Context:
In the Budget presented by Union Finance Minister on July 23, 2024, the government set the budget estimate (BE) for food subsidy in FY 2024-25 at Rs 205,250 crore, which aligns with the figure provided in the interim Budget. Over the last five years, the Central government’s expenditure on food subsidy has consistently exceeded Rs 200,000 crore each year: Rs 529,000 crore in 2020-21, Rs 372,000 crore in 2021-22, Rs 287,000 crore in 2022-23, Rs 211,394 crore in 2023-24, and Rs 205,250 crore (BE) in 2024-25.
Relevance:
GS3-
- Major Crops – Storage, Transport and Marketing of Agricultural Produce and Issues and Related Constraints
- Issues related to Direct and Indirect Farm Subsidies and Minimum Support Prices
- Public Distribution System – Objectives, Functioning, Limitations, Revamping
- Issues of Buffer Stocks and Food Security
Mains Question:
Over the last five years, the Central government’s expenditure on food subsidy has consistently exceeded Rs 200,000 crore each year. In this context, discuss the challenges associated with India’s food subsidy system and suggest a way forward strategy to deal with them. (15 Marks, 250 Words).
Analysing the Estimate:
- Although budget estimate (BE) for food subsidy is slightly less than the revised estimate (RE) of Rs 211,394 crore for FY 2023-24, it offers little reassurance, as the RE for any financial year often exceeds the BE.
- For instance, while presenting the budget for FY 2023-24, the Finance Minister had initially allocated Rs 197,000 crore for food subsidy. However, the RE ended up being Rs 14,394 crore higher.
- For FY 2024-25, food subsidy will constitute 4.2 percent of the total budget (Rs 4,820,000 crore), 5.5 percent of revenue expenditure (Rs 3,709,000 crore), and nearly 8 percent of the estimated net tax receipts (Rs 2,583,000 crore).
Controlling the Food Subsidy Expenditure:
- Controlling food subsidy expenditure is as crucial as achieving its primary objective, which is to ensure ‘food security.’
- An unchecked increase in food subsidy can lead to an unsustainable rise in the fiscal deficit (the gap between total receipts and total expenditure), potentially harming the economy through high inflation, increased interest rates, slower growth, fewer jobs, and lower incomes.
- This could create a demand for more financial assistance, including food subsidies, thereby worsening the cycle.
- There is significant potential to reduce food subsidies. To evaluate this, it’s essential to first understand how the subsidy is administered.
How is the Subsidy Administered?
- Under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the Centre directs the Food Corporation of India (FCI) and other state agencies to procure food from farmers at the minimum support price (MSP) and distribute it for free to approximately 820 million people.
- The entire cost, which includes the MSP paid to farmers along with handling and distribution costs (HDC), is reimbursed to the FCI and other state agencies as a subsidy. This funding comes from the Union Budget’s allocation for ‘food subsidy.’
- The PMGKAY has been in place since January 1, 2023, but before that, the Centre provided food to 820 million people (7 kg of cereals per person per month for 120 million of the poorest individuals under the Antyodaya Anna Yojana or AAY families, and 5 kg per person per month for the remaining 700 million) at highly subsidized rates of Rs 2/3/1 per kg for wheat/rice/coarse cereals under the National Food Security Act (NFSA).
- Additionally, from April 2020, the government distributed 5 kg of food per person per month for free to all 820 million beneficiaries under PMGKAY to mitigate the impact of the Covid-19 pandemic.
- Starting January 1, 2023, the free component of PMGKAY was merged with the regular food security programs under NFSA.
- Now, under the new version of the NFSA, food is available for free to all 820 million beneficiaries through PMGKAY.
- This arrangement will continue for five years until the end of 2028, as announced by Prime Minister Narendra Modi in November 2023.
Potential Savings in Subsidy:
- Fundamentally, subsidized food is intended for the poor, who constitute no more than 15-20 percent of India’s population.
- However, the PMGKAY currently covers 820 million beneficiaries, which accounts for nearly 59 percent of the population.
- According to the Shanta Kumar Committee (2015), the number of people eligible for subsidized food under NFSA should not exceed 40 percent of the population. This excess coverage of 19 percent translates to around 270 million individuals.
- Additionally, according to a recent Niti Aayog report, 250 million people have risen out of poverty during the last nine-and-a-half years under the current government. These individuals could be removed from the list of beneficiaries.
- A rough calculation shows that providing free food to one million people requires a subsidy of Rs 200 crore annually. Excluding 250 million people could save Rs 50,000 crore.
- The current list of 820 million beneficiaries is based on the 2011 Census, but the Supreme Court (SC) has directed the Centre to consider the population as of 2021.
- On this basis, an additional 100 million people may need to be provided with free food. That would cost Rs 20,000 crore, but even after accounting for this, the government could still save Rs 30,000 crore annually.
Associated Concerns:
Should Every Beneficiary Receive Free Food?
- The Shanta Kumar Committee recommended that non-AAY beneficiaries should pay 50 percent of the MSP.
- Other than AAY beneficiaries, there are 700 million people. Subtracting the 250 million who shouldn’t receive a subsidy and adding 100 million as per the Supreme Court’s order, we have 550 million people.
- Charging them 50 percent of the MSP, or Rs 11.4 per kg (for wheat), would result in annual savings of Rs 37,600 crore.
- The NFSA legislation, enacted in 2013, required beneficiaries to pay Rs 2/3/1 per kg for wheat/rice/coarse cereals, with these rates frozen for three years. Since 2016, there has been no legal restriction on increasing these prices. However, rather than raising the prices, the government reduced them to zero.
- Are all 820 million beneficiaries so impoverished that they can’t afford even a fraction of the cost (Rs 2 per kg of wheat is only 1/15th of the actual cost)? Even charging a nominal Rs 1 per kg could save Rs 5,000 crore annually.
‘Open-Ended’ Procurement System:
- Fourth, the original intent of the scheme was for FCI and other agencies to purchase only the quantities needed to meet beneficiaries’ requirements under NFSA, plus maintain a ‘strategic’ buffer for emergencies.
- It was never intended to be an ‘open-ended’ procurement system, which it has become today. This approach has contributed to unnecessary increases in subsidies and storage issues. Avoiding open-ended purchases could result in significant savings.
Other Issues:
- Currently, FCI and state agencies are reimbursed for handling and distribution costs (HDC) on an ‘actual’ basis, which allows for inefficiencies and cost padding.
- The stories of loaders receiving exorbitant salaries from FCI are still fresh in memory. Switching from ‘actual’ to ‘normative’ reimbursement could save a substantial amount in subsidies.
- The availability of around 60 million tons of food (the quantity distributed under PMGKAY) in the supply chain at zero cost is an open invitation for dubious operators to divert and sell it on the open market for profit.
- The PDS scam in West Bengal, involving the diversion of subsidized food grains worth tens of thousands of crores, currently under investigation by central agencies, is a prime example.
- This could be curbed by providing the subsidy directly to beneficiaries through the DBT (Direct Benefit Transfer) system.
Conclusion:
The potential for reducing food subsidies is vast. The government can implement any of these measures or all of them, depending on the level of savings it aims to achieve. However, under the current political climate, the government is unlikely to take even a small step like charging a nominal price of Rs 1 per kg.
