Garib Kalyan Yojana to clear FCI's bulging stocks, but may hurt finances

FCI already had an outstanding unpaid loan of around Rs 254,000 crore from National Small Savings Fund (NSSF) as on March 31, 2020

The government’s decision to extend free grain distribution under the PM Garib Kalyan Yojana (PMGKY) for another five months will not only provide relief to millions of poor people, but also help clear bulging inventories of the Food Corporation of India (FCI).

However, the subsidy burden is expected to balloon and that could further strain the already stretched finances of the FCI, by increasing its dependency on loans and market borrowings.

This is unless the government decides to increase its budgetary allocation for food subsidy in the current fiscal to pay for the extra grain distribution. But that looks highly improbable in the current economic situation.

Even before Covid-19 struck, the FCI had an outstanding loan of around Rs 2.54 trillion from National Small Savings Fund (NSSF) as on March 31, 2020.

NSSF loans have been the government’s default option to fund expenditure in the past few years, as it tries to ensure that the fiscal deficit is kept in check. 

Officials said in a normal year, the actual subsidy on the National Food Security Act (NFSA) is around Rs 1.80 trillion. However, this year, the subsidy will rise by another Rs 1.23 trillion because of expenditure incurred on distributing free grain. Thus, FCI’s total subsidy bill in 2020-21 will be around Rs 3.03 trillion.

In addition, it has to make provisions for another Rs 20,000 crore at least towards payment for decentralised procurement by states. “Therefore, the central government will have to make a provision of over Rs 5.70 trillion from its own finances in 2020-21 if it wants to clear FCI of all its dues along with subsidy payment,” a senior official explained. This looks improbable in the current context, and will mean that FCI will either have to increase its borrowings from NSSF or the market.

According to the FY21 Budget, FCI is projected to borrow around Rs 1.36 trillion from NSSF, which might rise to meet the expenses of the free grain scheme. Raising the off-budget borrowing or the quantum of loans will in turn add to the economic cost of wheat and rice in FY22.

According to some estimates, almost 6 per cent of the economic cost of rice and wheat in FY21 will be on account of interest on loans taken by FCI, which will rise if borrowings increase.

Subsidy 

Through two tranches of the PM Garib Kalyan Yojana and one of Atmanirbhar Bharat, the central government is projected to distribute around 32 million tonnes (mt) of additional grain in FY21 over and above the usual sale through the public distribution system (PDS) of around 55 mt of wheat and rice.

According to the government, it incurred expenditure of Rs 45,000 crore for distributing grain under the first phase of the Garib Kalyan Yojana, which ran from April to June and through which around 12 mt of wheat and rice were distributed for free to over 750 million beneficiaries.

The subsidy calculation has been arrived at assuming the economic cost of Rs 37.26 per kg for rice and Rs 26.83 per kg for wheat. In this, an expenditure of Rs 1,930 crore has been added towards transportation and dealers’ margins. Thus, the total subsidy for free distribution comes to around Rs 46,601 crore.

Now that the Garib Kalyan Yojana has been extended for five more months, an additional subsidy of around Rs 75,000 crore will have to borne by the government. Therefore, the total subsidy implication will come to around Rs 1.23 trillion.

Stocks

However, the scheme will help clear foodgrain stocks, which stood at around 97.26 mt as on June 1. If 32 mt of grain is absorbed through the Yojana along with 55 mt under NFSA, this will ease the pressure on FCI, which would otherwise have been unmanageable given kharif rice procurement in the 2020-21 season is expected to be high, if sowing is any indication.

“Two things, one this distribution will help in excess stock clearance. Second, the money saved by the poor on buying foodgrain could boost their discretionary spending and also help in improving the nutritional level as 5 kg per person under NFSA is clearly inadequate,” Ashok Gulati, Infosys Chair Professor for agriculture in ICRIER, told Business Standard.

“But, my bigger worry is about pilferage and leakage, particularly in states that have a large population of the poor. Therefore, a better option is cash transfer as identification and distribution is less flawed there,” he added.