Finance ministry red flags extending free food scheme

The finance ministry’s Department of Expenditure has argued against extending the free food ration scheme beyond September or making any major tax cuts, warning of the consequences for the government’s fiscal position. The government in March extended the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) for six months to September.

The government has budgeted ₹ 2.07 lakh crore for food subsidies in FY23, lower than the revised ₹ 2.86 lakh crore for FY22. The PMGKAY extension till September is expected to swell the subsidy bill to about ₹ 2.87 lakh crore. Extending the scheme by a further six months could cost another ₹ 80,000 crore in FY23, lifting the food subsidy to nearly ₹ 3.7 lakh crore.

Any further tax cuts or food subsidy extensions could have adverse consequences for the fiscal math, the department said in an internal note seen by ET. “In particular, it is not advisable to continue the PMGKAY beyond its present extension, both on grounds of food security and on fiscal grounds,” the department said.

The note said recent decisions such as the free ration extension, increase in fertilizer subsidy, re-introduction of subsidy on cooking gas, reduction of excise duty on petrol and diesel and cut in customs duty on edible oils and various inputs have created a serious fiscal situation. Last month’s reduction in excise duty on petrol and diesel to dampen inflationary pressures is expected to cause a revenue loss of about Rs 1 lakh crore.

The government has budgeted a fiscal deficit of 6.4% of GDP for FY23. Fitch Ratings expects it to be 6.8% of GDP because of higher subsidies and loss of revenue due to duty cuts. In its monthly economic review for May released on Tuesday, the Ministry of Finance’s Department of Economic Affairs said rationalizing revenue expenditure has become critical for protecting growth-supportive capital expenditure but also for avoiding fiscal slippage, warning that a higher fiscal deficit could widen the current account deficit.

PMGKAY Rolled out During Lockdown

The PMGKAY is a free food grain scheme that was rolled out by the government during the first nationwide lockdown imposed to contain Covid-19 in March 2020. Under the scheme, 5 kg of free rice or wheat and 1 kg of whole chana are provided per person per month to over 810 million people in addition to the subsidized ration already provided under the National Food Security Act.

The department pointed out that, apart from fiscal considerations, the move was also not advisable from the country’s food security point of view.

An eligible family of five gets over 50 kg of grain – 25 kg at a nominal price of ₹ 2 or 3, and 25 kg free. This exceeds the requirement when there’s no pandemic, the note said.

“It is vital that major subsidy increases / tax reductions are not done,” the expenditure department said in its note.

Duty Cuts

On May 21, the Center announced a reduction of excise duties on petrol and diesel by ₹ 8 and ₹ 6 per liter to curb inflation, and a subsidy of ₹ 200 per gas cylinder for up to 12 cylinders to about 90 million beneficiaries of the Pradhan Mantri Ujjwala Yojana. Later in the month, the duty was cut on edible oil. The finance ministry estimates a revenue loss of over ₹ 1 lakh crore due to these measures for the current fiscal year. The fertilizer subsidy bill is estimated at ₹ 2.15 lakh crore against the budget provision of ₹ 1.05 lakh crore in FY23.

Experts have warned that the fertilizer subsidy bill may go up even further if global prices continue to rise due to geopolitical factors.

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