Free NFSA foodgrain eases fiscal strain but food subsidy still double pre-Covid number

Representative image

The central government's move to not extend the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) and give 100 percent subsidy for foodgrain provided under the National Food Security Act (NFSA) for 2023 is being considered crucial for restoring prudence to the government finances.

"It seems to be a fiscally prudent move in comparison to an extension of the PMGKAY," said Radhika Pandey, a senior fellow at the National Institute of Public Finance and Policy.

Last week, the Union Cabinet decided to give 100 percent subsidy for foodgrain provided under the NFSA for 2023.

The PMGKAY, which also provided free foodgrain, is set to end at the end of this month. The scheme, while necessary during the pandemic, had perhaps gone on for too long as it received multiple extensions, resulting in seven phases totalling 28 months.

Such was the cost of PMGKAY that reports emerged in June that the finance ministry's Department of Expenditure had advised against its extension beyond September. The government, however, denied this in Parliament in July.

The new structure

According to reports, the provision of free foodgrain under the NFSA, which provided subsidised foodgrain so far, will cost the Centre an additional Rs 20,000-Rs 25,000 crore for a year.

From 2015-16 to 2019-20, the Centre's annual food subsidy averaged Rs 1.1 lakh crore. As such, while next year's bill will still be roughly double that figure, the government will not have to spend on PMGKAY, which cost nearly Rs 14,000 crore per month.

Piyush Goyal, Minister of Consumer Affairs, Food and Public Distribution, said last week that the Centre will bear the entire cost of Rs 2 lakh crore for free foodgrain under NFSA.

The central government has spent nearly Rs 4 lakh crore for dispensing free foodgrain under PMGKAY till date.

The government's decision will ease the strain on the exchequer but nearly three years since the start of the pandemic, the cost remains high.

Politically astute

The free foodgrain pivot is also about the government striking a political balance as a string of states are set to go to polls next year followed by the Lok Sabha elections in 2024. The electoral impact of withdrawing the popular PMGKAY was a risk, especially given the high, albeit easing, levels of retail inflation.

More than 80 crore Indians are expected to benefit from the provision of free food grain under the NFSA, which so far offered rice, wheat, and coarse cereals at subsidised rates of Rs 3, Rs 2, and Rs 1 per kilogram, with a monthly ceiling of 5 kilogram per person. The limit for the poorest families – those covered under the Antyodaya Anna Yojana – is 35 kilogram per month.

"The move is also consistent with lower foodgrain availability in public stocks," Radhika Pandey of NIPFP added.

Moreover, the end of PMGKAY without any alternative scheme would have led to higher purchases of food grain from the open market. This could have led to a rise in prices at a time when inflation has cooled a bit following a series of rate hikes by the Reserve Bank of India.

While free foodgrain will be provided until December 2023, an extension cannot be ruled out as the general elections are slated for the first half of 2024. But much will also depend on how the Indian economy performs. Should growth and incomes pick up, the presence of such a scheme would undermine the growth narrative.