Home / News / India /  Food subsidy bill hits record high of 5 trillion in 2020-21

India’s revised food-subsidy bill for 2020-21 has hit a record high of nearly 5 trillion largely because the Union government has paid off a “majority of longstanding debt arrears" of the Food Corporation of India (FCI) amounting to more than 2 trillion, a senior official with knowledge of the matter said.

This is part of a broader policy to eliminate hidden subsidies by accounting for them in the fiscal deficit, a stance spelt out by finance minister Nirmala Sitharaman in the Union budget 2021-22.

Budget FY22 signalled a departure from usual practice, opting to account for full borrowings of FCI, India’s main grain handling agency, on the budget.

Till last year, FCI’s massive loans to finance distribution of subsidized ration were sourced from the National Small Savings Fund (NSSF). These borrowings were part of “extra budgetary resources", literally outside the budget. Hence, they did not reflect in the fiscal deficit, which is the shortfall in the government’s earnings compared to what it spends.

A larger fiscal deficit means the government is saddled with loans. This influences sovereign credit worthiness ratings assigned by global ratings agencies and tends to increase the government’s borrowing costs.

Union budget FY22 indicated opaque subsidies would be done away with. “In the July 2019-2020 budget, I introduced Statement 27 on extra budgetary resources. It disclosed the borrowings of government agencies that went towards funding government of India schemes and whose repayment burden was on the government," Sitharaman had said in her February budget speech.

“In my 2020-2021 budget, I enhanced the scope and coverage of the statement by including the loans provided by government to FCI. Taking a step further in this direction, I propose to discontinue the NSSF loan to FCI for food subsidy and accordingly budget provisions have been made in RE 2020-21 and BE 2021-22," she had said.

The government has cleared 1.7 trillion in the last fiscal year and more than 60,000 crore would be cleared this fiscal year, according to the senior official mentioned above. “This would leave FCI with only negligible outstanding loans," the official said.

India’s fiscal deficit for 2020-21 was 9.3% of gross domestic product (GDP), marginally lower than the 9.5% estimated by the finance ministry, according to data released by the Controller General of Accounts on 30 May 2021.

“If the fiscal deficit is (expressed) as a ratio to GDP, it can come down or go up depending on the numerator or denominator. However, right now our purpose should be to give fiscal stimulus, though the quality of this stimulus is important. The important thing is to watch the public debt-to-GDP ratio," said N.R. Bhanumurthy of the Dr BR Ambedkar School of Economics, Bengaluru. What this means is that higher spending should go into productive uses, rather than unproductive uses, such as consumption.

Despite a larger fiscal-deficit projection this fiscal, the market has responded positively because of increasing transparency in accounting, he said.

India’s accounting practices are cash-based. An expenditure is incurred only when a debit is charged against the government’s bank accounts. By making FCI rely on incessant borrowing to fund its operations, rather than paying it directly, the government in the past limited its food expenditures to rein in fiscal deficit.

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