A relook at food subsidy

Estimates on poverty reduction should be used to usher in a targeted scheme for free foodgrain

Less than three months are left before the Union Budget for 2027-28 is due to be presented in Parliament. Even as inter-ministerial consultations have started and discussions with representatives of industry, trade, and farmers, among others, are set to be held soon, expectations from the forthcoming Budget are already running high. This is not just because the Securities and Exchange Board of India (Sebi) has called for the removal of the long-term capital gains tax for foreign portfolio investors, but also because Finance Minister Nirmala Sitharaman has responded to this issue by making a careful statement that the government acknowledges concerns about sustained foreign investment inflows and the market’s anxiety over them. 

Expectedly, the stock market has responded positively to these statements in the hope that the Union Budget on February 1 will revise the taxation framework for long-term capital gains from assets. At another level, senior government officials are making statements that underline the need for more reforms. Those too have raised expectations from the forthcoming Budget. 

Last week, Chief Economic Advisor (CEA) V Anantha Nageswaran delivered an important address highlighting the imperatives before India’s economic policymakers in the face of the current challenges. For obvious reasons, the headline for the CEA’s address focused on the comparison between the current economic challenges of 2026 and those that India faced in 1991. Of course, the comparison was qualified, even though the structural and external challenges were as formidable then as they are now. The policy suggestions made by the CEA, particularly the one requiring a re-examination of the country’s growth and industrial strategies, deserve serious consideration. The simultaneous pursuit of import substitution, stronger local manufacturing, and improved export competitiveness will also require a reimagined policy approach. 

Similarly, recent statements from Niti Aayog Member Rajiv Gauba have ignited hopes of an overhaul of urban governance, with empowered city governments, directly elected mayors with five-year terms, greater financial autonomy for urban local bodies, and the introduction of integrated land-use planning in cities and towns of India. Over the past many years, the Union Budget has gone beyond fiscal matters, outlining the government’s overall development policies as well. Mr Gauba’s statement that urban centres cannot be effectively run from state Capitals should lead to necessary governance reforms, as city governments will require the authority, resources and institutional capacity to address local developmental issues. 

The coming Union Budget can lay down a road map for ensuring the devolvement of all 18 functions, listed under the 74th Constitutional Amendment Act to urban local bodies. States can be nudged to ensure that urban local bodies are empowered to take decisions on master planning, water supply, fire services, and traffic management, which are all functions currently controlled by most state governments. 

But going beyond governance, there is an important issue that the Union Budget should tackle to support the government’s fiscal situation. That reform should be in the area of food subsidies and its need has been triggered by a World Bank report (the Poverty and Equity Brief for India) released in October. It states that between 2011 and 2023, the share of Indians living below the poverty line, using the yardstick for lower middle-income countries (daily consumption of $4.2), fell from 57.7 per cent to 16.1 per cent. The World Bank report released another datapoint indicating that India’s extreme poverty (measured by a daily consumption of $3, used for low-income countries) fell from 27.1 per cent to 2.6 per cent during the same period. But the relevant number for India’s poverty estimate is the one showing the decline in the share of poor people in the country’s total population to 16.1 per cent. India is a lower middle-income country and the daily consumption benchmark of $4.2 is the correct yardstick to measure India’s poverty level. 

Such a reduction in India’s poverty level is obviously being debated among economists. There are many questions about how this reduction was achieved and whether it impacted the level of inequality in India. While these issues warrant further discussion, another policy debate should be triggered by this poverty reduction. This is about the Modi government’s scheme to supply free foodgrain to over 800 million Indians. 

Remember that India did not have a free foodgrain scheme in 2011, when its poverty level was 57.7 per cent, according to the World Bank. The free foodgrain scheme was started in March 2020 in response to the Covid pandemic. It was tweaked slightly to cover all beneficiaries under the National Food Security Act in January 2023 for a period of 12 months, even though Covid was no longer a threat at that time. Then, a few weeks before January 2024, it was announced that the free foodgrain scheme would run for five years. In the process, over 57 per cent of India’ total population has come to enjoy free foodgrain, even though the country has a poverty rate of 16 per cent. 

For the Union government, the free foodgrain scheme entails a significant cost. Food subsidies are estimated at over ₹2 trillion every year, over four per cent of the government’s total annual expenditure. Food subsidies cannot be completely eliminated. But they can certainly be reduced significantly if the free foodgrain scheme is targeted to benefit only the poor. Any such move will face obvious political pushback because of the electoral costs it could impose on the ruling party. 

But a government that could take on powerful retailers by reintroducing the merchant discount rate (MDR) on select transactions made through the Unified Payments Interface can be expected to roll out a similar free foodgrain scheme that benefits only the poor and needy. 

Why talk of only traders? The government this year has successfully linked the sale of fertilisers to farmers’ land records through the use of AgriStack and other digital platforms. Fertiliser sales this kharif season fell by over 37 per cent. As a result, the new scheme has prevented large-scale diversion of fertilisers to non-farming sectors and to neighbouring countries, where fertiliser prices are much higher. The government’s fertiliser subsidies bill too has benefitted. 

Hopefully, the proposed MDR will be enforced after Diwali, and the scheme linking fertiliser sales to land records will be continued and expanded to cover more farmers after addressing concerns of tenant farmers. Food and fertiliser subsidies in the first half of the current financial year have been kept under check so far, growing by 13 per cent against the annual growth projection of 18 per cent. Given the way energy prices have been behaving, the government needs to introduce these subsidy reforms to provide some cushion against expenditure slippages in other areas this year and during 2027-28.