The government has recently announced that it will discontinue the free-food scheme that it started during the Covid-19 pandemic and will instead distribute foodgrains for free under the Public Distribution System (PDS). According to some analysts, this is good news because it will reduce the government’s food subsidy bill. However when looked at closely, this announcement could raise questions about the fiscal conservativeness of the government and also about the direction of agricultural policy.
Let’s try to unravel these issues.
During the pandemic, the government’s fiscal deficit understandably soared, as revenues fell and the need for spending increased. But even after the economy has recovered from the pandemic, the fiscal deficit remains large. The deficit of the centre and states put together is likely to be around 10 percent this year, the highest among G20 countries. The deficit of the centre alone is budgeted to be 6.4 percent of GDP.
Such a high fiscal deficit is not sustainable. Hence, economists expect the Union Budget, to be presented by the Finance Minister on February 1, 2023, to establish a clear glide path of consolidation, which would ensure that the deficit is brought down over the medium term.
How does the recent announcement fit into this picture?
To answer this question, some background is necessary. In March 2020, the government launched the PM-GKAY (PM Garib Kalyan Anna Yojana) free food scheme as a Covid-relief measure. The scheme provided 5 kg of free foodgrains (wheat or rice) per person, per month to all families holding a ration card, around 80 crore people. The scheme was meant to run from April to November 2020 but was extended multiple times and most recently to December 2022. While being well-intentioned and appropriate as an emergency measure, this scheme imposed a serious fiscal burden on successive Union Budgets.
Accordingly, on December 23, the government announced that it will discontinue the PM-GKAY scheme. Instead, it would provide free foodgrains through the existing PDS system for a period of one year, starting from January 1, 2023. This policy action will supposedly generate savings for the government on account of a reduced food subsidy bill. Hence, at first glance, it seems that the announcement achieves the right objectives – help the poor and reduce subsidy burden. But does it, really?
The food subsidy will undoubtedly fall next year, compared to this year, but that is not the right comparison. This is because PM-GKAY was meant to be a temporary relief provision to help people tide over the pandemic. So, the post-health emergency plan needs to be compared to the pre-pandemic situation. Evaluated against that base, the announcement implies that food subsidy will go up since (a) the selling prices of PDS grains have been reduced to zero, and (b) the quantities provided have been increased. In other words, the scheme will increase the fiscal burden when compared with the pre-pandemic base.
The medium-term implications could be significant. In the past, there was always the possibility that the government could reduce the budget deficit by raising the prices at which foodgrains were distributed through the PDS. But now that the government has made grains free, it will be difficult to start charging the households again. In other words, this announcement commits the government to a scheme that arguably makes it more difficult to achieve medium-term fiscal consolidation targets.
This announcement is likely to have repercussions for the overall agricultural policy as well. The government will now be even more constrained than before as far as raising the Minimum Support Price (MSP) is concerned. If it raises the MSP, its budget will get squeezed further because it will procure the grains at a higher price and then distribute them for free. Yet if it does not raise the MSP, farmers’ income from selling to the government will fall in real terms.
In that case, the farmers may decide to sell to the free market rather than the government. But then, the government will face a shortage of foodgrain stock and will not be able to fulfil its commitment. In other words, over and above fiscal issues, this announcement may have opened a Pandora’s Box.
Some may argue that this is nonetheless a good measure, since the government is giving more help to poor people. But the new programme is aimed at 80 crore beneficiaries: is more than half the country’s population poor? Put another way, why is it necessary to provide free foodgrains tomorrow to people who could afford to pay for them yesterday, when the country is becoming more prosperous every day?
The main task of the approaching Union Budget is to present a credible plan for reducing the fiscal deficit over the medium term. This will be difficult, since most of the major items in the centre’s budget – interest payments, wages, defence, and such like – cannot effectively be reduced. Until recently, the largest scope for reduction lay in steadily narrowing the food subsidy, the largest component of discretionary current expenditure. But with the recent announcement merging the PM-GKAY into the PDS this option may have been foreclosed.
While this may make for good politics, it reflects questionable economics.
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