Disturbing the maths: PMGKAY extension may be a costly affair in long run

In the midst of high-decibel campaigning ahead of crucial state elections, Prime Minister Narendra Modi has made a surprise announcement: The Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), a free foodgrain distribution scheme, will be extended for the next five years. While this move may be fiscally manageable in the current financial year, it could strain government finances in the future as the economic cost of foodgrain is expected to rise due to an increase in the minimum support price (MSP) and other incidental costs.

This new version of PMGKAY initially had a tenure of one year and was scheduled to end on December 31, 2023.

One potential method of controlling food subsidies is by capping foodgrain procurement and limiting it to just what is required under the National Food Security Act (NFSA), effectively ending the open-ended procurement system.

The Commission for Agriculture Costs and Prices (CACP) has long advocated for a cap on the procurement of wheat and rice on a per-hectare basis. However, this is easier said than done, given the political implications.

Barring the past couple of years, data shows that annually, 78-80 million tonnes (mt) of wheat and rice are procured for the central pool, against a requirement of 50-59 mt for the Public Distribution System (PDS), leaving an excess. For 2023-24, the central government has allocated around 60 mt of foodgrain under the NFSA: Around 40 mt of rice, 19 mt of wheat, and 1 mt of coarse grains.

The food subsidy allocated for this financial year was around Rs 197,350 crore, of which approximately 48 per cent (Rs 95,149 crore) had been exhausted as of September, according to the Controller General of Accounts (CGA).

Civil society activists and others had been critical of the decision to end the extra grain allocation under the old PMGKAY, which was initiated during the Covid-19 pandemic, and replace it with the new version of PMGKAY, which is essentially the NFSA scheme without the customary central issue price (CIP). They argue that the 5 kg per month per person allocation of wheat, rice, or coarse cereals under the NFSA is inadequate and should have been increased. Therefore, they believe that stopping the old PMGKAY is not rational.

The CIP is the rate at which the Centre collects from NFSA beneficiaries for wheat, rice, and coarse cereals: Rs 3 per kg for rice, Rs 2 per kg for wheat, and Rs 1 per kg for coarse cereals. Some states subsidise the CIP by either charging even a lower price or making foodgrain free for beneficiaries.

Since the NFSA was implemented in 2013, the CIPs have not changed (the Act states that it could be reviewed every three years). The central government collects approximately Rs 1,250 crore per month from beneficiaries as the price for the foodgrain sold, totalling around Rs 15,000 crore per annum. Over a five-year period, this would amount to around Rs 75,000 crore.

However, if the economic cost continues to rise because of increasing MSP, it remains to be seen whether the central government will have sufficient funds to cover this additional expenditure over the next five years.

Arun Kumar, a retired professor from Jawaharlal Nehru University, noted that while the announcement won’t significantly impact this year’s fiscal deficit target of 5.9 per cent of GDP, it will likely lead to a reduction in expenditure on other social sector programmes, such as health and education. “While the government has ample space to meet our fiscal deficit obligations, it would also entail cutting down on its capital spending in the medium term. It’s also expected that the government will come up with a fresh roadmap for fiscal consolidation in the coming years with new projections for both revenue receipts and expenditure,” he added.

Echoing Kumar’s views, Santosh Mehrotra, visiting professor, the University of Bath, said the policy as such is not “very fiscally prudent”, this implies that the economy isn't generating enough decent jobs for a large part of the labour force and people have to depend on government measures to sustain themselves.

Madan Sabnavis, chief economist, Bank of Baroda, on the other hand, dubbed the new PMGKAY a smart way for the government to roll back the free foodgrain scheme by merging it with PDS and making it free. “The subsidy cost would not go up significantly and it would not stifle the Budget balance of the government. The cost of procurement would increase to the extent that the minimum support price goes up,” he said.

S Mahendra Dev, former director and vice-chancellor of Indira Gandhi Institute of Development Research (IGIDR), Mumbai, questioned the need for extending the freegrain scheme for next five years. “The moot question is whether there is any need to extend the PMGKAY for five years now that you claim that the economy is recovering,” Dev wondered.

(with inputs from Ruchika Chitravanshi and Shiva Rajora)