Statistical jugglery can’t hide India’s burgeoning food subsidy bill

Borrowings by Food Corporation of India have risen and it continues to hold buffer stocks way above norm. Solutions lie in increasing PDS prices and reforming FCI

One of the myriad numbers in Budget 2020-21 that caught attention related to the food subsidy bill. The revised estimates of 2019-20 showed that, at Rs 1.08 lakh crore, this was 41 percent lower than what had been originally budgeted (Rs 1.84 lakh crore). What’s more, the 2020-21 budget figure of Rs 1.15 lakh crore was a mere 6.3 percent higher than the revised estimate. If one compared it to the budget estimate of 2019-20, it was a 37 percent cut.

So was this a much-needed subsidy rationalisation measure by a fiscally prudent government or a deliberate disregard for food security by a callous government? Actually it is neither.

Close to 60 percent of the food subsidy bill is the reimbursement by the central government to the Food Corporation of India (FCI) for the costs the latter incurs in procuring and distributing food grains for the public distribution system (PDS). In 2019-20, this was originally budgeted at Rs 1.51 lakh crore and more than halved to Rs 75,000 crore in the revised estimates. But this was no saving on the part of FCI. All that happened was that the central government got it to borrow more from the National Small Savings Fund (NSSF) to make up for the shortfall in reimbursement. In 2019-20, FCI will borrow Rs 1.10 lakh crore from the NSSF. In 2020-21, the budgetary allocation for reimbursing FCI is Rs 77,982 crore (a piffling 3.9 percent rise), while its borrowing will shoot up 34 percent to Rs 1.36 lakh crore.

This practice of FCI being forced to resort to borrowings to bridge the gap between the subsidy reimbursement due to it and actual reimbursement received has been going on for years together. The shortfall has ranged from 15 percent in 2011-12 to 51 percent in 2016-17. The only thing new in this Budget is that the borrowing from NSSF has been stated upfront in the annex to the Budget speech. But the NSSF is just one source of borrowing; there are others and these are high-cost loans, as a 2017 Comptroller and Auditor General (CAG) report on FCI pointed out.

So, what is the problem if the FCI borrows to fund its operations? The problem is that ultimately this will result in the food subsidy bill escalating. Here’s how.

There’s interest to be paid on these borrowings. The CAG report noted out that the interest incurred on FCI’s borrowings between 2011-12 and 2015-16 totalled Rs 35,701 crore (the annual interest burden rose from Rs 5,000 crore in 2011-12 to Rs 8,000 crore in 2015-16). FCI being a public sector organisation, ultimately it is the central government that has to bear this interest burden. So every year a few thousand crore gets added to the food subsidy bill not because more food grains are being supplied or more beneficiaries being added, but only because central and state governments are not paying the FCI.

What is the solution? The most obvious one is for the FCI to be paid on time. But why not consider reducing the operating cost of FCI? The high levels of inefficiency and corruption in the organisation are well known. The Shanta Kumar Committee on restructuring FCI had suggested ways this could be done. There’s been no meaningful action on its very sensible recommendations.

Importantly, the whole food management system (including the minimum support price (MSP) regime) needs to be reviewed and recast. Right now, FCI is forced to procure at MSP to help farmers. As a result, it often ends up procuring far more than the buffer stock norms. As of December 31, 2019, the total stock of wheat and rice in the central pool was 56.51 million tonnes, more than double the buffer norm of 21.41 million tonnes. There is a huge cost to holding this, which pushes up the subsidy bill. The Economic Survey released last week pointed out that an increase of one unit in real MSP leads to a 0.48 unit increase in economic cost.

The effect of the increase in cost can be mitigated if the selling price is increased. The economic cost of wheat and rice has increased from RS 19 kg and Rs 26.15 a kg, respectively, in 2013-14 (when the National Food Security Act was passed) to Rs 25 a kg and Rs 36 a kg in 2019-20. But the price to the NFSA beneficiary has remained Rs 2 a kg for wheat and Rs 3 a kg for rice since the Act came into force, though it was to be reviewed after three years, that is 2016.

This is not sustainable. If the government wants to cling on to its welfarist image by not increasing the issue price even a mite, then it needs to take drastic action on reforming FCI and the way it works to bring down costs (this includes helping FCI access lower-cost loans). Statistical sleight of hands will help only to a limited extent; the interest burden will throw some future governments into deep financial crisis.

(The writer is a senior journalist and author. She tweets at @soorpanakha)

Disclaimer: The views expressed above are the author’s own. They do not necessarily reflect the views of DH.