Second Covid wave, global prices could derail Centre's FY22 subsidy maths

The Centre's plan to start FY22 on a clean slate seems to have gone for a toss within just six months after it cleared the food subsidy backlog and paid its pending liabilities to NSSF

During the Covid-19 lockdown and consequent disruption of the economy in FY21, the Central government cleared two big items in India’s subsidy basket--food and fertilisers--in a bold move designed to start the current financial year on a relatively clean slate.

While fiscal deficit zoomed despite best efforts, it did wipe off the entire food subsidy backlog and the Centre's dues to NSSF, enabling the government to start FY22 on a clean slate.

However, just within six months, the subsidy maths has gone for a toss both in food and fertilisers.

While the second Covid wave and the economic hardship that it brought led to restarting the free food grain distribution scheme, in the case of the fertilisers, the sudden and sharp spike in international prices of key raw materials that go into the manufacturing of DAP and other complex fertilisers has ensured that Centre pays more than what it budgeted for both the heads in FY22.

So far, rough estimates show that for food, the extra requirement will be about Rs 94,000 crore, while for fertilisers it will be Rs 14,800 crore.

Together this will mean that an extra Rs 108,000 crore in the form of food and fertiliser subsidies will have to be factored in.

In FY22, the Centre provided a sum of about Rs 2.43 trillion for food subsidy while a sum of Rs 79,530 crore was provided for fertiliser subsidy in the Budget.

The actual expenditure on running the National Food Security Act (NFSA) is roughly Rs 1.8-1.9 trillion annually.

If this number is accurate, it will mean that the extra available balance of Rs 53,000 crore could help meet a part of the additional expenditure of Rs 94,000 crore that the Centre is expected to incur on account of providing free food grains under the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY-3).

However, such a luxury might not be possible for fertilisers, as the Budget provided for Rs 79,530 crore, which is closer to its actual requirement of Rs 80,000-85,000 crore every year in subsidy.

The additional expenditure incurred on providing cheap DAP will have to be either carried forward to the next year or provided from the current year’s budget in the revised estimate.

Food subsidy

In FY21, the Central government paid around Rs 5.26 trillion, which was about Rs 1.03 trillion more than its revised estimate to clear all the subsidy backlog accounting for food and also pay all the pending liabilities and dues that it had from the National Small Savings Fund.

Of this, some Rs 4.63 trillion was purely on account of NSSF dues that accrued to the Food Corporation of India (FCI).

The interesting part is that the Centre has outpaced its own plan while doing so.

Union Budget 2021-22 had envisaged a cash infusion of Rs 1.2 trillion to FCI last fiscal year (revised estimate for FY21). This was close to half the NSSF-FCI loan pile, according to estimates.

This would have kept FCI still indebted to the NSSF. But the Centre paid more, at actuals, to clear the NSSF debt.

Due to this one-time settlement, FCI will be deleveraged, its financial rating will improve, and lenders may charge a lower rate of interest on loans in future.

It will improve its cash balance and bring efficiency in its operations, Atish Chandra, chairman and managing director at FCI, had told Business Standard.

“The government transferred Rs 4.63 trillion to FCI in FY21 against the Budget estimate of Rs 77,982 crore. This additional transfer has cleared the NSSF debt,” Chandra said.

The revised estimate for FY21 had shown an allocation of Rs 3.44 trillion towards FCI, reflecting a partial loan clean-up.

The extra amount of Rs 1.19 trillion is what the Centre transferred ahead of its own target.

The transfer of Rs 4.63 trillion from the government to FCI includes food subsidy not just for the usual off-take under the National Food Security Act, but also the additional off-take of FCI stocks under the Pradhan Mantri Garib Kalyan Anna Yojana, the emergency food provision programme instituted to palliate the impact of the pandemic.

The Centre’s food subsidy spending also includes that incurred by decentralised procurement states (DCP), which lies outside the purview of FCI.

The Budget has estimated spending on DCP at Rs 78,338 crore in FY21 (RE) and Rs 40,000 crore in FY22 (BE).

It is not known if the arrears of subsidy to DCP states have been fully paid.

Fertiliser subsidy

Not only food, the Centre also paid extra for fertiliser subsidy in FY21 to clear the backlog and start the FY22 on a clean slate.

It made a one-time additional allocation of Rs 65,000 crore in November 2020 that was good enough to clear FY21 actual subsidy requirement and also all the pending dues in total amounting to Rs 1.28 trillion (this includes subsidy for urea and subsidy for other fertilisers).

The additional allocation of Rs 65,000 crore in FY21 was over and above the budgeted Rs 71,309 crore for 2020-21.

However, as things stand too, the twin effect of second Covid wave and sharp spike in international commodity prices seems to have once again jeopardized the subsidy maths for FY22.

Table: Food and fertiliser subsidy released till March 31

Item	FY21	FY20
Food	Rs 5,25,444.44 crore	Rs 108, 688.35 crore
Fertiliser	Rs 127,921.74 crore	Rs 81,124.33 crore

Source: CGA