News
Five more years of free foodgrains: The financial and welfare implications
Summary
The sticky nature of food subsidies—it’s a constitutional guarantee—means savings need to come from elsewhere
NEW DELHI : With elections looming, the prime minister has extended the free foodgrain scheme, which was due to end after December, by 5 years. The announcement, made at an election rally, is being viewed as a political move. What does it entail? Mint explains:
What is the free foodgrain scheme?
The National Food Security Act (NFSA) entitles about 810 million citizens to 5 kg of subsidized foodgrain per month. They include the poorest households who get 35 kg per month. During the pandemic, the Centre announced an additional 5 kg free foodgrain. As disruptions eased, the Centre, instead of stopping the free scheme, rolled back the additional quota in December and made the initial quota free. This saved the Centre money, but it had to lose revenue that it generated from selling the foodgrain at subsidized rates. Currently, the free foodgrain scheme costs about ₹2 trillion a year.
Why has the scheme been extended?
During the pandemic, the vast procurement and distribution network helped the government to rapidly respond to the needs of the 810 million beneficiaries. The scheme was hailed as bringing immediate relief to the poor. But experts believe that once such schemes are launched, they are difficult to roll back immediately despite the fiscal cost, especially close to general elections. With the assembly election season already in full swing, every political party is trying to woo voters through various populist measures, and the Bharatiya Janata Party (BJP) is betting on a scheme that has seen very few critics.
What will be the fiscal impact of the scheme?
Last year’s redesign has slashed the scheme’s fiscal cost by half to ₹2 trillion. However, the scheme is still costlier than the pre-pandemic era’s as the government is forgoing revenue from its subsidized food sales. According to Nomura, revenue foregone could amount to 0.05% of GDP. Moreover, the rise in procurement costs will lift food subsidy bills.
What are the risks from the scheme?
The sticky nature of food subsidies—it’s a constitutional guarantee—means savings need to come from elsewhere. To curtail fiscal deficit, the Centre earlier resorted to off-budget borrowings, which were brought back to the books in the 2021. But a sharp rise in the Food Corporation of India’s internal and extra-budgetary resources in FY24 led to questions again. The Centre allayed the concerns, but past accounting jugglery leaves experts wary, even as the rising cost of procurement threatens to keep spending high.
Does the continuation make economic sense?
Schemes offering free goods and services divide experts over whether they are welfare measures or freebies to woo voters. While food security for the poor is a government duty, questions are rife whether all 810 million still need free food to survive. If so, does it signify economic distress? India may be the world’s fastest growing major economy, but experts say a K-shaped recovery has kept the poor vulnerable, making the scheme necessary. However, this risks stoking competitive populism.
