Fiscal consolidation risks

Food distribution decision will be tough to reverse

The Union government last week decided to discontinue the Pradhan Mantri Garib Kalyan Anna Yojana. Under the scheme, which started 28 months ago to support vulnerable sections of the population during the pandemic, 5 kg of rice or wheat was being provided free of cost. As the economy opened up, it was suggested, including by some in the government, that the programme should be stopped. The government, however, decided after multiple extensions to continue it till the end of this year. The scheme was costing about Rs 15,000 crore per month. Discontinuing the scheme, which was essentially a temporary measure, will result in significant savings, but the government has decided to extend the free-of-cost aspect to distribution under the National Food Security Act (NFSA) for a year, starting January 1, 2023. Such a decision at this stage should have been avoided.

The government anyway provided foodgrain at highly subsidised prices under the food security law. Under the NFSA, it was distributing rice, wheat, and coarse grains at Rs 3, Rs 2, and Rs 1 per kg, respectively. Although prices were nominal and would not result in a big hit to the Budget, the decision, in principle, is puzzling. The distribution of foodgrain under the Act, which covers over 810 million beneficiaries, is expected to cost Rs 2 trillion. It is not clear what economic reasons prompted the government to take this decision. There were strong reasons to distribute free foodgrain when economic activity was affected by the pandemic, but it makes little sense now. Further, it is hard to imagine, politically, that the government would be able to withdraw the provision of free foodgrain at the end of 2023, just a few months before the general elections. It is always hard to withdraw entitlements, particularly close to elections. The risk, therefore, is that it will be extended at least for some time beyond 2023, if not permanently.

The decision, in essence, is the opposite of what the government should have been expected to do. As the distribution prices have not changed since the implementation of the law in 2013, the government should have revised it upwards to contain subsidy outgo. It is worth noting that the government has been running a high fiscal deficit and, given the level of public debt, it should aim for quicker fiscal consolidation. Although the government has reiterated its commitment to contain the fiscal deficit at 6.4 per cent of gross domestic product (GDP) in the current year, consolidation could become more challenging in the coming years with slower growth.

The latest country report of the International Monetary Fund (IMF) expects India’s growth to slow down from 6.8 per cent in the ongoing fiscal year to 6.1 per cent next year. Notably, the IMF has called for a “more ambitious and well-communicated fiscal consolidation”, which would help ensure fiscal sustainability in the medium term. India’s debt-to-GDP ratio is estimated to have peaked at 89 per cent in 2020-21 but is expected to remain elevated in the medium term. The decision on foodgrain gives an impression to the market that the government would go slow on fiscal consolidation till elections, which could push up borrowing costs. It has thus become extremely important for the government to present a clear consolidation road map in the upcoming Budget.