India’s revised food subsidy bill for 2020–21 is now estimated to be a record high of nearly ₹5 lakh crore, not due to enhanced distribution from federally-held food stocks during the pandemic, but because the Union government has paid off a “majority of longstanding debt arrears” of the Food Corporation of India (FCI) amounting to over ₹2 lakh crore, 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.
The budget signalled a departure from usual practice, opting to account for full borrowings of the FCI, India’s main grain handling agency, on the budget.
Till last year, the FCI’s heaps of loans to finance its operations for distributing subsidised ration were sourced from the National Small Savings Fund (NSSF). These borrowings were part of what is known as “extra budgetary resources”, literally outside the budget. Hence, they did not reflect on the fiscal deficit, an accounting trick.
The fiscal deficit 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. A larger fiscal deficit tends to increase the government’s borrowing costs.
The Union Budget FY22 indicated opaque subsidies would be done away with. “In the July 2019–2020 Budget, I introduced the Statement 27 on extra budgetary resources — it disclosed the borrowings of government agencies that went towards funding GoI schemes, and whose repayment burden was on the government,” finance minister 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 the 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 (revised estimates) 2020–21 and BE (budget estimates) 2021–22,” she had added.
According to the senior official cited above, the government has cleared ₹1.7 lakh crore in the last fiscal year and over ₹60,000 crore would be cleared this fiscal year. “This would leave the FCI with only a negligible amount of outstanding loans,” the official said on condition of anonymity.
To be sure, India’s fiscal deficit for 2020–21 came in at 9.3% of gross domestic product (GDP), marginally lower than 9.5% estimated by the finance ministry, according to data released by the Controller General of Accounts on May 30, 2021.
“If the fiscal deficit is (expressed) as ratio to GDP, it can come down or go up depending on the numerator or denominator. But right now, our purpose should be to give fiscal stimulus. But the quality of fiscal stimulus is important. The important thing is to watch the public debt-to-GDP ratio,” said N R Bhanumurthy of Dr BR Ambedkar School of Economics, Bengaluru. What this means is that higher spending should go into productive uses, rather than unproductive uses, like 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 the FCI rely on incessant borrowing to fund its operations, rather than paying it directly, the government in the past managed to limit its food expenditures to rein in the fiscal deficit.