Can FCI's subsidy wipe-out serve as a base for deeper food subsidy reforms?

If clearing of FCI's outstanding dues and loans does not spur further reforms, they will once again reach current levels in the next 4-5 years, say experts

The Central government had, in one stroke, allocated a staggering Rs 4.22 trillion as food subsidy for Financial Year 2020-21, topping it up with another hefty allocation of Rs 2.42 trillion for FY22.

The twin allocations will not only help clear the Food Corporation of India (FCI)'s outstanding and unpaid subsidy dues, but will also held service a significant portion of its unpaid loans from National Small Savings Fund (NSSF) along with interest due thereon. FCI has been been availing these loans to fund the subsidy allocation shortfall over the years.

This will mean that FCI, which has drawn huge amounts of outstanding subsidy dues and loans from NSSF, might well become debt-free over the next few years, signalling a new era for the Corporation. The development could also serve as a platform for further reforms in the food sector, say experts. 

However, ending the open-ended procurement system under which the Centre purchases grains far in excess of its requirement under the National Food Security Act (NFSA) looks a distant possibility given the political complications associated with any such move. 

Experts said that a more feasible option would be to incentivise farmers in paddy- and wheat-growing states to shift some other lucrative crop, so that the burden on grain procurement reduces. 

The open-ended procurement system along with under-provisioning of food subsidy in the Budget to keep fiscal deficit under check has been regarded as the key reason that FCI has been drawing up huge unpaid dues and loans in its books over the years.

The Budget announcement and allocations for food have come barely months after the Centre decided to wipe out all outstanding subsidy dues, this time for the fertiliser sector, by allocating an extra Rs 63,000 crore in FY21 under this head.

Fertiliser subsidy in FY21 was given an outlay of Rs 1.33 trillion, about 88 per cent more than the Budget Estimates that year.

So who is to be blamed for FCI's current financial state and from where has it built up humungous dues? Add to this  the fact that in the previous years, its subsidy was under-provisioned, pushing it to approach NSSF for loans to finance its financial burden.

Open-ended procurement System

With the Centre sitting on huge stockpiles of wheat and rice, far more than what is required annually for delivery under through the Public Distribution System (PDS), the Commission for Agriculture Costs and Prices (CACP), the government’s main farm price-fixing panel has, over the past several years, repeatedly recommended reviewing the open-ended procurement policy to bring down the financial and logistical burden on the government.

Rough estimates show that due to the open-ended procurement policy, largely in Punjab and Haryana, wherein the government buys whatever quantity of wheat and rice the farmer brings to the mandi, India annually ends up picking up some 80 million tonnes of the grains, while its requirement is about 55 million tonnes.

“In States like Punjab and Haryana, the government procured a large share of the wheat output and market arrivals--about 73 per cent of production in Punjab and 80 per cent in Haryana in RMS (rabi marketing season) 2019-20. The Commission recommends that open-ended procurement policy needs to be reviewed,” the CACP said in the report released last year.

It said the open-ended procurement policy for rice and wheat has led to mounting food stocks and adversely affected crop diversification.

“These excess stocks create storage problems and high storage and financing costs, leading to high food subsidy burden and therefore the Commission recommends that open-ended procurement policy should be reviewed,” the report said.

The excess stock is due to a huge mismatch between food grains needed to run the PDS and the quantity procured, officials said.

Data shows that annually 78-80 million tonnes of wheat and rice are procured for the central pool, against a requirement of 50-54 million tonnes for PDS, leaving the rest in excess.

According to latest data from the Food Corporation of India, India’s food grain stocks as on December 1, 2020 were estimated at 52.29 million tonnes, or 144.23 per cent more than the required quantity as on January 1.

CACP also said in the same report that the economic cost of wheat has risen by about 31.3 per cent, from Rs 1,908 a quintal in 2013-14 to Rs 2,506 in 2019-20. On the other hand, Central Issue Price (CIP) of wheat (the price at which the grain is sold in ration shops) has remained unchanged at Rs 200 a quintal since July 2013, leading to a huge spike in food subsidy.

The food subsidy has risen from Rs 92,000 crore in 2013-14 to Rs 1,71,298 crore in 2018-19 (RE) and Rs 1,84,220 crore in 2019-20 (BE), according to CACP.

Food Subsidy and FCI

Even before Covid-19 struck in 2020, FCI, the government’s main designated agency to procure and supply millions of tonnes of cheap grains to the poor had an outstanding loan of about Rs 2.54 trillion from NSSF as on March 31, 2020.

NSSF loans have been the government’s default option to fund expenditure in the past few years, as it tries to keep fiscal deficit in check.

Officials said in a normal year, the actual food subsidy burden under the National Food Security Act (NFSA) is about Rs 1.80 trillion (which includes subsidy to FCI and to decentralised procurement states).

However, this year, the subsidy will rise by another Rs 1.23 trillion due to expenditure on distributing free grain.

Thus, the government's total food subsidy bill in FY 2020-21 is estimated to be about RS 3.03 trillion (NFSA at Rs 1.80 trillion, plus Garib Kalyan at Rs 1.23 trillion).

It may also have to provide for Rs 20,000 crore at least towards pending payment dues for decentralised procurement by states.

What's more, the outstanding loan dues from NSSF is projected at Rs 2.54 trillion at the start of FY21.

“Therefore, the central government will have to provide for over Rs 5.7 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 had explained a few months ago.

Now that the Centre has provided Rs 4.22 trillion in the latest budget, a very significant portion of the dues and loans have been cleared.

Lowering the off-budget borrowing or quantum of loans will in turn cut down the economic cost of wheat and rice in FY22.

According to some estimates, almost six per cent of the economic cost of rice and wheat in FY21 is on account of interest on loans taken by FCI, which will come down in the coming years if borrowings drop.

New subsidy due to PM Garib Kalyan Package

Through two tranches of the PM Garib Kalyan Yojana and one of Atmanirbhar Bharat, the central government distributed some 32 million tonnes (mt) of additional grain in FY21 over and above the usual sale through the PDS and other welfare schemes of around 55 mt of wheat and rice.

According to the government, it incurred an expenditure of Rs 44,131 crore for distributing grains under the first phase of the Garib Kalyan Yojana, which ran from April to June and through which around 12 mt of wheat and rice were distributed for free to over 750 million beneficiaries.

The subsidy calculation has been worked out assuming the economic cost of Rs 37.26 a kg for rice and Rs 26.83 for wheat.

In this, an expenditure of Rs 1,930 crore has been added towards transportation and dealers’ margins.

Thus, the total subsidy for free distribution comes to about Rs 46,061 crore for the first three months of April, May and June.

After that, the Garib Kalyan Yojana was extended by five months for which an additional subsidy of Rs 76,000 crore had to be borne by the government.

Therefore, the total subsidy implication for both the packages of Garib Kalyan comes to around Rs 1.23 trillion.

Table: Food and fertiliser subsidies (Rs cr)

Year	2019-20*	2020-21**	2020-21@	2021-22**
Food

1,08,688 1,15,570 4,22,618  2,42,836  Fertiliser 81,124  71,309  1,33,947  79,530  *Actuals; **Budget Estimate; @Revised Estimate; Source: Budget papers