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Tuesday, May 24, 2022

Explained: Reining in the subsidy bill

🔴 After falling for several years, the food and fertiliser subsidy outlay has reversed the trend since 2020-21, thanks to additional allocation, higher food procurement amid Covid-19, and rising global fertiliser prices.

Written by Harish Damodaran | New Delhi |
Updated: January 24, 2022 4:59:08 pm
The combined food and fertiliser subsidy bill in the revised estimates for 2020-21 was a massive Rs 556,565 crore, representing 16.1% of the Centre’s entire Budget. (File)

On February 1, Budget day, two numbers likely to come under close scrutiny relate to the Centre’s spending on food and fertiliser subsidy. Between 2015-16 and 2019-20, the aggregate outlay on the two fell, both in absolute terms (from Rs 211,834 crore to Rs 189,813 crore) and as a share of the Centre’s total expenditure (from 11.8% to 7.1%). A further drop, to Rs 186,879 crore and 6.1%, was projected in the Budget for 2020-21 presented on February 1, 2020. This was before Covid-19 struck.

That declining trend has, however, since completely reversed. The combined food and fertiliser subsidy bill in the revised estimates for 2020-21 was a massive Rs 556,565 crore, representing 16.1% of the Centre’s entire Budget (Table 1). While the budget estimates for 2021-22 stood lower, they are still way above the trend till 2019-20.

There are two reasons for the reversal.

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Coming clean

The first has to do with the Centre, until last year, not providing fully for the subsidy, arising from the Food Corporation of India (FCI) and fertiliser firms selling grains/nutrients at below cost to public distribution system (PDS) consumers/farmers.

In the case of food, the Centre wasn’t wholly funding the difference between the FCI’s economic cost – what it incurs in procuring, handling, transporting, distributing and storing grain – and its average issue price, multiplied by the quantities sold. To bridge the gap, FCI had to borrow heavily, especially from the National Small Savings Fund (NSSF). These loans were availed at interest rates ranging from 7.4% to 8.8% per annum.

Table 2 shows that FCI’s borrowings from NSSF in 2019-20, at Rs 110,000 crore, exceeded the food subsidy of Rs 108,688 crore provided through the Budget. The same goes for fertilisers, where the industry was owed Rs 48,000 crore of subsidy dues at the start of 2020-21. The budgeted subsidy of Rs 71,309 crore fell short of the requirement of about Rs 85,000 crore just for 2020-21, exclusive of arrears.

But in the revised estimates for 2021-22, Finance Minister Nirmala Sitharaman allocated an additional Rs 3,69,687 crore towards food and fertiliser subsidy. As a result, all outstanding NSSF loans to FCI got repaid and the fertiliser subsidy dues cleared at one go. This exercise of coming clean — the Centre owning up its expenditures, rather than transferring to the balance sheets of FCI and fertiliser companies — also meant a huge one-time spike in the subsidy bill.

Covid and after

The second source of overshooting has been Covid (in respect of food subsidy) and soaring international prices (vis-à-vis fertilisers).

In 2020-21, a record 93.11 million tonnes (mt) of rice and wheat was sold through the PDS, compared to 62.19 mt, 65.91 mt and 60.37 mt in the preceding three fiscals. Government agencies also procured 103.53 mt of the two cereals from the 2020-21 crop, surpassing the previous high of 90.82 mt in 2019-20, 78.53 mt in 2018-19 and 73.97 mt in 2017-18.

Simply put, the post-Covid crisis led the Centre to not only distribute, but also procure, unprecedented quantities of grain. The PDS —more so, the 5 kg of free grain per person per month given under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), apart from the regular 5 kg quota of wheat or rice at Rs 2 and Rs 3/kg, respectively — became the government’s preeminent social safety net programme, both during and after the lockdown.

The 5 kg extra grain provision under PMGKAY was implemented for eight months (April-November 2020, until the Bihar elections) in 2020-21. In the current fiscal, it was restarted in May 2021 and has been extended until March 2022, when polls in Uttar Pradesh and four other states also get over. With PDS grain offtake already at 74.55 mt in April-December 2021, and three months to go, the total quantum of subsidised/free sales looks set to top 100 mt, a new high. Government officials have further indicated that PMGKAY alone will cost Rs 1.47 lakh crore this fiscal, with the revised food subsidy bill at around Rs 3.7 lakh crore, as against the budgeted Rs 242,836 crore.

A similar overshooting, despite no pending past dues, is expected in fertiliser subsidy. The primary reason is global prices. Urea imports into India are taking place now at $900-1,000 per tonne (cost plus freight) and di-ammonium phosphate at $900, while ruling at $300 and $400 respective levels a year ago. Prices of MOP (muriate of potash), too, have surged over this period, from $230 to $600 per tonne. So have that of imported inputs: phosphoric acid ($689 to $1,330), ammonia ($300 to $900), rock phosphate ($100 to $200) and sulphur ($150 to $300).

Following the surge in international prices, the Centre last month secured Parliament’s approval for an additional Rs 58,430 crore towards fertiliser subsidy through a supplementary demand for grants. Rating firm ICRA Limited pegs the revised fertiliser subsidy figure for 2021-22 at Rs 1.40 lakh crore-plus, up from the budgeted Rs 79,530 crore.

The road ahead

The overshooting of the food and fertiliser subsidy by roughly Rs 1.9 lakh crore in 2021-22, in spite of no carry forward from previous years, would raise the hackles of fiscal hawks. This is particularly when 10-year Indian government bond yields — a barometer for interest rates in the economy — have climbed from 5.96% to 6.62% in the last one year.

The hawks can derive some comfort, though, from no blockbuster elections being scheduled for 2022-23: The political imperative for extending PMGKAY may not be as great for Gujarat and Himachal Pradesh as for UP and Bihar. Also, the current Omicron wave doesn’t seem presenting a threat calling for intense lockdowns like those in 2020-21 and 2021-22. It is realistic, then, to expect a lower food subsidy outgo in 2022-23. The same cannot be said for fertiliser subsidy, where there is no certainty with regard to international prices.

Many economists would, of course, want more substantive measures to rein in subsidy. These include hiking PDS issue prices, capping grain procurement, decontrolling urea and providing a fixed per-tonne nutrient-based subsidy similar to that for other fertilisers. But such far-reaching reforms may be easier in the first three than the last two years of a government’s term — irrespective of the results of the Assembly elections.

(Damodaran is National Rural Affairs & Agriculture Editor of The Indian Express and currently on sabbatical as Senior Fellow at the Centre for Policy Research, New Delhi)

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