Fiscal impact of free food grain extension unlikely for next 2 years

The extension of the free food grain scheme would not have any impact on the fiscal deficit target for at least the next two financial years, a top Finance Ministry (FinMin) source said on Monday.

The FinMin is also concerned about bogus demand being generated by some states to claim funds under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). According to reports, the Centre recently released Rs 10,000 crore towards urgent assistance for the NREGS .

Prime Minister Narendra Modi on Saturday announced a five-year extension of the free food programme — 5 kg of food grains per person per month  —  which was set to be discontinued by the end of December.

During the pandemic, the government offered an additional 5 kg of food grains free of cost in a scheme called Pradhan Mantri Garib Kalyan Anna Yojana, above the 5 kg ultra-subsidised food grain.

Before the extension, the free food grain programme was estimated to cost the government around Rs 2 trillion. Nomura’s report called the government’s free food scheme extension move prudent and not fiscally unsustainable.

An analysis by Nomura said the extension reflects the difficulty in withdrawing populist policies, especially ahead of elections but the near-term macro implications should be muted.

“Higher revenue expenditure, including on rural employment guarantees, could impact the government’s FY24 fiscal deficit target of 5.9 per cent of GDP,” Nomura’s report said.

While stating that the need for subsidised grains for lower income households is undeniable, the Nomura report flagged that there are risks with announcing free schemes that lead to competitive populism.

“Over the medium term, the government is likely to forgo revenues from its subsidised food sales — 0.05 per cent of gross domestic product (GDP) on an annualised basis,” the report said.

According to experts, the extension of the free food grain scheme could strain government finances in the future as the economic cost of food grain is expected to rise due to an increase in the Minimum Support Price and other incidental costs.

The food subsidy allocated for this financial year was around Rs 1.97 trillion, of which approximately 48 per cent (Rs 95,149 crore) had been exhausted as of September, according to the Controller General of Accounts.

A Reuters report quoted a government official saying that an increase in grain prices could lead to limited additional spending for 2023-24 of between Rs 50 billion to Rs 70 billion.