMGKAY throughout the FY plus seven kg a month at Rs 3/2/kg for rice/wheat during April - December 2022 under the NFSA. It was a doubling of the quantity supplied at throwaway/zero price during nine months of the FY that contributed to an unusually high subsidy outgo of Rs 287,000 Crore. During FY 2023-24, the 'double quantity' effect was not present as five kg a month supplies to all beneficiaries at Rs 3/2 per kg under the NFSA were withdrawn. This should have led to a massive reduction in subsidy outgo from the FY 2022-23 level. But, that didn't happen. The payments during FY 2023-24 were substantial at Rs 211,394 Crores. A hike in MSP of all 14 Kharif crops by 5-10 per cent announced in June 2023, besides an increase in HDC, led to higher subsidy payment.

Look at things from another angle. While, presenting the budget for FY 2023-24, Sitharaman had kept the BE for food subsidy at Rs 197,000 Crore. Against this, RE turned out to be Rs 14,394 Crore more indicating that the potential savings in subsidy due to dissipation of 'double quantity' effect were partially offset by increase in MSP and other costs associated with distribution of food.   

Coming to FY 2024-25, the FM has put the RE for the year at Rs 197,000 Crore which is even lower than the BE of Rs 205,250 Crore. This is anomalous. Only a month before the presentation of the budget for FY 2025-26, the prevailing situation was pointing towards a slippage of around Rs 20,000 Crore from the BE. The higher subsidy requirement of about Rs 225,000 Crore was expected primarily due to the rising costs of holding on to a huge stockpile of rice, besides the increase in MSP of wheat and rice.

Then, as part of the central pool stock, the FCI was holding around 50 Million ton including 34 Million ton of rice and 16 Million ton of wheat (this stock excluded 34 Million ton of rice receivable from millers). The stock was against the buffer of 21.41 Million ton for January 1. Put simply, the stock holding was four times what was required.  

At a fundamental level, the problem lies in the government using state agencies not just to meet food requirements under the PMGKAY but also to extend price support to farmers. Under what has come to be known as 'open-ended' procurement, it buys from farmers unlimited quantities at MSP. For the last many years, the FCI has been procuring over 50 Million tons of rice every year even while supplying around 36 - 38 Million tons under PMGKAY to the states.

This mismatch has inevitably led to a huge pile-up of stocks and associated high carrying costs which bloats the subsidy bill. The Centre has pinned its hope of trimming subsidy (as per RE) on liquidating its burgeoning stocks. But, given the situation on the ground, this seems unlikely. Till about a month back, response to the open market sale of rice by FCI from its stocks was poor with only 0.7 million tons of rice sold at the subsidised rate of Rs 28/kg (during 2023-24 also, the agency could sell only 0.1 million tons).

A recent order from the food ministry let state governments and their corporations purchase up to 1.2 million tons of rice, and ethanol distilleries buy up to 2.4 million tons at a reduced rate of Rs 22.55/kg - a 20 per cent discount from the earlier price of Rs 28/kg - won't make any dent on the mammoth stocks.

The actual subsidy outgo during FY 2024-25 will be close to Rs 225,000 Crore instead of Rs 197,000 Crore being the RE given in the budget. Considering that the agencies will be saddled with high stocks even during FY 2025-26 and further annual increase in the MSP and HDC (in the past, MSP of paddy and wheat has been increasing 6 - 7 per cent in kharif and rabi seasons annually and this trend is expected to continue), it is unlikely that subsidy payments will be contained within the budgeted level of Rs 203,420 Crore.  Far from a declining trend that the figures mentioned in the budget would seem to suggest, food subsidy has actually been on a rising trajectory and this trend will continue in the future as well. How the Scheme has been crafted, an escalating trend is inevitable. The coverage of PMGKAY is ‘universal’ (820 Million beneficiaries and at least 100 Million waiting to be included), assurance of giving them ‘free’ food eternally, purchase of ‘unlimited’ quantum of food from farmers at MSP resulting in high stocks with FCI and agencies and associated high carrying cost, reimbursement of handling and distribution cost to them on ‘actual’ basis and pilferage of subsidised food.

Conclusion

The trajectory of food subsidy in India is not on a downward slope, as the budget figures might suggest, but rather on a continuous rise due to the structural inefficiencies within the system. The universal coverage of PMGKAY, along with the open-ended procurement of food grains at MSP, has resulted in excessive stock accumulation, driving up costs related to storage, handling, and distribution.

Despite attempts to trim the subsidy bill through stock liquidation, market demand has remained weak, making a significant reduction in expenditure unlikely.

Moreover, factors such as annual increases in MSP and handling costs, as well as the Supreme Court's directive to include an additional 100 million beneficiaries under food security programs, will only exacerbate the financial burden.

While the budgeted estimate for FY 2025-26 has been set at Rs 203,420 Crore, the actual expenditure is expected to exceed this projection, just as it has in previous years.

Unless the government undertakes fundamental reforms, such as rationalising procurement, improving targeting mechanisms, and curbing inefficiencies, food subsidy will continue to spiral upwards.

(The author a policy analyst. The views expressed are personal)