A costly decision

Extension of PMGKAY should have been avoided

The Union government’s decision to extend the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) for another three months is difficult to justify. Under the scheme, 5 kg of rice or wheat is provided free of cost to eligible beneficiaries. The programme was launched in April 2020 during the initial phase of the pandemic. The move to provide free food grains was rightly applauded then because it provided much-needed support to the most vulnerable sections of the population at a time when economic activity came to a virtual halt, owing to the pandemic-induced lockdown. Its subsequent extensions were also justified on account of successive waves of the pandemic, which affected economic activity in various parts of the country. However, given that the economy has now opened up completely, the government should have stopped what was essentially an emergency measure.

It is being argued that the scheme has been extended due to political reasons in the context of the upcoming Assembly elections in Himachal Pradesh and Gujarat. The scheme is said to have helped the ruling Bharatiya Janata Party in the last round of Assembly elections. However, political considerations should not always drive decision-making in the government. There were strong reasons to end the programme this month as was also reportedly advised by finance ministry officials. The extension of the scheme gives an impression that it would continue even in normal times and was not necessarily an emergency intervention. This will make its withdrawal increasingly more difficult. In terms of fiscal impact, the extension will lead to an additional expenditure of Rs 44,762 crore. This is expected to take the food subsidy bill to about Rs 3.38 trillion, as against the Budget estimate of Rs 2.07 trillion. Its extension in April, which could also have been avoided, is estimated to have resulted in an outgo of Rs 85,838 crore.

The expected increase in the subsidy outgo, partly because of higher prices of petroleum and fertilisers, should have restrained the government from extending the PMGKAY. The outgo on fertiliser subsidy is expected to increase to about Rs 2.5 trillion, compared to the Budget estimate of Rs 1.05 trillion this fiscal year. To be sure, tax revenue receipts are buoyant, which would limit the overall fiscal slippage. However, higher revenues at this stage should have been used to either push up capital expenditure, which would have boosted growth, or reduce the fiscal deficit. The target for the current year is to contain the fiscal deficit at 6.4 per cent of gross domestic product.

An improvement in this regard would have boosted confidence and reduced pressure on the bond market. Since liquidity conditions have changed significantly in recent weeks, in part because of measures taken by the Reserve Bank of India to contain inflation, higher government borrowing can push up the cost of money. A swift fiscal consolidation in the case of better revenue realisation is also desirable from the medium-term perspective. The global economic outlook has worsened significantly and will affect growth in the Indian economy as well, which could make fiscal consolidation more difficult in the medium term. 

The government should, therefore, use every opportunity to move forward in this direction. This would help create some policy space to deal with another potential adverse shock.