Although this year's additional food subsidy tab of an estimated Rs 1.30 lakh crore is primarily due to the distribution of free food grains on account of COVID-19, the fiscal cost for the Narendra Modi government has grown enormously in the last three years alone.
In FY18, the exchequer bore a cost of Rs 1.65 lakh crore, with almost 40 percent financed through Food Corporation of India (FCI) borrowing from the National Small Savings Fund (NSSF), as the government did not want to show a higher fiscal deficit.
In FY19, the subsidy bill was Rs 1.91 lakh crore, with almost 50 percent borrowed from the NSSF. In FY20, the tab was Rs 2.18 lakh crore with Rs 1.10 lakh crore picked up by FCI as small savings loans.
Coming to this fiscal, the government estimated Rs 2.57 lakh crore as the subsidy amount, with Rs 1.36 lakh crore worth of small savings loans financing 53 percent of this amount.
Against Rs 2.57 lakh crore shown in the budget (cash and borrowings ), the actual food subsidy liability is now estimated at a massive Rs 3.7-3.8 lakh crore this financial, although it is unclear how much of the heavy lifting will be done from NSSF.
FCI's outstanding loans from NSSF as of October end are Rs 2.93 lakh crore. These are amounts the government has to service and eventually pay Rs 2.93 lakh crore is inclusive of fresh borrowings of Rs 38,000 crore so far in the fiscal. Plus, 90 percent of Rs 1.21 lakh crore cash subsidy in the budget has been utilised, thus the total spend for this fiscal alone is Rs 1.47 lakh crore up to October end.
The government officials said the widening gap between the economic cost of grains and the central issue price is one of the major reasons for the burgeoning subsidy. The cost escalation is also somewhat due to the progressive increase in the MSP, which forms around 85 percent of the economic cost.
The economic cost of grains has inched up progressively, for rice, from Rs 32.80/kg in FY18 to an estimated Rs 37.26/kg in FY21. For wheat, the economic cost has risen from Rs 22.93/kg in FY18 to an estimated Rs 26.83/kg in FY21.
While the central issue price of Public Distribution System (PDS) grains is unchanged at Rs 3/Rs 2 a kilo for rice, wheat since 2013 when the National Food Security Act was rolled out.
FCI estimated the total economic cost of rice and wheat for PDS at Rs 1.55 lakh crore for the current financial alone.
Also, the unpaid NSSF loans which the government is servicing every year at a higher interest than its market borrowings, and one is staring at a massive food subsidy liability.
The government officials said introducing price reforms in PDS is next to impossible. Rationalising PDS prices for the poorest of the poor, just to lower the subsidy burden, is anathema.
At best, to prevent leakage, the government is weeding out undeserving beneficiaries in PDS and digitising the network, wherein now 85 percent of the Fair Price Shops are linked with point of sale machines using Aadhaar and mobile phone data of the ration card holders.
Eventually, with a better revenue position, union finance ministry will be able to square off all the past liabilities of the food subsidy and pay the actual cost from the budget, without having to worry about the fiscal deficit. The way it has tried to do with fertiliser subsidy by paying an additional Rs 65,000 crore this fiscal.
The only saving grace probably is that unlike for cooking gas and fertilizer subsides where economic interest of companies is impacted, food subsidy is a completely government owned and government run operation, with no companies involved. To that extent, the economic impact on other stake holders is zero.