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Why Modi govt’s rejig of food subsidy bill is as much good politics as it is sound economics

Foodgrain under the National Food Security Act is currently sold at a highly subsidised price. All of this will be free from 1 January onwards.

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New Delhi: The Modi government’s decision to rejig its food subsidy burden under the National Food Security Act (NFSA) is not only a fiscally prudent decision, but also stands to deprive states of some political capital, according to government officials and economists.

Union Minister for Food and Public Distribution Piyush Goyal had announced Friday the Cabinet’s decision that subsidised foodgrain provided under the NFSA would be provided free for a year starting from 1 January 2023. 

The foodgrain under the scheme is currently sold at the highly subsidised price of Rs 3 per kg for rice, Rs 2 per kg for wheat, and Rs 1 per kg for coarse grains. Under the scheme, 5 kg food grains per person is provided to Priority Households (PHH) beneficiaries and 35 kg per household to Antyodaya Anna Yojana (AAY) beneficiaries, who constitute the ‘poorest of the poor’. All of this will be free from 1 January onwards.

During the pandemic, the central government also ran a free-foodgrain programme, the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), under which beneficiaries registered under the NFSA were provided an additional 5 kg of foodgrain per month for free. The programme, which began in April 2020, was extended several times and is now set to end on 31 December.

Government officials have told ThePrint that the decision to stop the PMGKAY and instead make the NFSA foodgrain free of cost was not motivated only by the financial savings this would bring to the Centre. The decision is also meant to encourage beneficiaries to go back to work now that the economy is open again and not depend on the additional free food. 

Finally, the political motivation behind the move is to ensure that state governments can no longer claim credit for free food schemes, the cost of which were almost entirely borne by the Centre. 

Also read: All is not well in India’s agriculture sector. State must help farmers access market systems

‘Fiscally prudent’

For every three-month extension of the PMGKAY, the government has budgeted an additional Rs 40,000-44,000 crore of expenditure. Using those estimates, the government would have had to spend an additional Rs 1.6-1.8 lakh crore if it had extended the scheme for the entire calendar year 2023. 

On the other hand, calculations by ThePrint show the government stands to forego revenue between Rs 5,000-15,000 crore a year by making the foodgrain under the NFSA totally free. That is the amount it would have earned had it charged the subsidised amount from ration card holders during 2023. 

Taken together, stopping PMGKAY and making NFSA foodgrain free would still end up saving the government about Rs 1.5 lakh crore a year. This is of particular significance since the government recently sought and received Parliamentary approval for additional spending this year of Rs 3.26 lakh crore, the bulk of which was due to higher-than-expected expenditure on subsidies. 

“Of course, the Centre’s expenditure on the food subsidy will reduce substantially,” a senior government official told ThePrint on the condition of anonymity as the government is in the pre-Budget silent period. “However, the government also decided it was time to stop the extra foodgrain that was being given due to the pandemic.”

“The economy has opened up, and things are going back to normal, but people were either sitting too comfortably in the knowledge that the free food was coming in, or were illegally augmenting their incomes by selling the excess that they did not use,” the official further explained. “They were not going back to work. So, the quantum of free food given is being halved.”

The Centre also wanted to bring clarity to budget-making by laying out a plan for the entire year, instead of extending it every 3 months as the PMGKAY was being done, he added.

Political capital

The government has taken note of the fact that, so far, many opposition-led states were taking credit for the NFSA even though the bulk of the expenditure was being borne by the Centre.

According to the government official quoted above, “What was happening is that the Centre would subsidise 98 per cent of the cost of foodgrain and charge the ration card holder just Rs 1-3 per kg. The opposition parties would subsidise this Rs 1-3 per kg and brand it in their states as if they are the ones making the foodgrain free, whereas it was the Centre shouldering almost the entire fiscal burden.”

Now, the NFSA has become an entirely central scheme, with the Centre shouldering 100 per cent of the cost of the foodgrain, apart from the cost of transportation and holding costs it was already bearing.

Madan Sabnavis, chief economist at Bank of Baroda, however, feels that the political cost of making the NFSA entirely free could perhaps be felt by the Modi government as well. 

“There is nothing stopping the government from charging for this free foodgrain again in the future,” he explained. “But once you give something totally free, it will become very difficult to start charging for it again.”

Push to go back to work

Government research and anecdotal evidence has shown that substantial portions of the 10 kg of foodgrain being provided to each beneficiary every month during the pandemic (5 kg under NFSA and 5 kg under PMGKAY) was being sold on the black market.

“A family of four cannot consume 10 kg of foodgrain per person, which is 40 kg of food grain totally, every month,” Sabnavis said. “You also can’t live on only foodgrain, so they were selling the excess foodgrain and buying whatever else they needed.”

This was confirmed by the government official, quoted earlier, as well, who said that the sale of the free foodgrain in the black market was resulting in a situation where people were not going back to the workforce. In order to rectify this without adding to their financial burden, the government halved the amount of foodgrain being given, but made it entirely free, he said.

Wheat stock management

Another reason for the halving of the foodgrain quantity being given out could be a temporary shortage of foodgrain held by the government in its central pool. According to reports, the Food Corporation of India saw its stock of wheat fall to 19 million tonnes at the start of December 2022, a six-year low. 

The government has, however, clarified that there are more than enough stocks to cater to the NFSA and PMGKAY. 

“Though procurement of wheat during last season was on lower side due to lesser production coupled with selling by farmers at prices higher than MSP in the open market consequent to geo-political situation, yet enough stock of wheat will still be available in the Central pool to cater to the needs of the country till the time next wheat crop arrives,” the Ministry of Consumer Affairs, Food & Public Distribution said in a statement on 15 December.

In light of the shortages of wheat, the government said it has revised the allocations under NFSA and PMGKAY in favour of rice so that it can maintain adequate buffer stocks of wheat. Further, in the near future, even the shortage of wheat is expected to be addressed.

“The Government of India has enhanced the MSP of wheat crop this year to Rs 2,125/qtl against the last year MSP of Rs 2,015/qtl for RMS 2022-23,” the statement added. “Thus, an increase in MSP of Rs 110/qtl coupled with fairly good climatic conditions, it is expected that the production and procurement of wheat during next season shall remain normal.” 

(Edited by Smriti Sinha)

Also read: One way Indian govt can remedy food crisis and boost production — vertical farm


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