Leakages can be curbed if the subsidy is given directly to the beneficiaries using ‘direct benefit transfer’ mode. The potential for reducing food subsidies is immense
In the full Budget presented by Union Finance Minister Nirmala Sitharaman on July 23, 2024, the government has pegged the budget estimate (BE) food subsidy for FY 2024-25 at Rs 205,250 crore which is no different from the estimate given in the interim Budget. Though slightly lower than the revised estimate (RE) of Rs 211,394 crores for FY 2023-24, this is no consolation as invariably, the RE for any financial year turns out to be higher than the BE. For instance, while presenting the budget for FY 2023-24, Sitharaman kept the BE for food subsidy at Rs 197,000 crore. Against this, RE has turned out to be Rs 14,394 crore more. The moot point is that the expenditure incurred by the Central government during the last five years under this head has been consistently over Rs 200,000 crore mark every year 2020-21: Rs 529,000 crore; 2021-22: Rs 372,000 crore; 2022-23: Rs 287,000 crore; 2023-24: Rs 211,394 crores and 2024-25: Rs 205,250 crore (BE).
During 2024-25, food subsidy will account for 4.2 per cent of its budget (Rs 4820,000 crore), 5.5 per cent of its revenue expenditure (Rs 3709,000 crore) and consume nearly 8 per cent of its estimated net tax receipts (Rs 2583,000 crore).Reining in food subsidy is no less important than the goal it seeks to achieve namely providing ‘food security’. The uncontrolled rise in the former leads to an unsustainable increase in fiscal deficit (excess of total receipts over total expenditure) which can injure the economy in multiple ways through high inflation, high interest rates, a slowdown in growth, fewer jobs, low incomes and so on. This, in turn, can lead to a demand for higher financial assistance including food subsidies from the government thereby exacerbating the vicious cycle.
There exists a huge scope for reducing food subsidies. To assess this, at the outset, let us see how it is administered. 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 from the farmers at MSP (minimum support price) and organize its distribution to around 820 million people for free.
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’. While, the PMGKAY has been in force since January 1, 2023, before that, the Centre was giving food to 820 million persons (7 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 given 5 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.
Now, food is available to all 820 million beneficiaries for free under the new incarnation of NFSA namely the PMGKAY. 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.Avenues for saving in subsidyFirst, fundamentally, subsidized food is meant for the poor. The number of poor isn’t more than 15 – 20 per cent of India’s population. Yet, the number of beneficiaries under the PMGKAY at 820 million works out to nearly 59 per cent of the population. Even as per the Shanta Kumar Committee (2015), the number of people eligible for subsidized food under NFSA shouldn’t be more than 40 per cent. The excess of 19 per cent comes to around 270 million. Further, during the last nine-and-a-half years of the incumbent government, 250 million persons have come out of poverty (as per a recent report by Niti Aayog). These persons can be excluded from the list of beneficiaries.
Doing a back-of-the-envelope calculation, giving free food to a million persons entails a subsidy of Rs 200 crore per annum. Excluding 250 million will help save Rs 50,000 crore. The existing beneficiaries list of 820 million is based on 2011 Census estimates while the Supreme Court (SC) has directed that the Centre should take into account the population during 2021. On this basis, it needs to give free food to an additional 100 million.
That will cost Rs 20,000 crore. Even after providing for this, it will save Rs 30,000 crore annually. Second, why every beneficiary should get free food? The Shanta Kumar Committee had recommended that non-AAY persons should pay 50 per cent of the MSP. Other than AAY are 700 million persons. Minus 250 million (who shouldn’t get a subsidy at all) and adding 100 million (as per SC order), we get 550 million. Making them pay 50 per cent of MSP or Rs 11.4 per kg (wheat), will save Rs 37,600 crore annually.Third, the NFSA legislation enacted in 2013 required beneficiaries to pay Rs 2/3/1 per kg for wheat/rice/coarse cereals.
It froze these rates for three years. Since 2016, there has been no legal bar on increasing the price. Yet, far from increasing, the Modi – government has reduced the price to zero. Are they all (read: 820 million persons) so poor that they can’t pay even a fraction of the cost (in the case of wheat at Rs 2 per kg, it is 1/15th)? Even if you make them pay a notional Rs 1 per kg, this will yield savings of Rs 5000 crore per annum. Fourth, the initial idea under the Scheme was that FCI et al would buy only the quantity needed for meeting beneficiaries’ requirements under NFSA plus maintain some ‘strategic’ buffer to meet emergencies.
It was never meant to be an ‘open-ended’ procurement which it has become today. This has also contributed to the avoidable increase in subsidy besides stocking problems. Shunning ‘open-ended’ purchases can yield significant savings. Fifth, currently, FCI/state agencies are paid HDC on an ‘actual’ basis. This leads to payment for inefficiencies in the system and even cost padding.
The stories of loaders being paid hefty salaries by the FCI are still fresh in memory. A shift from ‘actual’ to reimbursement of cost to agencies on a ‘normative’ basis can save a lot of subsidy. Finally, the availability of a mammoth of around 60 million tons (the quantity distributed under the PMGKAY) in the supply chain with zero price tag is an open invitation to dubious operators to siphon off and sell in the open market raking in a moolah.
The PDS scam in West Bengal involving the diversion of subsidized food grains worth tens of thousands of crore currently under investigation by the central agencies provides a classic example. This can be curbed if the subsidy is given directly to the beneficiaries using DBT (direct benefit transfer) mode. The potential for reducing food subsidies is immense. The government can go for any of the above measures or all of them depending on how much savings it targets. But, ALAS under the current political scenario, Modi won’t dare to take even a baby step like charging a notional price of Rs 1 per kg.
(The writer is a policy analyst; views are personal)
