PMGKAY | Extension of free foodgrain scheme is fiscal compulsion or welfare choice?

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The Union Cabinet, on March 26, approved an extension of Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY) for six months (from April 1 to September 30) for benefiting nearly 800 million beneficiaries ‘who will get additional 5 kg free ration per person per month in addition to his normal quota of foodgrains under NFSA’ (National Food Security Act).

The PIB press release further underlined that government will spend Rs 80,000 crore on 24.4 million tons (MT) foodgrains to be distributed under the extended scheme. This means the government incurs cost of Rs 32.8 per kg of foodgrains provided free. In addition to Rs 2.07 lakh-crore provided in BE-2022-23, this additional expenditure will increase food subsidy bill to Rs 2.87 lakh-crore. It might go up another Rs 80,000 crore, if the PM-GKAY is extended till March 31, 2023.

The press release asserted ‘(e)ven though the COVID-19 pandemic has significantly abated and economic activities are gathering momentum, this PM-GKAY extension would ensure that no poor household goes to bed without food during this time of recovery’, as if foodgrains under the NFSA did not exist.

The COVID-19 situation has only improved since the Budget. Fiscal pressures, however, have increased after Russia’s invasion of Ukraine throwing oil, gas, and fertiliser prices out of comfort zone of the government.

Why then this surge of ‘concern and sensitivity towards poor and vulnerable sections of society’ as the press release states without consideration of precarious fiscal situation?

Rising Foodgrain Stock

India’s foodgrain production has steadily grown, even during the COVID-19 years, and is expected to exceed 316 MT in 2021-22 (285 MT in 2018-19). Foodgrain procurement has also gone up (100 MT in 2020-21 against 86 MT in 2019-20).

Off-take under all the NFSA (at subsidised rates of Rs 2/3 per kg wheat/rice) and other schemes (other than the PM-GKAY), however, peaked in 2018-19 at 66 MT. There has been some drop in last three years (of about five MT).

The government procures foodgrains at minimum support prices (MSP for wheat is Rs 2,015 per-kg in 2022-23). It, however, pays the economic cost (which includes procurement incidentals and distribution costs: wheat Rs 2,589 per-kg in 2022-23). The MSP is higher than global and domestic market prices: the economic cost is for only food subsidy payment. The government has not been able to sell any foodgrains in the domestic or export markets in last four years. Consequently, the foodgrain stocks with the government have been rising steadily- from 53 MT on July 1, 2017 to 82 MT on July 1, 2020.

While the NFSA foodgrains are adequate for meeting food energy requirements, the government, saddled with rising food-stocks, decided to provide another 5 kg of wheat/rice free of cost to all 800 million NFSA-registered citizens when COVID-19 struck in March 2020.

This did increase foodgrain off-take (32 MT and 41 MT distributed under the PM-GKAY in 2020-21 and 2021-22). Still, there was increase in foodgrain stocks with the government (90 MT on 1 July 2021).

The conclusion seems quite obvious. The total foodgrain consumption in India has not gone up. Despite PM-GKAY stocks, India consumes the same amount of foodgrains. The difference now is that foodgrains reach people in a little roundabout manner.

Changing Dynamics

Russia and Ukraine together share more than 25 percent of global wheat exports. The conflict has upended wheat exports raising market prices above India’s MSP. This has created opportunity for Indian wheat exports. India could export about 7.5 MT wheat in FY2021-22. Private players are currently buying wheat, and expected to export about 15 MT this year.

There is, however, no change in global rice dynamics.

Government agencies have procured about 14 MT of wheat so far (about three-fourth of wheat arrivals) with private players buying the rest. Still it is early days of the wheat procurement season. Wheat crop exceeds 100 MT per annum (it might be 5 percent less on account of a hot March). The government is still likely to make substantial procurement of wheat (maybe, around 30 MT against last year’s 43 MT). Meanwhile, rice procurement has already been quite high.

Given this, there is unlikely to be much of a dent in the government’s bulging food-stocks this year.

Turning A Compulsion Into An Opportunity

The government cannot export foodgrains bought at the MSP as these are considered subsidised procurement under the WTO rules. There is also no prospect of domestic consumption demand improving materially either. Given this, the government cannot allow foodgrains to rot.

It has to bear the economic cost of foodgrains procured whether it keeps stocking FCI warehouses or distributes it to the poor free of cost. The fiscal impact is no different. Thus, the only way to lessen the fiscal impact is to procure less.

Put together, is the government making a virtue out of a necessity? Given the way things are, in every likelihood the PM-GKAY will be extended for the rest of the year.

Subhash Chandra Garg, currently Chief Policy Adviser, Subhanjali, is former Union Finance Secretary, and author of The $10 Trillion Dream. Views are personal, and do not represent the stand of this publication.