Context

Union budget missed the opportunity to undertake reforms in the grain management system and food security act.

The massive reduction in food subsidy and its implications

• Subsidy slashed by 75,552 crores: The revised estimates (RE) for food subsidy for 2019-20 have been slashed by a whopping Rs 75,552 crore -from the budgeted estimate (BE) of Rs 1,84,220 crore to Rs 1,08,668 crore (RE).
  • For the next fiscal year, the budget estimate has been kept at Rs 1,15,570 crore.
• No major reforms in grain management system: One wonders whether any major reforms have been undertaken in the grain management system or in the National Food Security Act such that this massive reduction in budget estimates is feasible. But no such reforms are undertaken.
  • The Food Corporation of India (FCI) has been asked to borrow more from myriad sources, but most importantly from the National Small Savings Fund (NSSF).
  • An item that should have been in the budget, is now getting reflected as outstanding dues of FCI.
• Implications of the move–postponing of the crisis:  In order to gauge how much is the effective food subsidy in the country, the budget numbers are becoming totally irrelevant.
  • One needs to add the actual subsidy numbers reflected in the budget to the outstanding dues of FCI.
  • Effective food subsidy: If one adds the due, the effective food subsidy turns out to be Rs 3,57,688 crore.
  • By not provisioning for it fully in the budget, and not undertaking any reforms in the foodgrain management system or the NFSA, the government is only postponing the crisis.

Need to bring down the coverage: The Economic Survey

• Bringing down the coverage at 20 %: While the Economic Survey clearly states that the coverage under NFSA needs to be revisited, and brought down to say 20 per cent of the population.
  • The budget did not bite this bullet.
  • Cost of procurement to go up: The expected cost of rice to FCI in 2020-21 is going to be about Rs 37/kg, and for wheat it will be Rs 27/kg.
  • The issue price, that covers 67 per cent of the population, is just Rs 3/kg and Rs 2/kg respectively.

Excessive stock with the FCI

• Actual stock in excess of buffer stocks: Compared to a buffer stock norm of 4 million tonnes, actual stocks with FCI (including unmilled paddy) were 3.5 times higher.
  • It speaks of a colossal waste of scarce resources, especially when tax revenues have been sluggish.
• Stocks likely to increase further: Given that Skymet has predicted that the coming wheat crop is going to be one of the best in many years-the stocks is likely to touch 113 million tonnes.
  • With procurement prices being above global prices, the chances of wheat exports are bleak unless there is a subsidy for exports.
  • And that will be challenged in the WTO.
  • The FCI may run out of stock capacity: So, one should expect a piling up of grains stocks with a record procurement of wheat.
  • FCI may run out of storage capacity. Stock levels may touch 85-90 million tonnes, or even more, by July 1, 2020.

Fundamental questions

• First: Is the government ignorant of the impending crisis of plenty?
• Second: Does it realise that the policy of procurement prices (50 per cent above cost A2+FL), without looking at the demand side, is likely to create more troubles for the government?
• Third: Does the government have any plan to reform the public distribution system under NFSA?

Way forward

• Reforms in foodgrain management: Reforms in foodgrain management have to start with reforming the PDS system.
  • With moving gradually moving away from grains to cash transfers.
  • Think over implementing the Shanta Kumar Committee reports recommendations.
• Stop open-ended procurement in Punjab-Haryana belt: The policy of procurement prices, with open-ended procurement in the Punjab-Haryana belt, is doing more damage by depleting the water table and not letting crop diversification take place.
  • This is very unfortunate as the “dead loss” in grain management runs to more than Rs 1,00,000 crore.
• Rationalise the fertiliser subsidy: The other part related to this is the fertiliser subsidy, which is largely used in wheat and rice.
  • The budget estimates for 2020-21 show a reduction in the subsidy, while dues of the fertiliser industry keep on piling.
  • The fertiliser industry estimates that by April 2020, the dues will be roughly Rs 60,000 crore.
  • Demoralised fertiliser industry: While FCI has been asked to borrow, the fertiliser industry does not have that type of window.
  • It is feeling totally demoralised.
  • No private player wants to come and invest in this sector.

Conclusion

Instead of postponing the crisis by compelling the FCI to borrow, the government need to reform the foodgrain management system, rationalise the fertiliser subsidy and limit the coverage under the NFSA.

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