Limited subsidy impact

The government's decision to slash the monthly foodgrain quota under the public distribution system (PDS), and to raise prices for households above the poverty line (or APLs) is a politically bold move, but its economic consequences are limited. According to the Cabinet's decision, the monthly grain entitlement of families below the poverty line (or BPLs) will now be 30 kg per month and that of APLs 20 kg a month, against 35 kg for both categories earlier. The central issue prices of grains to be supplied to APL ration card holders have been stepped up modestly by 85 paise a kg for rice and 95 paise for wheat, while keeping them unchanged for the poor.

These moves seem to be aimed more at easing the pressure on the government's grain reserves than at reducing the food subsidy, the bulk of which is accounted for by grain sold to BPLs and under the Antyodaya scheme (at Rs 2 per kg wheat and Rs 3 per kg for rice). Note that, despite the increase in grain prices for APLs, the subsidy component has been kept unchanged at 30 per cent. Also, the actual lifting of grains against APL cards is significant in only a couple of southern states. As such, the projected Rs 1,000-crore saving on subsidy in the last quarter of this fiscal may be an over-estimation. The total subsidy reduction of Rs 4,524 crore for the year may, however, come through but for different reasons, notably the series of cost-cutting measures taken by the Food Corporation of India (FCI). These include a substantial cut in staff strength (including at the senior managerial level) through a voluntary retirement scheme, pruning of stocks, raising funds from the market to lower the cost of food credit, insurance of food stocks in transit to address pilferage and grain damage during transportation, and some other measures to tone up the administration and cut waste.

Nevertheless, the government's move is a significant one and politically sensitive. The changes proposed by the food ministry were not taken up by the Cabinet Committee on Economic Affairs (CCEA) on at least five occasions before they finally got pushed through on Friday. The final decision is a compromise version of the original proposal, which had reportedly mooted a hike in prices for BPLs too. Despite this crucial dilution, the government has faced criticism from the Left parties, which have called for an immediate reversal. It is therefore up to the government to display some spine and not succumb to the Left's pressure, as has happened on several other occasions. In fact, what is needed is to remove APLs from the PDS and link every hike in the procurement prices of grains with PDS issue prices, so that the food subsidy bill is capped and a price once fixed for PDS grain does not become a permanent political marker for years on end, despite inflation, merely because no one wants to touch a political hot potato or be seen as "anti-poor".