Context: Between 2015-16 and 2019-20, the aggregate outlay on food and fertilizer subsidy fell, both in absolute terms (from Rs 211,834 crore to Rs 189,813 crore) and as a share of the Centre’s total expenditure (from 11.8% to 7.1%).
A further drop, to Rs 186,879 crore and 6.1%, was projected in the Budget for 2020-21.
That declining trend has, however, since completely reversed.
The combined food and fertiliser subsidy bill in the revised estimates for 2020-21 was a massive Rs 556,565 crore, representing 16.1% of the Centre’s entire Budget (Refer image below)
What are the reasons for the reversal in 2020-21?
First reason is government coming clean in food & fertilizer subsidy bill
The first has to do with the Centre, until 2021, not providing fully for the subsidy, arising from FCI’s subsidies and fertiliser firms selling nutrients at below cost to farmers.
In the case of food, the Centre wasn’t wholly funding the difference between the FCI’s economic cost and its average issue price, multiplied by the quantities sold.
FCI’s economic cost includes costs of procuring, handling, transporting, distributing and storing grain.
To bridge the gap, FCI had to borrow heavily, especially from the National Small Savings Fund (NSSF), with interest rates ranging from 7.4% to 8.8% per annum.
FCI’s borrowings from NSSF in 2019-20, at Rs 110,000 crore, exceeded the food subsidy of Rs 108,688 crore provided through the Budget.
Similarly in fertilizer sector, the industry was owed Rs 48,000 crore of subsidy dues at the start of 2020-21.
But in the revised estimates for 2021-22, Finance Minister allocated an additional Rs 3,69,687 crore towards food and fertiliser subsidy. As a result, all outstanding NSSF loans to FCI got repaid and the fertiliser subsidy dues cleared at one go.
This exercise of coming clean — the Centre owning up its expenditures, rather than transferring to the balance sheets of FCI and fertiliser companies — also meant a huge one-time spike in the subsidy bill.
Second reason is COVID
The second source of overshooting has been Covid (in respect of food subsidy) and soaring international prices (vis-à-vis fertilisers).
The post-Covid crisis led the Centre to not only distribute, but also procure, unprecedented quantities of grain. 5 kg of free grain/ person/ month was given under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), apart from the regular 5 kg quota of wheat or rice at Rs 2 and Rs 3/kg, respectively.
In 2020-21, a record 93.11 million tonnes (mt) of rice and wheat was sold through the PDS (62.19 mt, 65.91 mt and 60.37 mt in previous three years)
A similar overshooting, despite no pending past dues, is expected in fertiliser subsidy. The primary reason is global prices. Urea imports into India are taking place now at $900-1,000 per tonne (nearly $300 in 2019-20) and di-ammonium phosphate at $900 (nearly $400 in 2019-20).
What is the way ahead for rationalising subsidy bill?
Hiking PDS issue prices
Capping grain procurement
Decontrolling urea and providing a fixed per-tonne nutrient-based subsidy similar to that for other fertilisers.
