Financing the food chain

The govt will face unprecedented budgetary challenges to ensure India remains hunger-free

On June 30, Prime Minister Narendra Modi extended the free grain distribution scheme under the Pradhan Mantri Garib Kalyan Yojana (PMGKY) for five months till November.

The decision will not only provide relief to millions of poor people as the Covid-19 pandemic infects economic activity, but also help Food Corporation of India (FCI), the country’s chief grainprocurement agency, clear its bulging food stocks.

The question, though, is whether the government will be in a position to sustain this level of spending. In fact, the cost of procuring and distributing food is only one aspect of the fresh fiscal burden; the fertiliser subsidy is another. Together, these subsidies could skew the government’s fiscal math in a major way.

Take FCI. Even before Covid-19 struck, the agency had an outstanding loan (as on March 31, 2020) of ~2.54 trillion from National Small Savings Fund (NSSF), an option the government has leveraged to keep the fiscal deficit in check.

In a normal year, the food subsidy on account of the National Food Security Act (NFSA) is around ~1.80 trillion (to FCI as well as states under a decentralised procurement arrangement). This year, the subsidy is expected to rise by another ~1.23 trillion on account of the expenditure incurred on distributing free grain, taking the total food subsidy bill in 202021 to ~3.03 trillion.

The Centre may also have to make a provision for another ~20,000 crore towards decentralised procurement dues.

“Therefore, the central government will have to provide for over ~5.70 trillion from its own finances in 2020-21 if it wants to clear all its subsidy and payment dues accruing to FCI and others,” a senior official explained.

This looks improbable in the current context, and will mean that FCI will have to increase its borrowings, either from the NSSF or the market.

According to the FY21 Budget, FCI is projected to borrow around ~1.36 trillion from NSSF in 2020-21. This figure could well rise to meet the expenses of the free grain scheme. But increasing off-budget borrowings will add to the economic cost of wheat and rice in FY22 (the economic cost includes the procurement price plus storage, transportation, interest costs and other expenditures). It is suggested that almost 6 per cent of the economic cost of rice and wheat in FY21 will be on account of interest on FCI loans.

Under two tranches of the PMGKY and one of Atmanirbhar Bharat, the Centre is projected to distribute around 33 million tonnes (MT) of additional grain in FY21 over the usual sale through the public distribution system and other welfare schemes of around 55 MT of wheat and rice.

Official figures show that the government spent ~44,131 crore for distributing 12 MT of free rice and wheat under the first phase of the PMGKY (April to June) to over 750 million beneficiaries.

This figure assumed the economic cost of ~37.26 per kg for rice and ~26.83 per kg for wheat. Add ~1,930 crore towards transportation and dealers’ margins and the total cost of free food distribution comes to around ~46,061 crore for the first three months of FY21. Extending the PMGKY to five months will entail an additional subsidy of over ~76,000 crore.

Therefore, the total subsidy will come to around ~1.23 trillion from April to November alone. .

The FCI, however, may get some relief from the extra drawal of 33 MT, which will reduce inventory cost a tad. The carrying cost of the buffer for 2020-21 is estimated at ~54.03 a tonne. As on June 8, FCI was holding around 81.25 MT of grains almost double the government’s buffer stocking norm of 41 MT (each July).

Fertiliser is the other looming problem. Urea is the top fertiliser sold in India, and almost 75 per cent of its price comes from subsidy the government pays manufacturers. The year 2020-21 started with unpaid subsidy of almost ~48,000 crore.

For the current year, the fertiliser subsidy is estimated at ~ 80,000 crore. So the total subsidy requirement in the current fiscal is roughly ~1.28 trillion. But the 2020-21 Budget provided ~71,309 crore, roughly 11 per cent lower than the 201920 allocation.

Worse, for this fiscal, the Department of Fertilisers has been clubbed under the “B” category of ministries under the expenditure management regime introduced following the Covid-19 outbreak, which means it can spend just 80 per cent of the allocated budget.

This means of the truncated budget, about ~57,047 crore will be released in 2020-21. Of this, round ~10,000 crore has already gone towards repaying bank loans, leaving ~47,047 crore, insufficient to clear even last year’s dues.

Assuming a minimum of ~30,000 crore is carried forward to the next financial year, as has been the practice in the past few years, ~50,000 crore will be the estimated subsidy receivables for 2020-21.

Now, given the acute financial stress, the country is facing due to the massive slowdown in economic activity, it will be extremely difficult for the government to arrange such huge sums from its budgetary resources.

Under such circumstances, a section of the fertiliser industry is demanding the subsidy be arranged through Special Banking Arrangement (SBA) and suggests that Reserve Bank of India (RBI) could be directed to remove the limit of 60 days for such financing due to extraordinary circumstances. But for the government, the challenge of financing hunger will remain.

“The government should be prepared to absorb some fiscal slippage by 1-2 percentage points that is bound to happen this year. To tide over this extra financial burden, the RBI could consider monetising the deficit (by printing more currency notes),” suggests S Mahendra Dev, Director and Vice- Chancellor of Indira Gandhi Institute of Development Research, Mumbai.