Timely disbursement of funds to FCI would go a long way  to streamline the Pradhan Mantri Garib Kalyan Anna Yojana, which provides free food grains to the people

The Ministry of Finance (MoF) has released Rs 97,000 crore towards food subsidy expenses in the first half of the current financial year (FY) to the Food Corporation of India (FCI). This is over two-thirds of the required fund support of Rs 147,000 crore to FCI during the current FY. The MoF is expected to release the balance amount by December 31, 2024. Under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the Centre asks the FCI and other state agencies to procure food from the farmers at MSP (minimum support price) and distribute it to around 820 million people for free. Under the Scheme, each beneficiary gets 5 kg of food per month. The entire cost i.e. MSP paid to farmers plus handling and distribution cost (HDC) is reimbursed to the FCI/other state agencies as a subsidy. The money comes from the Union Budget’s allocation for ‘food subsidy’.

The FCI conducts the bulk of the food procurement, handling and distribution operations on behalf of the Centre. At Rs 147,000 crore, it gets around 72 per cent of the total food subsidy Rs 205,250 crore being the budget estimate (BE) for 2024-25. The government is duty-bound to make timely payments to FCI to enable the latter to conduct its operations ‘smoothly’ and ‘effectively’.   

What is so special about the current FY?

In the past, thanks to inadequate budgetary allocations (often prompted by the compulsion to keep the fiscal deficit – excess of total expenditure over total receipts - under check), the government’s payments to FCI had fallen short, forcing the latter to take recourse to working capital from banks to sustain operations. To bridge cash-flow mismatch, the extant arrangements provided for the FCI to avail a short-term loan with a tenure of 90 days up to Rs 75,000 crore at any given point in time.

This led to an increase in subsidy as interest cost on loans taken from designated banks (the interest rate ranges between 6.98 per cent to 7.36 per cent per annum) had to be reimbursed to the FCI. The gap between budget allocation and actual requirements used to be so huge that cash credit limits sanctioned by the banks proved to be inadequate. This prompted the FCI to even borrow funds from the National Small Savings Fund (NSSF). The NSSF is a public account (established on April 1, 1999) where all deposits received under National Saving Schemes are credited. All withdrawals by depositors are made out of the accumulations in this Fund. Normally, the government is not expected to use the NSSF to meet its revenue expenditure and expenses on food subsidy fall in this category. Yet, it encouraged the FCI to encroach on the Fund to plug the shortfall in its receipts. When the FCI started taking loans from NSSF in FY 2016-17, the Centre had committed to release the subsidy arrears to enable FCI to pay back the loans in subsequent years. But, that was not to be as subsidy arrears kept mounting, and FCI continued borrowing increasingly from NSSF. At the end of 2018-19, FCI’s cumulative borrowing from NSSF was Rs 200,000 crore. This continued into 2019-20 on a much larger scale. In that year’s budget, Finance Minister Nirmala Sitharaman had kept the BE for food subsidy at Rs 184,000 crore and drastically reduced it to Rs 109,000 crore in the revised estimate (RE) just because she wanted to keep the FD close to the target. Against this, the requirement being Rs 219,000 crore, the shortfall of Rs 110,000 crore was made up by FCI borrowing from NSSF. In the budget for 2020-21, she kept BE at Rs 116,000 crore against the requirement of Rs 137,000 crore.

TV Somanathan, the then expenditure secretary, saw nothing wrong in the above practice arguing that borrowings by FCI were against the assets it held in the form of food stocks. The argument was flawed since loans were taken against subsidy receivable from the Centre. In the case of wheat, for instance, on every kilo sold under the National Food Security (NFSA), the subsidy was Rs 23 (MSP plus HDC of Rs 25 minus Rs 2 being the price paid by the beneficiary).

The loan was given against this amount promised by the Centre. This liability couldn’t be adjusted against the food stock, which, on giving to the NFSA beneficiary would fetch only Rs 2. The Secretary further argued that keeping these borrowings off the Centre’s balance sheet would prevent crowding out, and help the private sector borrow from the market at a lower interest cost. This needed to be weighed against erosion in the credibility of fiscal consolidation, which is inevitable when a strict liability of the Centre is kept off its balance sheet. A wrong can’t be justified simply because the honest course of reflecting the liability in the Union budget would lead to problems for private firms.

The government recognised the flaw in the above approach even as Sitharaman made a course correction while presenting the budget for FY 2021-22. In the RE for FY 2020-21, she provided for a massive allocation of Rs 529,000 crore. That amount included Rs 462,000 crore towards payment of subsidy to the FCI against a claim of Rs 216,000 crore by the latter. The excess amount was used by the FCI to extinguish all its accumulated liabilities to the NSSF. During 2021-22, 2022-23 and 2023-24, the government stayed on course with allocation for food subsidy at Rs 372,000 crore, Rs 287,000 crore, and Rs 211,394 crore respectively adequate to fully cover the requirement. As for payments to the FCI, during 2021-22, the subsidy received was Rs 208,000 crore against the claim of Rs 207,000 crore. During 2022-23, the amount received was Rs 200,000 crore against the claim of Rs 204,000 crore. During 2023-24, the FCI received Rs 139,000 crore against the claim of Rs 133,000 crore.

During the current FY, having already received 2/3rd of its likely annual requirement, Rs 147,000 crore, during the first half, the FCI is expected to receive the balance 1/3rd by December 31, 2024. It receives the money almost round the clock, meaning it doesn’t have to resort to short-term credit even from banks (forget NSSF), as its operational expenses are fully met from timely reimbursement of subsidy dues by the Center.        From the Centre’s perspective, all its liabilities regarding food subsidies are ‘fully’ reflected in the budget for any given FY. The government no longer indulges in window dressing, no carryover of subsidy dues, and the process is fully ‘transparent’. Moreover, there is no interest cost boost to subsidy payments as the FCI need not borrow. But the unsustainable increase in food subsidies continues to haunt us.

This has to do with ‘universal’ coverage of PMGKAY (820 million beneficiaries and at least 100 million waiting to be included as per an order of the Supreme Court), promise to give them ‘free’ food eternally, purchase of ‘unlimited’ quantum of food from farmers at MSP resulting in high stocks with FCI (at 44 million ton, its stock of rice as on October 1, 2024 is over three times the requirement) and associated high carrying cost, reimbursement of cost to FCI on ‘actual’ basis and pilferage of subsidized food. Addressing these maladies calls for major reforms in the Scheme. Can Modi bite the bullet?

(The writer is a policy analyst; views are personal)