Was it prudent of the Centre to extend the free foodgrain scheme?

Ahead of major festivals, and assembly elections in Gujarat and Himachal Pradesh, the Union Cabinet on Wednesday approved the extension of ‘Pradhan Mantri Garib Kalyan Anna Yojana’, PMGKAY, for another three months – from October to December 2022.

Launched in April 2020, during the first wave of the pandemic, the scheme extends 5 kg of wheat or rice per person per month free of cost to all beneficiaries of the National Food Security Act, or NFSA. That’s estimated at Rs 80 crore, in addition to their regular monthly quota of foodgrains under NFSA. 

The latest extension, dubbed the seventh phase of PMGKAY, entails an additional expenditure of Rs 44,762 crore over and above the budgeted food subsidy for FY23. 

Phase 6 from April to September 2022 cost the exchequer almost Rs 86,000 crore. 

For all phases, the overall expenditure of the scheme will swell to about Rs 3.91 trillion. 

And with Phase 7, estimated expenditure on food subsidy this fiscal would be Rs 3.38 trillion against the budgeted Rs 2.07 trillion.  

But the government could see some savings in procurement and carrying cost this year due to a decline in wheat purchases. Also, considering the healthy collections in direct and indirect taxes so far, the impact of the additional outlay should not be very stark.

Direct tax collections are on track to exceed the budget target.  

The Centre is counting primarily on strong tax collections this year to maintain its FY23 fiscal deficit target of 6.4% of GDP. Its subsidy and welfare spending commitments have increased due to inflationary pressures and supply-chain disruptions triggered by the Ukraine war.

Economist Vivek Kumar explains if the scheme’s continuation and additional outlay can put pressure on fiscal management

Vivek Kumar, Economist, QuantEco Research says, this is one of the factors putting pressure on fiscal deficit. Govt saw savings in other areas, tax revenue is good. It can optimise other spending to meet target. High nominal GDP growth gives 40bps of cushion.

A day before the Cabinet decision, the Finance Ministry’s Department of Expenditure objected to the extension in an office memorandum sent to the Ministry of Consumer Affairs, Food and Public Distribution.

It said that since the Covid-19 pandemic had subsided considerably, the reasons for which the earlier extensions were given do not hold anymore, adding that the financial implication was a substantial one.

The note flagged existing fiscal concerns due to the war in Europe, its impact on fuel prices and the consequent rise in other subsidies.

The department suggested a reduction in quantity if the food ministry still decided to to go ahead with a continuation of the scheme.

Continuation of PMGKAY over a long period of time may give an impression that it’s of permanent nature, thereby make it difficult to stop, the office memorandum added.

But does the financial distress caused by Covid still persist? Professor Dipa Sinha, who is involved with the ‘Right to Food Campaign’ elaborates whether the scheme’s extension is warranted, at least in the short-term, despite Covid-19 cases abating. 

Dipa Sinha, Assistant Professor, Dr BR Ambedkar University, Delhi says extension needed in the present situation. Covid’s economic impact remains. Food inflation is new, employment and wages yet to recover. Grain stocks are adequate. 

There are still people who need such support, And the government, which appears to have some limited leeway left, has acted accordingly. It appears that the government is trying to strike a delicate balance between providing relief to those who need it the most without upsetting its fiscal math too much.