PMGKAY extension may cause fiscal stress if foodgrain prices shoot up, experts say

While efficient expenditure management and buoyancy in tax revenues could avert stress on finances in current fiscal, the food subsidy scheme, which guarantees free foodgrains to 80 crore poor Indians, is expected to build fiscal pressure in the coming years, when the procurement cost or minimum support price (MSP) of grains rises, causing the subsidy bill to balloon.

“PMGKAY has the potential to add to fiscal stress if the government procures less foodgrain and buys it from the market to provide it for free to beneficiaries under the scheme. But if current levels of procurement – which is much more than the buffer stock – continues, the government will be able manage its subsidy bills as additional foodgrain would be available at no extra cost. The calculation is complex and will require better stock-management tools to prevent a sharp increase in food subsidies,” said Pronab Sen, former chief statistician of India.

Ahead of election in five states, Prime Minister Narendra Modi on Sunday announced that PMKAY would be extended to the end of December 2028. It was earlier set to end on December 31, 2023.

The subsidy has been included in the overall food subsidy of around ₹197,350 crore provided in the 2023-24 budget, of which ₹95,149 crore or 48% has been used as of September, as per CGA data. With the scheme now being extended, the food-subsidy bill is expected to rise sharply as the MSPs for foodgrains rise.

Experts said extending the scheme for another five years would result in additional expenditure of over ₹1 trillion. The amount will rise substantially if foodgrain prices are revised regularly under the MSP programme.

According to an analysis by Care Edge, the fincancial position of the union government has been fairly comfortable during the first half of the current fiscal, despite economic headwinds. Gross direct tax collections staged an encouraging recovery in August and September after lagging in the first four months of FY24. The government’s non-tax collections have also been better than anticipated, supported by a higher-than-budgeted dividend transfer from the RBI.

A noteworthy aspect of the government’s expenditure policy has been the progressive improvement in the quality of expenditure, as reflected in the ratio of capital expenditure to revenue expenditure. Overall, the government’s fiscal deficit stood at ₹7 lakh crore in the first half of FY24, or 39.3% of the budget estimate (BE). This compares 37.3% in the corresponding period of the previous year.

“Overall, while we remain hopeful of the government meeting its fiscal deficit target of 5.9% of GDP, we need to be watchful of the trajectory of revenue spending ahead of the election season, along with the possibility of lower-than-expected nominal GDP growth,” CareEdge ratings said.

Other experts have expressed similar concerns, saying the extension could keep food-subsidy costs higher. This would also reverse the trend of falling food subsidies – from ₹5.41 lakh crore in FY21 to ₹1.97 lakh crore now.

Presently, beneficiaries of the National Food Security Act (NFSA Act) pay a nominal fee of ₹1-3 per kilo for foodgrains. As per the act, 5 kilos of foodgrain is allocated per person each month for priority households, and 35 kilos per family each month for Antodaya Anna Yojna (AAY) families, with highly subsidised prices of Re 1, ₹2, and ₹3 per kilo for coarse cereals, wheat, and rice, respectively. In 2023, the government will offer complimentary rations to the scheme’s beneficiaries.

PMGKAY was introduced during the covid pandemic in 2020. Under it, 5 kilos of foodgrains were supplied for free to individuals under the NFSA quota. The government has now amalgamated PMGKAY with NFSA.

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Updated: 06 Nov 2023, 03:01 PM IST