Garib Kalyan may hurt FCI financially
Business Standard
4 Jul 2020
SANJEEB MUKHERJEE
Source: Budget 2020-21
The government’s decision to extend free grain distribution under the PM Garib
Kalyan Yojana (PMGKY) for another five months will not only provide relief to
millions of poor people, but also help clear bulging inventories of the Food
Corporation of India (FCI).
However, the subsidy burden is expected to balloon and that could further strain the
already stretched finances of the FCI, by increasing its dependency on loans and
market borrowings.
This is unless the government decides to increase its budgetary allocation for food
subsidy in the current fiscal year to pay for the extra grain distribution. But that looks
highly improbable in the current economic situation.
Even before Covid-19 struck, the FCI had an outstanding loan of around ~2.54 trillion
from National Small Savings Fund (NSSF) as on March 31, 2020.
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.
Officials said in a normal year, the actual subsidy on the National Food Security Act
(NFSA) is around ~1.80 trillion. However, this year, the subsidy will rise by another
~1.23 trillion because of expenditure incurred on distributing free grain. Thus, FCI’S
total subsidy bill in 2020-21 will be around ~3.03 trillion.
In addition, it has to make provisions for another ~20,000 crore at least towards
payment for decentralised procurement by states. “Therefore, the central government
will have to make a provision of over ~5.70 trillion from its own finances in 2020-21
if it wants to clear FCI of all its dues along with subsidy payment,” a senior official
explained. This looks improbable in the current context, and will mean that FCI will
either have to increase its borrowings from NSSF or the market.
According to the FY21 Budget, FCI is projected to borrow around ~1.36 trillion from
NSSF, which might rise to meet the expenses of the free grain scheme. Raising the
offbudget borrowing or the quantum of loans will in turn add to the economic cost of
wheat and rice in FY22.
According to some estimates, almost 6 per cent of the economic cost of rice and
wheat in FY21 will be on account of interest on loans taken by FCI, which will rise if
borrowings increase.
Subsidy
Through two tranches of the PM Garib Kalyan Yojana and one of Atmanirbhar Bharat,
the central government is projected to distribute around 32 million tonnes (mt) of
additional grain in FY21 over and above the usual sale through the public distribution
system (PDS) of around 55 mt of wheat and rice.
According to the government, it incurred expenditure of ~45,000 crore for distributing
grain under the first phase of the Garib Kalyan Yojana, which ran from April to June
and through which around 12 mt of wheat and rice were distributed for free to over
750 million beneficiaries.
The subsidy calculation has been arrived at assuming the economic cost of ~37.26 per
kg for rice and ~26.83 per kg for wheat. In this, an expenditure of ~1,930 crore has
been added towards transportation and dealers’ margins. Thus, the total subsidy for
free distribution comes to around ~46,601 crore.
Now that the Garib Kalyan Yojana has been extended for five more months, an
additional subsidy of around ~75,000 crore will have to borne by the government.
Therefore, the total subsidy implication will come to around ~1.23 trillion.
Stocks
However, the scheme will help clear foodgrain stocks, which stood at around 97.26
mt as on June 1. If 32 mt of grain is absorbed through the Yojana along with 55 mt
under NFSA, this will ease the pressure on FCI, which would otherwise have been
unmanageable given kharif rice procurement in the 2020-21 season is expected to be
high, if sowing is any indication.
“Two things, one this distribution will help in excess stock clearance. Second, the
money saved by the poor on buying foodgrain could boost their discretionary
spending and also help in improving the nutritional level as 5 kg per person under
NFSA is clearly inadequate,” Ashok Gulati, Infosys Chair Professor for agriculture in
ICRIER, told Business Standard.
“But, my bigger worry is about pilferage and leakage, particularly in states that have a
large population of the poor. Therefore, a better option is cash transfer as
identification and distribution is less flawed there,” he added.
