The union cabinet approved on March 26 a six-month extension (of 1 in addition to his normal quota of food grains under the National Food Safety Act (NFSA)) to Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY).
The PDG press release further stated that the government will spend Rs 80,000 crore on 24.4 million tonnes (t) of grains to be distributed under the expanded program. This means that the government will incur a cost of Rs 32.8 per kg of free grain provided. In addition to the Rs 2.07 lakh-crore provided in BE-2022-23, this additional expense will increase the food subsidy bill to Rs 2.87 lakh crore. This could increase by another Rs 80,000 if PM-GKAY is extended until 31st March 2023.
The press release states that “(e) although the COVID-19 pandemic has subsided significantly and economic activity is picking up again, this expansion of PM-GKAY would ensure that no poor household goes to bed without food during this recovery period” . if food grains did not exist under the NFSA.
The COVID-19 situation has only gotten better since the budget. However, fiscal pressure increased after Russia invaded Ukraine and pushed oil, gas, and fertilizer prices out of the government’s comfort zone.
Why, then, this outpouring of “concern and sensitivity towards the poor and vulnerable sectors of society,” as the press release puts it, without considering the precarious budget situation?
Increase in food grain stocks
India’s food grain production has increased steadily even during the COVID-19 years and is expected to exceed 316 MT in 2021-22 (285 MT in 2018-19). Cereal purchases also increased (100 tons in 2020-21 vs. 86 tons in 2019-20).
However, levies under the entire NFSA (at subsidized rates of Rs 2/3 per kg of wheat/rice) and other schemes (except PM-GKAY) peaked at 66 MT in 2018-19. In the last three years, there has been a certain decrease (by about five tons).
The government buys grain at minimum support prices (MSP for wheat is Rs 2,015 per kg in 2022-23). However, it bears the economic costs (including ancillary supply costs and distribution costs: wheat Rs 2,589/kg in 2022-23). The MSP is higher than the world and national market prices: the economic cost is related only to the payment of food subsidies. The government has not been able to sell grains on the domestic or export market for the past four years. As a result, government stocks of food grains steadily increased from 53 MT on July 1, 2017, to 82 MT on July 1, 2020.
While NFSA dietary grains are sufficient to meet dietary energy needs, the government, dealing with increased food supplies, decided to provide NFSA’s 800 million registered citizens with an additional 5kg of wheat/rice for free when COVID-19 hit in March. 2020
This increased feed grain recalls (32 MT and 41 MT distributed under PM-GKAY in 2020-21 and 2021-22). However, there has been an increase in government stocks of food grains (90 MT on July 1, 2021).
The conclusion seems obvious enough. Total grain consumption in India has not increased. Despite PM-GKAY stocks, India consumes the same amount of grain. The difference now is that the grain reaches people in a somewhat indirect way.
Change the dynamic
Russia and Ukraine together account for more than 25% of world wheat exports. The dispute has disrupted wheat exports and pushed market prices above India’s MSP. This has created opportunities for Indian wheat exports. India could export about 7.5 tons of wheat in the fiscal year 2021-22. Private players are currently buying wheat and are expected to export around 15 tons this year.
However, nothing changes in the global dynamics of rice.
Government agencies have purchased about 14 tons of wheat so far (about three-quarters of the wheat arrivals), with the rest being purchased by private actors. We are still in the early days of the wheat supply season. The wheat harvest exceeds 100 tons per year (maybe 5% lower due to the March heat). The government is likely to continue to make sizeable wheat purchases (perhaps around 30 MT vs. 43 MT last year). Meanwhile, the supply of rice is already quite high.
Given that, the government’s bloated food stocks are unlikely to have many teeth this year.
Turn a constraint into an opportunity
The government cannot export grain purchased from MSPs, which are considered subsidized purchases under WTO rules. There is no sign of a significant improvement in domestic consumer demand either. Given this, the government cannot allow the grains to rot.
You must bear the economic cost of the purchased grain, whether you continue to supply FCI stores or distribute it to the poor for free. The tax implications are no different. So the only way to reduce the tax impact is to get less.
In short, is the state making a virtue of necessity? As things stand, PM-GKAY is very likely to be extended for the rest of the year.