What Free Food Scheme Extension Means For Buffer Stocks, Subsidy Bill

Despite an addition to costs, the government is likely to stick to it's fiscal deficit target, government sources said.

<div class="paragraphs"><p> (Photo: Deepak Kumar/Unsplash)</p></div>
(Photo: Deepak Kumar/Unsplash)

The government's decision to extend the five-kilogram-a-month food scheme is unlikely to have any meaningful impact on food buffer stock and fiscal deficit target.

The union cabinet's decision to extend the food relief scheme for three months up to December 2022 would see a total outgo of 122 lakh metric tonnes of foodgrain costing an additional Rs 44,762 crore to the exchequer, according to a PIB statement. That would take the overall expenditure on the scheme to about Rs 3.91 lakh crore for all the phases.

Though the food stocks were at record highs when the scheme was first introduced, they are now at their lowest since April 2019, according to data from Food Corporation of India. Rice stocks stood at 244.6 lakh tonnes and wheat stocks at 248.2 lakh metric tonnes in September 2022, the FCI data showed.

Economists, however, told BQ Prime that the scheme is unlikely to deplete food stocks below the buffer norms.

Assuming a drawdown of 122 lakh metric tonnes over the next three months, food grain stocks will still be comfortably above 300 lakh metric tonnes in early January 2023 against the buffer norm of 210 lakh metric tonnes, said Teresa John, lead economist at Nirmal Bang.

Kharif procurement, she said, will start by early October, which will add to the stocks.

The challenge, according to Madan Sabnavis, chief economist at Bank of Baroda, will be to ensure that procurement of rice is on target because production of rice is set to decline by 7 million tonnes this year. This is because the government is focusing on giving rice instead of wheat as the stocks of the latter is down, he said

Suvodeep Rakshit, senior economist at Kotak Institutional Equities, too said, the government might keep the mix weighted towards rice.

An Additional Cost 

The government remains committed to rationalising expenses from the additional food subsidy and sticking to the budgeted fiscal deficit target, said a senior government official with knowledge of the matter.

This was in relation to the extension of the 5 kg-per-month food scheme that raised the government’s additional subsidy bill to about Rs 3.3 lakh crore.

The announcement certainly adds to the costs, but the government remains committed to retaining the budget deficit target of 6.4 % this fiscal, the official told BQ Prime on the condition of anonymity.

According to the official, there are two ways to cover the additional costs—rationalising expenditure or getting additional receipts.

It will have to be balanced through expenditure rationalisation or additional receipts for the year to end at the projected deficit in the budget estimates, he said. This will only be certain after the discussions of revised estimates have been concluded.

The government's discussions on the revised estimates are expected to begin in the second week of October, the official said.

Queries emailed to the Department of Economic Affairs under the Ministry of Finance did not elicit any response.

NR Bhanumurthy, vice chancellor at Ambedkar School of Economics, said the fiscal deficit can still meet the budgeted projections.

“The budgeted revenue figures are very conservative when they are announced," Bhanumurthy said. "With buoyant goods and services tax and direct taxation collections, the scheme is unlikely to have a significant impact on the fiscal deficit,” he said.

Sabnavis of Bank of Baroda agreed, saying the amount per se may not be distortionary in case other revenue heads are met. "The GST collections for the centre so far has been around Rs 30,000 crore higher (apart from the shared component)," he said. "Also other tax collections like corporation tax has been buoyant."

As such, the hit on fiscal deficit would be minimal if these revenue trends persist. "If all other budget numbers are as per the budget (ceteris paribus), the increase will be 0.2% of GDP," Sabnavis said.

The challenge, according to Sabnavis, will arise if there are shortfalls in say disinvestment or non-tax revenue.

But with the nominal GDP number likely to be around Rs 273-275 lakh crore as against Rs 258 lakh crore for FY23 as assumed in the budget mainly due to very high inflation, the fiscal ratio will remain unchanged on this score, Sabnavis said.

Rakshit of Kotak Institutional Equities expects the fiscal impact to be at around 0.15% of the GDP.

From a development perspective, Amalendu Jyotishi, professor, School of Development at Azim Premji University, said the extension intent is good but policy-wise, it is still a stop-gap measure in solving larger concerns like chronic hunger and food security.

“It is certain that the scheme will add to the disposable income of the vulnerable population at a time of (high) food inflation and help them out of poverty," Jyotishi told BQ Prime. "But we still don’t have exact data on the number of households this is benefitting.”