Unless PM Modi cracks the whip on reforms in food and fertiliser subsidy, such liabilities will haunt economy

In Budget 2020-21, Finance Minister Nirmala Sitharaman candidly acknowledged the existence of the so-called off-budget liabilities and extra-budgetary resources (EBRs) and mentioned these in an annexure. EBRs are those financial liabilities or borrowings that are raised by public sector undertakings (PSUs) and other agencies of the government to fund latter’s schemes for which repayment of entire principal and interest is done from its Budget.

If all obligations pertaining to the borrowings are met by the Union government then why does it not take these on its own balance sheet (BS) instead of riding piggyback on its agencies/PSUs? The reason is by not borrowing itself and hence not reflecting on its BS, it is able to show lower fiscal deficit to the extent of EBRs.

Against this backdrop, acknowledging the existence of EBRs by itself was an unprecedented step by the Narendra Modi government. Presenting Budget 2021-22, the FM took the logical step forward of actually taking off-budget liabilities on the Union government’s books not just for FY 2021-22 but also in the revised estimate (RE) for FY 2020-21. Take the case of food subsidy which is administered by the Food Corporation of India (FCI) and other state agencies.

Under the National Food Security Act (NFSA), around 820 million beneficiaries receive food grains, primarily wheat, rice and coarse cereals, at the heavily subsidized price of Rs 2, Rs 3 and Rs 1 per kg, respectively, which is a fraction of the cost of procurement, handling and distribution. The task is performed by the FCI et al on behalf of the Government, which reimburses the shortfall in realization from sale vis-à-vis the cost to the former as food subsidy. This is solely the liability of the Centre and is paid from the Union Budget.

Prior to 2020-21, the Government was invariably keeping a portion of the reimbursement amount due to the FCI pending. The extant method of accounting expenses on a cash basis, i.e., when actual payments are made, enabled it to do this. This forced FCI to borrow the “unpaid amount” from the banks or any other source. These borrowings plus interest accrued remained on the books of FCI.

This mechanism might have helped the Centre show that it is sticking to the fiscal consolidation road map. But it gave a misleading picture of the Government’s finances and made it complacent with regard to the dire need for bringing about genuine and sustainable reduction in expenses. It also affected the financial health of the agency implementing welfare schemes.

The ballooning unpaid food subsidy dues forced the FCI to even borrow from the National Small Savings Fund (NSSF)—a totally undesirable and unconscionable practice. Since 2016-17, when the FCI started borrowing from the NSSF, as on March 31, 2020, it owed a staggering Rs 300,000 crore to the Fund.

In Budget 2020-21, the FM allocated a mere Rs 116,000 crore for food subsidy. However, in the RE for the year, she provided for Rs 422,000 crore (this was later raised to Rs 525,000 crore), thereby enabling the government to not only pay for all of the expenses incurred during that year, which included free food scheme launched in April 2020 under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), but also help FCI clear all its dues to NSSF.

During 2021-22, the government gave a substantial hike in allocation at Rs 242,000 crore over BE for 2020-21. The RE for 2021-22 was even higher at Rs 286,000 crore which fully covered the requirement during the year leaving no room for any off-budget liabilities. In fertilizers also, prior to 2020-21, a large chunk of subsidy payments to manufacturers were kept pending by the government of the day if only to show a better picture of the fiscal deficit. During 2020-21, Modi-government put an end to this disingenuous practice by making sufficient provision/RE for fertilizer subsidy at Rs 128,000 crore (against BE of Rs 71,000 crore), thereby enabling payment of all bills for 2020-21 as well as all arrears from previous years.

For 2021-22 also, it kept the RE at Rs 162,000 crore (against BE of Rs 80,000 crore) enough to fully pay for all liabilities from the budget. However, the numbers for FY 2022-23 and FY 2023-24 make one apprehensive about the government's intention.

In case of fertilizer subsidy, Sitharaman allocated only Rs 105,000 crore in the hope that fertilizer prices in the international market would decline drastically from the elevated levels of 2021-22. But that hasn’t happened; in fact, these have increased further (courtesy, Ukraine war). This would have meant a likely subsidy outgo of around Rs 250,000 crore (as alluded to by officials during the course of the year).

Against this, Sitharaman has kept the RE for 2022-23 at Rs 225,000 crore implying a shortfall of Rs 25,000 crore, which will be kept pending. For 2023-24, she has allocated Rs 175,000 crore for fertilizer subsidy. With no end to the Ukraine War in sight and tight global supply conditions likely to continue till the end of FY 2023-24, fertilizer prices will remain elevated. As a result, the outgo during the year would be well above Rs 200,000 crore.

Together with carry forward from current FY, the actual could be touching Rs 250,000 crore, Rs 75,000 crore more than the BE. Coming to food subsidy, against BE of Rs 207,000 crore for 2022-23, the officials were estimating the actual outgo to be Rs 330,000 crore (this includes payment on PMGKAY till December 31, 2022). But the FM has kept RE at Rs 287,000 crore implying carry forward of Rs 43,000 crore to the next year.

For 2023-24, she has allocated Rs 197,000 crore for food subsidy - a cut of Rs 90,000 crore over the RE for 2022-23. This may well be due to the discontinuation of PMGKAY from January 1, 2023. However, in view of impending elections during 2023/2024, the possibility of reviving the scheme can’t be ruled out; in any case, Modi is free to revive it for three months i.e. January 1-March 31, 2024, as the extant arrangement will end on December 31, 2023.

Together with carry forward from 2022-23, the government could be staring at a shortfall of around Rs 100,000 crore. The trend in food and fertilizer subsidy payments during 2022-23 and 2023-24 vis-a-vis budgetary allocation clearly points towards resurgence of the practice of off-budget liabilities.

The paramount reason behind this sordid state of affairs is that successive governments haven’t made efforts to bring about sustainable reduction in expenditure on subsidies. Even as they have talked of big bang reforms in these schemes including DBT (direct benefit transfer) of subsidy to the beneficiaries but none walked the talk. Another factor has to do with the extant accounting methodology of recognizing expenses on cash basis i.e. when payment is actually made. This gives ample leverage to the government to defer payments to agencies.

In 2015, an Expenditure Management Commission (EMC) under Bimal Jalan, ex-Governor of the RBI, had recommended switching to accrual-based accounting of receipts and expenses, besides strongly disapproving of the practice of deferring major payments, especially subsidies to the following year. That hasn’t been acted upon.

Unless PM Modi cracks the whip on reforms in food and fertiliser subsidy schemes, off-budget liabilities will continue to haunt.

(The author is a policy analyst)