After hiking fertiliser, Centre may now review food subsidy outlay

After hiking fertiliser subsidy, the Centre may have to take a relook at the food subsidy outlay, with 91 per cent of the allocation already achieved in the first seven months of the current fiscal year. This might have prompted it to not extend the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY)) (free foodgrains scheme). 

Extending the free foodgrains scheme, would have added on to government's spending pressure amid bleak revenue outlook and higher capital expenditure going forward. 

While the free food grain distribution scheme under the PMGKAY ended on Monday, economists say a large part of it was not accounted for in the fiscal package even as the government increased its borrowing programme. There were also talk of extending the scheme, but no decision has been taken so far, given the financial implications. 

Of the Rs 1.15 trillion budgeted as food subsidy for the fiscal year, Rs 1.05 trillion was spent by October, according to data by the controller general of accounts. October saw a 27 per cent jump in food subsidy spend on a month-on-month basis compared to a 16 per cent monthly increase seen in September.

Last year, about 70 per cent of the total food subsidy allocation was exhausted by October.

“The Centre will have to provide for over Rs 5.70 trillion from its own finances in 2020-21 if it wants to clear all its subsidy and payment dues accruing to Food Corporation of India (FCI) and others,” said a senior government official. In June, the government had extended the free grain distribution scheme to November taking up the total spend to Rs 1.5 trillion. In a normal year, the actual food subsidy on the National Food Security Act (NFSA) is around Rs 1.8 trillion (which includes subsidy to FCI and decentralised procurement states).

However, this year, the subsidy will rise by another Rs 1.5 trillion because of expenditure incurred on distributing free grain. Thus, the government's total food subsidy bill in 2020-21 is estimated to be over Rs 3 trillion (NFSA+ Garib Kalyan).

In addition, it may have to make a provision for another Rs 20,000 crore (at least) towards pending payment dues for the decentralised procurement by states.

“Of the Rs 1.5 trillion of the free food grain distribution scheme, only Rs 30,000 crore was included in the fiscal package. So, it is unclear where the balance will come from. It is to be seen whether it will come as National Small Savings Fund (NSSF) loan to FCI or the government will increase its borrowing programme. That is the confusion,” said Aditi Nayar, principal economist, ICRA Ratings.

“Our fiscal deficit estimate at 7.7 per cent of GDP can no way fully accommodate the food subsidy. There is an under-budgeting of Rs 1.2 trillion for which the source of funding remains unclear,” added Nayar.

Madan Sabanvis, chief economist, CARE Ratings, said that since the free food grain distribution scheme will not be extended beyond November, the spending pressure will ease. However, the government will need to make additional provisioning for food subsidy for the current fiscal year or will have to roll it over to the next fiscal.

NSSF loans have been the government’s default option to fund expenditure in the past few years, as it tries to ensure that the fiscal deficit is kept in check. Even before Covid-19 struck, 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 around Rs 2.54 trillion from the NSSF as on March 31, 2020.

While the government is facing pressure to meet the capex target for the fiscal year, 81 per cent of the subsidy budget allocation has already been met in the first seven months of the fiscal. Earlier this month, the government hiked fertiliser subsidy outlay by another Rs 65,000 crore, up from Rs 71,309 crore allocated in the budget, taking the total to Rs 1.36 trillion.

The Centre had budgeted to borrow Rs 7.80 trillion in FY21 but was forced to raise it by as much as 54 per cent in May amid decline in revenue.

The Centre will borrow Rs 4.34 trillion, or about 34 per cent of the full-year target in the second half.

Through two tranches of the PM Garib Kalyan Yojana and one of Atmanirbhar Bharat, the government is projected to distribute around 32 million tonnes (mt) of additional grain in FY21, over and above the usual sale.

This will be through the public distribution system (PDS) and other welfare schemes of around 55 mt of wheat and rice.