FCI to be under a pile of Rs 3.3 trn outstanding subsidy and loans by FY20

This even if government clears all its allocated subsidy for 2019-20

Bulging grain stocks and lack of storage are one the multiple problems that India’s main grain procurement agency -- Food Corporation of India (FCI)-- faces. A bigger and more acute issue is its stretched financial position which, unless addressed quickly, could have serious implications on FCI’s working.

Though grain procurement operations might not get impacted as funds for purchase of rice and wheat would continue to be provided, several experts said, the Corporation’s financial health could worsen unless immediate corrective measures are taken.

Such is the poor financial health of the FCI, officials said, that even if Centre released all its allocated subsidy for 2019-20, then too by March 2020, FCI would still have Rs 174,000 crore as outstanding unpaid subsidy dues and around Rs 145,000 crore as outstanding loans from National Small Savings Funds (NSSF) by the end of the 2019-20 financial year.

In March 2019, this number was Rs 191,000 crore in outstanding dues and an equal amount of money as loans outstanding from NSSF.

At the start of the 2019-20 financial year, FCI required Rs 1,86,000 crore as subsidy, including Rs 46,000 crore for repayment of the principal amount. 

However, the total allocation under budget was Rs 151,000 crore (food subsidy allocated in 2019-20 was Rs 184,000 crore of which FCI’s share is Rs 151,000 crore while the rest is state’s share for procurement operations), already leaving a gap of Rs 35,000 crore even before the full year’s operations had started. After adding the outstanding dues and other liabilities, the total subsidy outstanding at the end of 2019-20 is expected to be Rs 174,000 crore, officials said.

NSSF Loans

Long before the Centre dipped into the RBI’s reserves to bridge its fiscal deficit, it has been doing the same with NSSF funds to manage its food subsidy (since 2016-17). Prior to that, surplus food subsidy was rolled over and reflected in the next year’s budget.

But, because of open procurement operations and a cap on the issue, the subsidy kept on growing while the allocations were less forcing the government to seek loan from NSSF which have to be repaid in five years’ time.

At the start of 2016-17, FCI's required subsidy was Rs 110,000 crore, but the Centre’s actual release during the year was just Rs 78,000 crore. The balance was loaned from NSSF, amounting to Rs 32,000 crore. During the year, as the subsidy requirement increased so did the loans from NSSF. As a result of which, this number swelled to Rs 70,000 crore by the end of 2016-17.

Similarly, in 2017-18, the actual subsidy requirement by FCI was Rs 117,000 crore, while the actual disbursal during the year was to the tune of Rs 62,000 crore, so the NSSF loans of around Rs 55,000 crore were required. But, during the year, more funds were sought from NSSF which along with interest and other requirements pushed the total outstanding loans at the end of 2017-18 at Rs 121,000 crore. By the end of 2018-19 (the last available year), this number had grown to Rs 191,000 crore.

Apart from NSSF loans, FCI also raised loans from a mix of bonds, cash credit limit from banks and short-term credit. The interest on them also gets on added to the government’s subsidy account.

So, at the end of 2018-19, while loans from NSSF were outstanding to the tune of  Rs 191,000 crore. The total outstanding loans were to the tune of over Rs 240,000 crore, of which NSSF loans contributed the most. From 2019-20 financial year, FCI will have to start repaying a part of the principal, which, according to some estimates, should be around Rs 46,000 crore.

Bulging Stocks

Picture this, just a month before Food Corporation of India (FCI) started its rice procurement in October, grains stocks in Chhattisgarh was 102 per cent of capacity, it was 99 per cent of capacity in Jharkhand, 96 per cent of capacity in Punjab and Haryana.

All the states mentioned above are big rice procurement states and just a month before their annual purchases for 2019 their storages were brimming with inventory accumulated over the years.

As on September 1, India has foodgrains stocks of over 67 million tonnes, while the storage available as on July 1 was around 88 million tonnes. Of this, around 14.5 million tonnes was in Covered Area Plinth (CAP).

Now, with fresh procurement starting this month, serious steps need to be taken to shore up the storage capacities.

A big reason for rising food subsidy which has stretched FCI’s financial position is the Centre’s reluctance to increase the price of highly subsidised foodgrains supplied under the NFSA, 2013. Under the act, the price of rice has been kept unchanged at Rs 3 a kg, while that of wheat has been kept unchanged at Rs 2 per kg and coarse grains at Rs 1 a kg.

Data shows that each 1 rupee (per kg) increase in issue price of grains could result in savings of food subsidy of over Rs 5,000 crore annually.

For 2018-19, while FCI’s issue price of grains to the states under the NFSA remains at  Rs 3 per kg for rice and Rs 2 per kg for wheat, the economic cost of grains is Rs 33.1 and Rs 24.45 per kg respectively. This means for every kilogram of rice sold through the over 500,000 ration shops across the country, the government incurs a subsidy of Rs 30 a kg, while for wheat it incurs a subsidy of Rs 22.45 per kg. 

But, a more important problem according to senior FCI officials is the open-ended procurement system which has created a big mismatch between grain procured and grain disposed off.

Open market sale is an option, but the quantities are small to make any significant dent into the stocks and reserves. 

Food grains stocks (with Food Corporation of India (FCI) against buffer norms ( in million tonnes)

 

Source: FCI, all figures in million tonne, , *as on Sept 1st 2019.

Food grain offtake (by states for implementation of NFSA) vs Procurement (in million tonnes)

NOTE: The 2018-19 data is till August end.

Source: FCI