Under ‘open-ended’ procurement, Govt buys from farmers unlimited quantities at MSP. Apart from high stocks, this adds to the food subsidy bill substantially
Addressing a poll rally in Chhattisgarh, Prime Minister Narendra Modi has announced an extension of the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) free ration scheme for another five years. Launched in April 2020 to deal with the situation triggered by the Covid-19 pandemic, PMGKAY provided 5 kg of rice or wheat per person per month for “free” to 820 million, as well as 1 kg of pulses per family per month to people covered under the National Food Security Act (NFSA). Run for three months initially, the scheme got six extensions till December 31, 2022.
On December 23, 2022, Consumer Affairs, Food and Public Distribution Minister Piyush Goyal announced the merger of the free part of PMGKAY with the regular food security schemes under NFSA. The ‘merger’ requires explanation. Under the NFSA, the Centre directs the Food Corporation of India (FCI) and other state agencies to procure food from the farmers at MSP and organize its distribution to around 820 million people through a network of fair price shops (FPS) at the subsidized price (issue price) of Rs 2/3/1 per kg for wheat, rice, and coarse cereals. There are two types of beneficiaries.
As part of the Antyodaya Anna Yojana (AAY), the poorest of the poor households get 35 kg of food grains per family. For a family of five, it comes to 7 kg per person each month. The number of families under AAY is 24 million, and persons getting 7 kg cereals per month @ Rs 2/3/1 per kg are 120 million. The rest 700 million get five kg per person a month at the same price.
The excess of MSP paid to farmers and handling and distribution costs (HDC) over the issue price is reimbursed to the FCI et al as a subsidy from the Union Budget. Call it regular food subsidy. In addition, under PMGKAY, all 820 million beneficiaries under the NFSA got 5 kg of cereals per month for free. On December 23, 2022, Goyal announced the withdrawal of PMGKAY while making supplies under regular NFSA free for a year from January 1, 2023, to December 31, 2023. Modi has extended this arrangement for five years. During the election season, Modi’s announcement was a political masterstroke. Nothing else could have carried a greater appeal to voters than the promise of free food to 820 million or nearly 59 per cent of the population that too for five years. But, it comes at a cost.
Against Rs 2/3/1 per kg for wheat, rice, and coarse cereals paid earlier, now, the beneficiaries would get these for free. The extra spend on food subsidy would be Rs 2 per kg per person if she takes her ration as wheat (Rs 3 per kg per person if it is rice). This will translate to additional outgo in the range of Rs 10,000 - 15,000 crore per annum (Rs 50,000 – 75,000 crore over five years) depending on which cereal or a combination thereof, the beneficiary opts for. It may be argued that in a total annual food subsidy budget of around Rs 200,000 crore, this is a small 5 - 7.5 per cent and by some tweaking of expenditure and revenue receipts in other heads, the government could avoid any slippage from the desired fiscal trajectory. This is a myopic thought.
It distracts attention from the overarching goal of 'rationalising and pruning subsidies to which the then Finance Minister (FM), Arun Jaitely under Modi had vowed in 2015-16. Even today, the NITI Aayog – Union government’s think tank - is studying the effectiveness of the food subsidy scheme and examining ‘whether, and how, the Scheme can be rationalised or closed’.
In sync with this goal, it is possible for the government to take credible steps to reduce food subsidies without compromising its commitments to the welfare of the poor. For instance, the current issue price of Rs 2/3/1 per kg was specified in the NFSA legislation. The law enacted in 2013 froze these rates for three years. Since 2016, there has been no legal bar on increasing the price. Yet, it remains where it was a decade ago despite a substantial increase in MSP as well as HDC. A hike in the issue price by Rs 1 per kg would yield an annual savings of over Rs 5,000 crore. Second, the existing number of beneficiaries under NFSA at 59 per cent of the country’s population is far in excess of the people who actually deserve a subsidy. Even as per the Shanta Kumar Committee (2015), the people eligible for subsidised food shouldn’t be more than 40 per cent of the population. The excess of 19 per cent comes to 266 million. By deleting these persons from the beneficiaries list, the government can save about Rs 40,000 crore (25 (27-2)x5x12x266; where 27 is the cost of supplying wheat).
Third, other than AAY families and persons, the rest can pay more than Rs 2/3/1 per kg. Deduct 266 million (those who shouldn’t be eligible for subsidy) from 700 million, this number comes to 434 million. The Shanta Kumar Committee wanted them should pay at least 50 per cent of the MSP or Rs 10.5 (current MSP is Rs 21).
This could yield savings of about Rs 22,000 crore [8.5(10.5-2)x5x12x434]. Fourth, the ridiculously low price at which food is available in the supply chain is an open invitation to dubious operators to siphon off and sell in the open market raking in a moolah. This can be prevented if only the government disbands the existing system and gives subsidies to the beneficiaries under DBT.
Under DBT, the state agencies need not buy, store and deliver food to the beneficiary; instead the latter buys from the market paying the full price, say, Rs 27 per kg of wheat. Of this, Rs 25 comes from the Centre as a subsidy and Rs 2 from her pocket as per the extant NFSA regime. Now, under Modi’s prescription of making it free, the entire Rs 27 would come from the Centre. When subsidized food doesn’t enter the supply chain, diversion and misuse is completely ruled out. With DBT in place, it is much easier for the Govt to deny subsidies to undeserving persons. It will also save on costs currently incurred on handling of grains by the agencies. Besides, all consumers will benefit from increased supplies and competition in the market.
Currently, the Govt is using state agencies not just to meet food requirements under NFSA but also to extend price support to farmers. Under what has come to be known as ‘open-ended’ procurement, it buys from farmers unlimited quantities at MSP. Apart from facing a nightmare due to high stocks and high carrying costs, this has added to the food subsidy bill. With the switchover to DBT, the government needs to get out of this price support business.
The only viable way to support farmers is to give them the freedom to sell their produce, open up the market and give them multiple choices to sell. This will require the resurrection of the three farm laws Modi was forced to junk in November 2021 following agitation by farmers from Punjab and Haryana. Sadly, all reforms are held hostage to the politics of populism. Giving food free, continuing with subsidies to the undeserving and open-ended purchases from farmers at MSP are all manifestations of populism. If Modi dares to tinker with any of these, he risks losing at the hustings. So, the status quo continues.
(The writer is a policy analyst, views are personal)
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