Future mortgaged for food

Tax revenue is nowhere near enough to pay for free food and the government is borrowing heavily to make up the shortfall, placing an unsustainable burden on the future generation of taxpayers.

To protect millions of poor people from the devastation caused by Covid-19, the Minister of Finance Nirmala Sitharaman had announced that the government would give five kg of rice or wheat per person per month “free” to around 80 million people through the public distribution system (PDS) for three months. It would also give one kg of pulses per household free of charge for three months. This was on top of the five kg of grain per person per month that 80 million beneficiaries already receive at a heavily subsidized price of Rs3 per kg of rice, Rs2 per kg of wheat and Rs1 per kg under the law. National Food Safety Authority (NFSA).

As the deadline for free supplies ended on June 30, on the same day the Prime Minister announced the extension of the program for five months until November 30. This time, the government will also provide one kg of grams for free to each family per month.

Listing a series of festivals during the extended period when demand normally increases, Narendra Modi urged that there is a need to continue with additional (albeit free) supply to ensure people are not rushed. He also thanked the farmers for producing the required amount of food and the taxpayers for helping the Center raise resources to facilitate the supply of the poor, free of charge.

But what Modi did not say is that tax revenues are nowhere near enough to pay for free or subsidized food supplies and that the government is borrowing heavily to fill the gap, thus imposing an unsustainable burden on the future. generation of taxpayers. Let’s check some facts.

Under the NFSA, supply of wheat, rice and coarse grains to beneficiaries/consumers at Rs 2/3/1 per kg represents a fraction of the cost of procurement, handling and distribution (e.g. 1/ 12th in the case of wheat). The supplies are made by the Food Corporation of India (FCI) and other state agencies on behalf of the Center which reimburses them an amount equal to “the difference between the cost and the selling price multiplied by the quantity sold “. This reimbursement amount is known as the food subsidy.

In recent years, food subsidies have reached frightening levels. During 2019-20, against an already high Budget Estimate (BE) of Rs 1,84,000 crore, the actual expenditure during the year was Rs 2,19,000 crore. Of this amount, the Revised Estimate (RE) was Rs 1,09,000 crore even though the balance of Rs 1,10,000 crore was borrowed by the FCI from the National Small Savings Fund (NSSF). For 2020-2021, expenditure has been estimated at Rs 2.53,000 crore, including Rs 1.16,000 crore as BE and probable borrowings of around Rs 1.37,000 crore by CFI.

This was before the Covid-19 crisis. It does not include the impact of free food given in April-June (Rs 60,000 crore) and promised by Modi for July-November (Rs 90,000 crore). With this additional expenditure of Rs 1,50,000 crore, the total expenditure on food subsidies in the current year will cross the Rs 4,00,000 crore mark (in case the program is extended beyond November, this would further inflate the bill).

Given the very fragile resource situation (due to a sharp drop in tax revenues on the one hand and the increase in expenditure linked to Covid-19 on the other), it is unlikely that the government will provide a additional amount beyond the budget allocation of Rs 1,16,000 crore. This means that all the additional amount, Rs 1.50,000 crore, will be borrowed by the FCI. With the initially budgeted Rs 1,37,000 crore, the total CFI borrowing in 2020-21 will be Rs 2,87,000 crore.

Add to this figure the cumulative borrowings of Rs 2,00,000 crore as of March 31, 2019 plus Rs 1,10,000 crore borrowed in 2019-20. The total amount owed by the FCI to the NSSF is said to be close to Rs 6,00,000 crore by the end of the current financial year. Although it remains on the CFI’s balance sheet, the fact remains that this colossal debt is entirely the responsibility of the Union government and will have to be repaid in the future by the latter’s tax revenues.

In the past, due to insufficient budget allocation, the government made short payments to the CFI, forcing the CFI to borrow from banks to sustain its operations. When the CFI began taking out loans from the NSSF in 2016-2017, the Center committed to releasing grant arrears to allow it to repay in subsequent years. But that was not the case. Grant arrears keep piling up and the CFI continues to borrow more and more from the NSSF.

India’s food subsidy regime remains fundamentally vulnerable. The Covid-19 crisis has only aggravated this vulnerability. The irony is that despite huge expenditures, even the poor are not getting full justice. NFSA supplies at 5kg per person per month barely cover 50% of a person’s requirement of 10kg per month, according to estimates by the National Sample Survey Organization (NSSO).

This forces him to buy the remaining quantity in the market at a much higher price, which in the case of rice is at least Rs 35 per kg, being linked to the cost of supply. To buy 10 kg, the poor have to spend a total of Rs 190 (five kg at Rs 3 per kg plus five kg at Rs 35 per kg). Thus, the effective price amounts to Rs 19 per kg instead of Rs 3 per kg that he would have to pay. Unless the subsidy imbroglio is resolved and payments brought back to sustainable levels, India runs the risk of falling into a debt trap. Broadly speaking, three main factors explain the high and ever-increasing food subsidies, viz. high supply cost, low issue price and an ocean of beneficiaries.

The cost of supply includes the minimum support price (MSP) paid to farmers in addition to handling and distribution costs. While the former is calculated as the cost of cultivation plus 50 percent of it as profit, the latter is reimbursed to handling agencies on an “actual” basis. This pay-as-you-go system devoid of any standard with respect to efficiency of operations is causing MSP and handling and distribution costs to be on an increasing trajectory all the time.

The price at which food grains are delivered to beneficiaries, Rs 2/3 per kg for wheat and rice, is almost close to ‘zero’. This means that almost the entire cost of supply is subsidized. In the case of rice, the cost of which is Rs 35 per kg, Rs 32 comes from the government as a subsidy. In such a scenario, widespread misuse of subsidies is inevitable.

Finally, the beneficiaries receiving food at a price close to zero represent more than 80 crores, or almost two thirds of the population. Does India have so many poor people? There is something seriously wrong as the official word on the number of poor is no more than 25-30%. Yet if more than 80 million people are entitled to virtually free food, the subsidy bill will inevitably become unsustainable.

In early 2015, a committee headed by Dr. Shanta Kumar, a senior BJP official, looked into these issues. He recommended a reduction in the number of beneficiaries from 67% to 40%. He also proposed to limit the benefit of Rs 1/2/3 per kg only to the poorest of the poor under the Antyodaya Anna Yojana while increasing the supply to seven kg per person and charging the rest 50 % of MSP paid to farmers. . This report is in cold storage.

The above recommendations can help save a good amount of money. But that is far from solving the problem of a burgeoning food subsidy. A lasting solution will not emerge as long as the government remains involved in the supply, handling and distribution of food grains; as then, all stakeholders will expect him to do whatever keeps the subsidy bill steadily rising. Thus, farmers would want him to pay a higher MSP; handling agencies will not rein in the cost and more and more people would like to come under the NFSA.

The government should stop buying and selling food. Instead, it should limit its role to providing direct subsidies to the poor using the direct benefit transfer (DBT) option. This will also be in line with his big bang reforms (announced on May 15) giving an unfettered role to the private sector in agricultural marketing. State agencies can continue but as a commercial entity on an equal footing with private actors. Only then will we have real food security in the country without mortgaging the future.

(The author is a New Delhi-based political analyst)