The biggest drawback with the current system of food subsidy is making it available at throwaway prices. It allures dubious players who buy it cheap and sell it at higher prices

The Union government’s total expenditure on the three major subsidies - fertiliser, food and cooking gas - during the current financial year (FY)   is likely to be around Rs 400,000 crore as against Rs 549,000 crore spent during FY 2022-23. From this, it might appear that the government has made serious efforts to trim the subsidy. But, looking at the situation on ground zero, this isn’t so. The subsidy on each tonne of fertiliser produced (or imported) and sold is the excess of the cost of production/import and distribution (or cost of supply) over the maximum retail price (MRP) controlled by the Central government at a low level. It controls the MRP of urea – a major source of nitrogen (N) – directly, while on all other fertilizers carrying phosphate (P), and potash (K) which are decontrolled de jure, the control is indirect. The subsidy is paid to manufacturers or importers to cover the differential between the ‘cost of supply’ and the MRP. 

India depends heavily on imports to meet its fertilizer requirements, the level of import dependence being 100 per cent in ‘K’, and 80-90 per cent in ‘P’. Regarding ‘N’, 25-30 per cent of the urea demand is met from imports. For domestic production of urea, the country imports at least one-third of the natural gas (NG) requirement; it could be higher if either there is a dip in domestic production of NG or more of it is allocated for priority sectors such as CNG, PNG etc leading to less availability for urea production.

A major determinant of the cost of supply and in turn subsidy is thus the international prices of fertilizers and fertilizer raw materials (FRMs). During FY 2022-23, these prices rose sharply due to global shortages triggered by the Ukraine war. In April 2022, the price of urea touched US$980 per ton while the price of di-ammonium phosphate (DAP) – a major source of ‘P’ - was US$954 per ton. As a result, actual fertilizer subsidy payments during FY 2022-23 turned out to be Rs 254,000 crore against a budget estimate (BE) of Rs 105,000 crore.

For FY 2023-24, finance minister Nirmala Sitharaman set the BE at Rs 175,000 crore, Rs 79,000 crore lower than the actual Rs 254,000 crore for 2022-23. This was on the assumption that international prices would decline sharply from the previous year’s high. The prices did decrease during the first four months of the current FY. The price of urea declined from US$980 per ton in April 2022 to US$333 per ton in July 2023. On the other hand, the price of DAP decreased from US$954 per ton in April 2022 to US$ 454 per ton in June 2023.

Had the declining trend continued, the government could have managed to keep subsidies within the BE. But, that hasn’t happened. From the third quarter onward, the prices have moved north. The price of urea increased to US$411 per ton in October 2023. The price of DAP rose to US$ 535 per ton in December 2023. This has prompted the government to go for an additional allocation of Rs 13,351 crore in December 2023 over the BE of Rs 175,000 crore.   

The year could end up with even higher subsidy outgo if prices increase further during January – March 2024; such a possibility is not ruled out given the continuing conflagration in the Middle in particular, the Israel – Hamas conflict and more recently the sporadic attacks by Houthi rebels on merchant ships in the Red Sea.       

Normally, any effort at prudent fiscal management involves countervailing measures to offset the cost-push effect of an increase in international prices. One such measure could be an increase in the MRP of urea that hasn’t been touched for over two decades. Yet, in June 2023, the Modi government decided to continue its availability to farmers at the prevailing MRP of Rs 242 per 45 kg bag for another three years. The government’s efforts to plug leakage of subsidized urea (estimated at 30 percent) by adopting various measures, including neem coating, haven’t delivered the desired results. 

Food subsidy is the excess of minimum support price (MSP) paid to farmers and handling and distribution costs over the heavily subsidised price of Rs 2/3/1 per kg for wheat, rice and coarse cereals, respectively paid by 820 million beneficiaries under the National Food Security Act (NFSA). In the budget for 2023-24, Sitharaman had set the BE at Rs 197,000 crore, down Rs 90,000 crore from the RE for 2022-23 of Rs 287,000 crore. 

Apart from the regular NFSA allocation, the RE for 2022-23 also included subsidy payments for distributing 5 kg of cereals per month for free to all 820 million people under the Pradhan Mantri Garib Kalyan Anna Yojana(PMGKAY), a Scheme launched in April 2020 to deal with the situation triggered by the Covid-19 pandemic. The PMGKAY was withdrawn from January 1, 2023, and supplies under regular NFSA were made free. This arrangement ran till December 31, 2023.

By ending free supplies under PMGKAY (rightly so, as the pandemic had completely fizzled out, it was no longer necessary to continue the Scheme), during April-December 2023, the government saved a lot of money. But this was partially offset by making supplies under the regular NFSA free. The impact of these decisions was captured while setting the BE at Rs 197,000 crore. But, Modi’s sudden announcement in November 2023 extending free supplies under NFSA for another five years has altered the subsidy math.

This is because in the remaining three months i.e. January – March 2024 of the current FY, the beneficiaries won’t pay anything instead of Rs 2/3/1 per kg for wheat, rice and coarse cereals they would have to pay if the regular dispensation were to be restored. This together with a hike in the MSP for all 14 kharif crops by 5-10 percent, announced in June 2023, has led to an increase in food subsidy beyond the BE. To accommodate this, in December 2023, the FM made an additional provision of Rs 5,589 crore under this head. 

As in fertilizers, we don’t see any major reforms happening in the food sector that would help in reducing the subsidy bill. The biggest drawback with the current system is making food available at a ‘throwaway’ price which allures dubious players to indulge in diversion and misuse of the subsidized food. Prime Minister’s promise of free food for five years ensures that this system won’t change till December 2028.   

The subsidy on cooking gas was pegged at Rs 2,250 crore in the BE.  It was meant to give a subsidy of Rs 200 per cylinder to 96 million households under the Pradhan Mantri Ujjwala Yojana (PMUY). From October 5, 2023, the subsidy was increased to Rs 300 per cylinder. Besides, the government plans to provide an additional 7.5 million connections under the scheme. Both these post-budget decisions have led to excess payments.     

During the current FY, the total subsidy outgo on cooking gas is estimated at Rs 9,800 crore - Rs 7,550 crore higher than the BE. Together with excess payment on fertilizer subsidy of Rs 13,351 crore and food subsidy of Rs 5589 crore, the total excess payment would be Rs 26,490 crore. So, the Centre would end up spending Rs 400,000 crore against BE of Rs 374,000 crore. The Centre has no control over subsidies.

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