Crude Prices Bigger Worry Than Food Grain Subsidy Extension, Say Govt Officials On Fiscal Impact

The recently announced five-year extension of the food grains subsidy scheme, Pradhan Mantri Garib Kalyan Yojana (PMGKAY), is reportedly not expected to have a significant fiscal impact.

However, the government is more concerned about the increasing global crude oil prices.

Despite this, the Centre is confident of meeting the fiscal deficit target of 5.9 per cent of the GDP for the financial year 2023-24.

During a pre-election rally in Chhattisgarh on Saturday, Prime Minister Narendra Modi announced that the Central government would continue to provide free foodgrains to beneficiaries under the National Food Security Act, 2013 for the next five years.

The extension of the free ration scheme, known as PMGKAY, is set to benefit approximately 80 crore people and could play a significant role in the BJP's campaign narrative for the 2024 Lok Sabha elections.

PM Modi's announcement comes as the PMGKAY was set to end in December.

“There is no major fiscal impact seen for five years (from the food grains subsidy extension),” a government official was quoted as saying by Indian Express.

The government is currently facing fiscal strain due to higher subsidies for fertilizers and fuel.

The Department of Expenditure, Ministry of Finance had expressed concerns about the fiscal expenditure on the food grains scheme in June 2022.

In an internal note, they advised against extending the PMGKAY (Pradhan Mantri Garib Kalyan Anna Yojana) beyond September 2022, citing reasons of food security and fiscal grounds.

The note highlighted that the current fiscal deficit of 6.40 per cent of GDP is already high by historical standards and any further deterioration could have serious adverse consequences.

The Expenditure Department emphasized the importance of not increasing subsidies or reducing taxes, specifically cautioning against extending the PMGKAY as it already provides 50 kg of grains per family, with 25 kg at a nominal price and 25 kg for free, which is considered excessive during non-pandemic times.

The Centre's fiscal spending on nutrient-based fertilisers subsidy during April-September 2023 has increased by 56 per cent compared to the same period last year, reaching Rs 42,200.69 crore from Rs 27,006.56 crore.

Similarly, the expenditure on urea subsidy for the first half of the fiscal year has risen to Rs 67,926.21 crore from Rs 54,718.78 crore in the previous year.

Additionally, the government's fuel subsidy spending from April to September has reached Rs 1,119.17 crore, up from Rs 944.35 crore in the corresponding period last year.

During the period of April-September, the government has spent Rs 95,149.44 crore on food subsidy, which is lower than the Rs 1,16,209.54 crore spent during the same period last year. This indicates a relatively comfortable situation in terms of food subsidy expenditure.

According to economists, the decision to extend the free food grains scheme highlights the challenges of rolling back populist policies. While the immediate impact is expected to be limited, it does contribute to the medium-term risks.

In April 2020, the central government introduced the PMGKAY scheme, which provided free foodgrains to every person in addition to their existing entitlement under the NFSA at subsidized rates.

The NFSA entitles people to rice at Rs 3 per kg, wheat at Rs 2 per kg, and coarse grains at Rs 1 per kg.

In December last year, the government merged PMGKAY with NFSA and decided to offer free foodgrains to NFSA beneficiaries according to their entitlement for a year starting from January 2023.

The NFSA covers around 81.35 crore people, and the government pledged to bear the entire cost of Rs 2 lakh crore to ensure their food security.