A lost opportunity to revamp the food subsidy bill

A lost opportunity to revamp the food subsidy bill

The desire to sport welfarist credentials has seen the Modi government do precious little on this count

Finance Minister Nirmala Sitharaman with MoS Anurag Thakur and others outside the North Block ahead of the presentation of Union Budget 2019-20 at Parliament. PTI file photo.

In her maiden budget speech, Nirmala Sitharaman talked about a few reforms that the government will be undertaking. She spoke about collapsing myriad labour laws into four labour codes. There was a welcome announcement about the government bringing down its stake in public sector enterprises to below 51 per cent. She said the government would work with states on agricultural marketing reforms. And she spoke about the need for tenancy reforms.

Barring privatisation (since strategic sales will mean higher non-debt capital receipts), these have little to do with the budget. What was missing in a budget that is being hailed for its fiscal prudence was a serious revamping of the subsidy bill of the Union government. This is one of the items of revenue expenditure that has implications for the overall fiscal deficit; and one of the heads of revenue expenditure that can lend itself to serious pruning.

Cutting back on revenue expenditure is a bit difficult, as two heads are committed expenditure – interest payments and salaries. These together take away close to 60 per cent of the revenue that comes from taxes. That leaves subsidy as the only head that gives some elbow room for pruning, even though it has been accounting for only around 10-15 per cent of total expenditure over the years.

There has, undoubtedly, been improvement on this count under NaMo1 – subsidies used to eat up over 30 per cent of tax revenues under the second United Progressive Alliance (UPA-2) government, but this has been brought down to the 17-18 per cent range in NaMo1. Much of this was because of the global decline in petroleum prices (which brought down the petroleum and fertiliser subsidy). But there is scope to do more. The subsidy bill is set to increase 13.3 per cent in the 2019-20 budget, accounting for 10.8 per cent of total expenditure and 18.2 per cent of tax revenue.

Where is the scope for cutting? The three subsidies accounting for nearly 85 per cent of the overall subsidy bill are food (61 per cent), fertiliser (14 per cent) and petroleum (12 per cent). The share of food subsidy in the overall subsidy bill used to be below 40 per cent but shot up to 50 per cent after the implementation of the National Food Security Act (NFSA) and has gone up further to above 60 per cent over the last three years. That is a pity because it lends itself to rationalisation and the desire to sport welfarist credentials has seen the Modi government do precious little.

It has, it will claim, brought down the bill by direct benefit transfer and weeding out ghost beneficiaries from the public distribution system. But those gains are minor compared to what a thorough restructuring of the food management economy will bring in.

The food subsidy bill is the difference between the cost the government incurs on procuring food grains (mainly through the Food Corporation of India. FCI), and distributing them through the public distribution system also known as the economic cost, and the price the beneficiary pays, known as the issue price. Now the economic cost has been increasing steadily, thanks largely to the inefficiencies in the procurement and distribution chain, but the issue price has remained static since 2013-14 when the NFSA was promulgated as an ordinance.

Consider this: The economic cost of rice has increased from Rs 26.15 a kg in 2013-14 to Rs 34.72 a kg in 2018-19 and that of wheat from Rs 19 a kg to Rs 24.35. But the issue price has remained stuck at Rs 3 a kg for rice and Rs 2 a kg for wheat. The subsidy is, therefore, over 90 per cent.

When the NFSA was enacted, the issue price of Rs 3 for rice, Rs 2 for wheat and Re 1 for coarse grains was to be reviewed after three years. As if a three year freeze were not bad enough, NaMo1 kept extending it by a year. The issue prices should have been reviewed this year but the freeze continues. This is nothing but nothing but misplaced welfarism.

It could be argued that this should not be a big issue since the food subsidy bill has increased only 7.5 per cent this year, against a 14 per cent increase in fertiliser subsidy and 50 per cent increase in petroleum subsidy. But part of the hikes under those two heads are on account of global petroleum prices which hardened and are now set to fall. In the case of petroleum subsidy, some of the increase in the LPG subsidy is because of more people being brought into the subsidised connection net. In any case, the subsidised price has been hiked with costs increasing. That is not happening in the case of food grains.

Even before the NFSA was passed, successive governments had not paid heed to recommendations by committees to link the issue price to the economic cost, the most common suggestion was to make the issue price 50 per cent of the economic cost. That is something that needs to be considered seriously.

Simultaneously, efforts have to be made to bring down the economic cost. The acquisition cost (pooled cost of grain plus procurement incidentals) accounts for 80-85 per cent of the economic cost and the distribution cost another 15-17 per cent. The cost of grain is the bulk of the acquisition cost and populist pressures to hike procurement prices keep this a bit inflexible. Ultimately, it is the beneficiaries of subsidised foodgrains who suffer because the inefficiencies in the procurement and distribution chain are passed on to them in the form of poor quality of rice and wheat.

Welfarism cannot mean making people pay even a pittance for bad quality food grains. A calibrated increase in issue price and reducing the economic cost by removing the inefficiencies in the procurement and distribution chain are both necessary. This will help balance the budget and provide welfare with dignity.


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


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