Date: 27/09/2022

Relevance: GS-3: Issues related to direct and indirect farm subsidies and minimum support prices; Public Distribution System- objectives, functioning, limitations, revamping; issues of buffer stocks and food security.

Key Phrases: Food subsidy expenses, Subsidised grain supplies, National Food Security Act (NFSA), 2013, Food Corporation of India, Department of Food and Public Distribution, Buffer stock, Economic cost and Central Issue Price, Minimum Support Price, Procurement incidental

Context:

• The finance ministry will soon make a strong pitch for imposing a ceiling on annual food subsidy expenses, the relentless rise of which has become an unsustainable fiscal obligation over the last few years. The expenditure on food subsidy this year is set to exceed the Budget Estimate of Rs 2.06 trillion by at least Rs 1 trillion.
• According to official sources, a Cabinet note being prepared by the ministry with this intent will suggest ending the open-ended nature of heavily subsidised grain supplies under the National Food Security Act (NFSA), 2013, and ways to bring down the rising economic costs of rice and wheat as incurred by the Food Corporation of India (FCI).

Food Subsidy in India:

• Food subsidy is provided by the Central government in the budget of the Department of Food and Public Distribution to meet the difference between the economic cost of food grains and their sales realisation at central issue prices for Targeted Public Distribution System and other welfare schemes.
• In addition, the central government also procures food grains for meeting the requirements of buffer stock. Hence, part of the food subsidy also goes towards meeting the carrying cost of buffer stock.
• The subsidy is provided to the Food Corporation of India, which is the main instrument of the government for procurement and distribution of wheat and rice under TPDS and other welfare schemes and for maintaining the buffer stock of food grains as a measure of food security.
• Food subsidy has three elements.
  • Consumer subsidy i.e. the difference between Economic cost and Central Issue Price (CIP) under different schemes of Government of India multiplied by quantity of food grains issued under different schemes. Economic Cost is the total cost to FCI. It consists
    • Acquisition cost consists of Minimum Support Price (MSP) plus procurement incidental cost. Procurement incidentals are expenses incurred during procurement till the food grains reach the first point of godown.
    • Distribution cost becomes the part of the Economic cost whereas the Buffer carrying cost becomes the part of Buffer subsidy.
    • Operational Cost: Operational Cost of FCI is categorized under the following elements:-
      • Transportation Cost/Freight
      • Handling Charges
      • Storage Losses
      • Interest cost
      • Operational Losses
      • Administration Charges
  • Buffer Carrying Cost i.e. a part of the operation cost apportioned to buffer stock based on excess stock held over and above operation stock (four months sale).
  • Subsidy on coarse grains, regularization of operation losses of Food Corporation of India and other non-plan allocation to State Governments.

Food Subsidy in the last Decade:

• Food subsidy is the largest component of the Department’s expenditure. It accounts for 95% of the allocation to the Department in 2021-22.
• The budgetary food subsidy rose from Rs 92,000 crore in FY14, the year when NFSA was introduced, to Rs 5.2 trillion in FY21 when the government settled the loans of FCI and brought all food subsidy expenses into the Budget, ending the practice of off-budget financing of a part of the subsidy.
• According to food ministry officials, the government’s total expenses under the free ration scheme launched in April 2020 in the midst of the first wave of the pandemic have already touched Rs 3 trillion.

Off-Budget Financing:

• Off-budget financing also known as 'extra' budget borrowing is used by the Centre to finance its expenditures while keeping the debt off from its annual statement.
• This refers to expenditure that’s not funded through the budget. i.e. Such borrowings are not counted in the calculation of the fiscal deficit.

Factors behind rising Food Subsidy in India:

• Rising Food Prices:
  • One of the important factors behind rising subsidy is high food prices in domestic and world markets.
• Rising economic costs:
  • Food subsidy expenditure has been rising because of rising economic costs which include payment of minimum support price (MSP) to farmers, transportation and distribution costs and levies imposed by state government on procurement of rice and wheat.
• Pending dues of FCI:
  • The central government provides food subsidy to FCI as reimbursement for the loss it incurs in its procurement, storage, and distribution operations.

National Food Security Act (NFSA) 2013:

• The National Food Security Act (NFSA) 2013, represents a paradigm shift in the aspect of food security, moving away from a welfare-based approach to one based on rights.
• The Act provides for coverage of upto 75% of the rural population and upto 50% of the urban population for receiving subsidized food-grains under Targeted Public Distribution System (TPDS), thus covering about two-thirds of the population.
• The eligible persons will be entitled to receive 5 Kgs of food grains per person per month at subsidised prices of Rs. 3/2/1 per Kg for rice/wheat/coarse grains.
• The Act also has a special focus on nutritional support for women and children. Besides meals to pregnant women and lactating mothers during pregnancy and six months after childbirth, such women will also be entitled to receive maternity benefits of not less than Rs. 6,000.
• The Act covers almost two-thirds of the population in order to provide them with heavily subsidised food grains.
• The National Food Security Act of 2013 (NFSA) is being implemented throughout all of India’s States and UTs.

Way Forward:

• India has one of the largest food subsidy programmes in the world that has created a relatively effective social safety net but is also under increasing criticism because of its large contributions to government budget deficits, economic inefficiency and poor targeting. The Food Corporation of India is always under attack from all quarters for perceived operational inefficiencies leading to an increase in the food subsidy burden.
• Therefore, steps need to be taken to reduce costs through appropriate procurement price policy, public-public participation through involvement of more states in procurement and distribution of various food-grains including coarse cereals, reduction in statutory and non-statutory charges charged by state governments, encouragement to private and/or public-private partnership in creating scientific storage facilities to reduce losses, need-based procurement of food-grains, and periodic and affordable increase in central issue price.

Source: MSN

Mains Question:

Q. Discuss the factors behind rising Food Subsidy in India. Suggest measures to reduce these budget subsidies in sustainable manner. (250 words).