Free Food Grain Scheme Extension: Limited Impact In FY24, Adds To Medium-Term Risk, Say Economists
The government has already factored in a majority of the cost at the time of the Union budget.
Prime Minister Narendra Modi's announcement that the free food grain scheme would be extended till 2028 is expected to have a manageable impact on the Union government's finances in the current fiscal, according to economists.
However, when conflated with the possible revision of rural employment guarantees and housing schemes, this could mount pressure on the planned fiscal deficit for FY24, they said.
The subsidy cost could be around Rs 2 lakh crore in the current fiscal to Rs 2.55 lakh crore by fiscal 2029, based on current beneficiary data, according to Devendra Pant, chief economist at India Ratings and Research Pvt. "Assuming the quantity of grains distributed doesn't change and the number of beneficiaries remains 80 crore, the only thing that changes is the annual economic cost."
The economic cost includes the procurement price, incidental expenses and transport costs that are incurred in the procurement and distribution of food grains.
Assuming a 5% increase in economic cost annually and that the growth of nominal gross domestic product is faster than the economic cost at 8%, the "cost of the food subsidy could increase from Rs 2 lakh crore to Rs 2.6 lakh crore eventually, bringing the total cost to Rs 11.5 lakh crore over the five years", Pant told BQ Prime.
The impact of the extension on the overall subsidy bill and the fiscal deficit will be limited because the government has already factored in a majority of the cost at the time of the budget, according to Sonal Badhan, economist at the Bank of Baroda.
The Food Corp.'s resources were increased from Rs 55,000 crore, as per the revised budget estimates in the last fiscal, to Rs 1.45 lakh crore in FY24. Export bans are also likely to continue to keep procurement costs in check, Badhan said.
Despite muted near-term macro implications, higher revenue expenditure—including on rural employment guarantees—could impact the government’s fiscal deficit target of 5.9% of the GDP, Nomura Holdings Inc. said in a research note.
The government has budgeted Rs 1.97 lakh crore in FY24 as a food subsidy. From April–September, 48% of this, or Rs 95,149 crore, has been expended, according to data from the Controller General of Accounts. During the first half of the year, the fiscal deficit has reached Rs 7.01 lakh crore, or 39.3% of the target.
Healthy tax and non-tax revenue, which are poised to overshoot the target, and the expected increase in the nominal GDP in the last three quarters as the Wholesale Price Index corrects into the inflationary zone will help, Pant said.
After the free food grain distribution scheme ended in December 2022, in January this year, the government approved a new integrated food security scheme that provided free food grains to Antodaya Anna Yojna and Priority Household beneficiaries. The new scheme—Pradhan Mantri Garib Kalyan Anna Yojana—effectively subsumed the National Food Security Act and was estimated to cost over Rs 2 lakh crore in 2023, according to a parliamentary statement by Food and Public Distribution Minister Piyush Goyal in August.
Under the NFSA Act, beneficiaries pay a fee of Rs 1–3 per kilogram for food grain, and 5 kg of food grain is allocated per person each month for priority households and 35 kg per family each month for AAY families.
The current subsidy allocation already accounts for food grain outgos till December.
Adding To Medium-Term Risks
The cost of the new integrated food security scheme is estimated at Rs 1.68 lakh crore annually. An extension for the next five years will mean a total outgo of Rs 8.4 lakh crore, which translates into 2.8% of the GDP at current prices, according to Yuvika Singhal, economist at QuantEco Research.
Along with other food-oriented welfare schemes, this could mean an annual food subsidy bill of Rs 2 lakh crore or higher over the next five years, Singhal said. "It's an elevated cost compared to historical standards and a persistent burden."
Nomura said that over the medium term, the government is likely to forgo revenue from its subsidised food sales—0.05% of the GDP on an annualised basis, the note said.
As procurement costs increase, the food subsidy bill will also rise over time. While the need for subsidised grains for lower-income households is undeniable, there are risks with announcing free schemes that lead to competitive populism, it said.
