Government should seriously ponder over giving subsidy directly to the beneficiary as the current system is defective

After much dilly-dallying, the Union Government has cleared the air on the fate of Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). On December 23, 2022, the Cabinet decided to terminate it from January 1, 2023. At the same time, it has decided to provide free ration to about 820 million poor in the country under the National Food Security Act (NFSA) for one year i.e. till December 31, 2023, in a bid “to shield the masses from shocks to the system at a time the economy was recovering in the aftermath of Covid crisis”.

Making these announcements, Consumer Affairs, Food and Public Distribution Minister Piyush Goyal said that the Government was merging the free part of PMGKAY with the regular food security schemes under NFSA, which would previously provide subsidized ration to the poor. With these changes, the Centre’s annual food subsidy bill is estimated to be Rs 200,000 crore.

In March 2020, Finance Minister Nirmala Sitharaman had announced PMGKAY to mitigate the hardship suffered by people due to a major disruption in economic activity and resultant loss of jobs and income in the wake of Covid-19 pandemic. Under it, the government would give five kg of rice or wheat per person per month for “free” to around 820 million people through the Public Distribution System (PDS) initially for a period of three months till June 30, 2020.

It would also give for “free” one kg of pulses per household. On June 30, 2020, Prime Minister Narendra Modi announced extension of the scheme for five months till November 30, 2020 with a slight change to provide one kg grams (instead of leaving the choice of pulse to the beneficiary) free to each family per month. The scheme was discontinued for five months during December 2020-April 2021. From May 2021, it was resurrected and got three extensions during the financial year (FY) 2021-22.

During FY 2022-23, it has got two extensions sixth (April – September 2022) and seventh (October–December 2022). Under the extensions given since May 2021, the provision for pulses was removed from the entitlement.

During FY 2020-21, economic activity had remained disrupted particularly during the first three quarters resulting in ‘negative’ growth in GDP by 6.6 per cent. So, the first two phases were perfectly justified.

However, its resurrection during FY 2021-22 when the economy rebounded with GDP registering growth of 8.9 per cent, raises many a hackles. During FY 2022-23 also, with the economy entering a phase of consolidation with an expected GDP growth of 6.8–7 per cent, one wonders whether its continuation was tenable.

Political considerations have been at work or else the government would not have run the scheme during these times when the economy was getting back to normal obviating the need for any extra support. Since March 2020, the government has spent a total of Rs 390,000 crore on running the scheme. A good slice of this expenditure could have been avoided if its actions had been guided purely by economic considerations.

Given a spate of state elections during 2023 followed by general elections in 2024, there was much speculation that the government might continue the PMGKAY. Yet, going strictly by economic rationale, it has discontinued the scheme. This will spare the national exchequer an outgo of around Rs 130,000 crore annually and help reining in fiscal deficit. But, by modifying the regular NFSA to provide for supply of ‘free’ food,

Modi has made way for populism to some extent. Under the NFSA, the Centre directs the Food Corporation of India (FCI) and other state agencies to procure food from the farmer at MSP (minimum support price) and organize its distribution to around 820 million people through a network of fair price shops (FPS) at the subsidized price (call it ‘issue price’) of Rs 2/3/1 per kg for wheat, rice, and coarse cereals respectively.

There are two types of beneficiaries. As part of the Antyodaya Anna Yojana (AAY), the poorest of the poor households get 35 kg of food grains per family (@ 7 kg per person in a family of five) each month. The number of families under AAY being 24 million, the persons getting 7 kg cereals per month @ Rs 2/3/1 per kg are 120 million. The rest 700 million persons are eligible to receive five kg of cereals per month at the same price. In addition, the PMGKAY gave 5 kg to each of 820 million for free.

Even as the additional (read: PMGKAY) has been withdrawn, the Cabinet has added a sweetener to the regular NFSA by supplying to all 820 million beneficiaries their eligible monthly quota for ‘free’ instead of Rs 2/3/1 per kg they pay currently. Considering that already, the extant price was close to zero, this was unwarranted. It is hard to fathom that nearly 2/3rd of the population can’t pay even a notional price of Rs 2/3/1 per kg.

The current issue price was specified in the NFSA legislation. The law enacted in 2013 had frozen these rates for three years. Since 2016 thus, there is no legal bar on increasing the price. An increase of Rs 1 per kg can yield savings of about Rs 5,200 crore annually; Rs 4,500 crore if hike is confined only to non-AAY beneficiaries. Instead, the government has made all sales ‘free’ which would entail an increase in subsidy by around Rs 13,000 crore annually.

Ridiculously, low price is only one major aspect of the food subsidy conundrum. There are others as well. Fundamentally, subsidized food is meant for the poor and their number is much less the present gargantuan 820 million - expected to increase to 920 million if one were to go by the Supreme Court directive to take into account the population during 2021 instead of the present coverage being based on the 2011 Census estimates.

As per the recommendations of the Shanta Kumar Committee (2015), the people eligible for subsidized food under NFSA should not be more than 40 per cent of the population against the existing 67 per cent. Denying subsidy to 27 per cent or around 380 million will result in saving of about Rs 66,000 crore annually (29x5x380x12). This is based on a person taking all of her 5 kg monthly quota as wheat and subsidy @ Rs 29 per kg [(MSP: 21 + HDC: 10) – issue price: 2] where HDC stands for handling and distribution cost.

Of the remaining 440 million (820-380), the committee felt that only persons under AAY i.e. 120 million should be eligible to pay Rs 2/3/1 per kg. It wanted that others or 320 million (440-120) should pay 50 per cent of the MSP or Rs 10.5 per kg of wheat. This would yield an annual saving of about Rs 16,500 crore (8.5x5x320x12); 8.5 being the excess of Rs 10.5 over the current price Rs 2.

There is no reason why these beneficiaries (read: non-AAY) should not pay more say MSP. Asking them to pay MSP or Rs 21 per kg can yield savings of around Rs 36,500 crore.

Finally, the Government should seriously ponder over giving subsidy directly to the beneficiary as the current system is prone to high inefficiencies, leakages and misuse.

(The author is a policy analyst)