The decision was taken by an Empowered Group of Ministers, headed by Finance Minister Pranab Mukherjee, in the face of severe shortage of storage capacity for foodgrains.
The situation may become grave once monsoon picks up in wheat growing north Indian states.
Against the total storage capacity of 63 million tonnes, the foodgrains stock with the government has reached a record 82 million tonnes as on June 1.
"The EGoM has agreed to allocate additional 5 million tonnes of foodgrains to BPL (Below poverty line) families. It has also agreed to allow 3 million tonnes of wheat through OMSS (Open Market Sale Scheme)," Food Minister K V Thomas told reporters after the meeting.
Under public distribution system, BPL families get 35 kg of wheat and rice per month at Rs 4.15 per kg and Rs 5.65 per kg, respectively.
The decision would also mean a windfall gain for bulk consumers such as flour millers and biscuit makers.
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Against the procurement price plus other costs of Rs 1822 per quintal of wheat, the EGoM has fixed a price of Rs 1170 per quintal under the OMSS. On top of it, the government will bear freight cost, according to Food Ministry officials.
The extra allocation of foodgrains to BPL families will cost the government Rs 8,500 crore, while the sale of wheat to bulk users will have an extra burden of Rs 1,900 crore this year, they said.