Centre saves subsidy and wheat stocks by making PDS free, ending PMGKAY

If PMGKAY was continued beyond December 2022, at least Rs 40,000 crore would have got spent for three months (Jan to March)

The Centre seems to have made a smart move to not only limit its food subsidy outgo, which was going out of hand due to unabated extensions of Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) but also saved a good chunk of wheat for effective intervention in the open market. This is through its latest decision to make PDS totally free but end extra allocations under PMGKAY, said experts.
 

This is aside from the huge political significance ahead of Lok Sabha elections in 2024 because ration in India has seldom been given free nationally except in case of emergencies such as the Covid pandemic.
 

The move will also take a big selling point from states, which distribute PDS free by adding their share of subsidy to the already-low central issue price.
 

Pick-up of grains under One Nation One Ration Card (ONORC) scheme would also improve due to this, some said.

Sources said in a normal year, the actual subsidy allocation for National Food Security Act (NFSA) — which governs the PDS in India — is around Rs 1.8 trillion. On top of this, the Centre has been bearing almost an equal amount of subsidy. This is due to extra grains distributed under the PMGKAY since the Covid first wave.
 

This extra amount will not have to be borne as a PMGKAY scheme as it has been discontinued. The hit due to making NFSA free is just around Rs 10,000-15,000 crore per annum as the central issue price (CIP) — the rate at which grains are sold to 810 million beneficiaries — has not been revised since 2013.

 

“Withdrawal of PMGKAY is a good sign as wheat stocks are down and it will definitely bring down the subsidy burden. But NFSA covers almost 67 per cent of the population and the CIP hadn’t been revised for almost 10 years. There should be some rationalisation of the coverage as well as different prices for different segments of the population,” said Ashok Gulati, Infosys chair professor for agriculture at the Indian Council for Research on International Economic Relations (ICRIER).
 

“Now, that CIP has been made zero but some rationalisation in coverage could be attempted after the 2024 elections,” Gulati said.
 

After multiple extensions to the PMGKAY, the food subsidy Bill for the year stands at Rs 3.3 trillion as of date, compared with a budget target of Rs 2.07 trillion. This means that an additional Rs 1.23 trillion has already been spent till December 2022 on PMGKAY and NFSA in FY23.
 

If PMGKAY scheme was continued beyond December 2022, another at least Rs 40,000 crore would have got spent for three months (January to March).
 

In contrast, by making NFSA free, the extra outgo would be just around Rs 3,750 crore (at Rs 1,250 crore per month).
 

This clearly is a huge win-win for a government struggling to cut expenditure. But the problem will arise when economic cost bulges as MSPs won’t be static in any year.
 

Sources had told Business Standard earlier that the Rs 2 trillion per annum outlay for free foodgrains under the NFSA is likely to be the entirety of food subsidy outlay per year in an ordinary year. This is without the kind of food supply chain disruptions and inflation shocks that were seen in FY23.
 

Hence, it is likely that the budgeted food subsidy outlay for FY24 could be capped at Rs 2 trillion.
 

“The government, by making this announcement for the next 12 months, has taken away a lot of uncertainty for next year’s budgeting. Till now, whenever we were asked on how the FY24 Budget will be, one of the caveats we gave was that we don’t know in what shape or form free food will continue. That outlay is now known,” said Aditi Nayar, chief economist at ICRA.

“Whatever expenditure and fiscal deficit numbers are revealed in the upcoming Budget, the uncertainty about food subsidy is taken away,” Nayar said.
 

There are benefits from a stock point of view as well. Ending the extra allocation under PMGKAY would ensure that the Centre has a good amount of wheat left in its kitty to make effective intervention in the open market from January onwards. This is when expectations are that prices in Delhi markets will top Rs 3,000 per quintal.
 

Trade sources said that if PMGKAY would have continued for another three months, even with the changed wheat and rice mix where more rice was being distributed to manage the stocks, it would have been difficult for the government to manage wheat stocks.
 

 According to government and official estimates, if PMGKAY would have continued till March 2023 in the ongoing form, India would have had around 11.4 million tonnes of wheat in its central pool by March 2023. This is against a buffer requirement of 7.5 million tonnes.
 

This would mean a cushion of around 3.9 million tonnes. However, with the abolition of PMGKAY, this cushion has further expanded by another 2-3 million tonnes.
 

In total, India should have stocks which are nearly 6 million tonnes more than the buffer norms.
 

“This will clearly give the government a big leeway to intervene with at least 2-3 million tonnes of wheat in the open market from January. This will immediately cool down prices. Private trade will also remain well supplied if this year's rabi crop turns out to be according to expectation,” a senior industry official said.
 

He said wheat prices will go down by at least Rs 200 per quintal as soon as the government starts liquidating its stocks.