• Central government spending on Farm Subsidy crossed 4 lakh crore yet farmer distress increasing. Why?
• Are we waiting for a crisis in agriculture to reform?

The unpaid and ballooning food subsidy is in the news because its funding is not fully included whilst calculating the fiscal deficit. The question is, was that always the case?

From 2001-02 onwards the percentage of subsidy released in the year in which it was incurred exceeded 74%, barring 60% in 2011-12. Things changed when The National Food Security Act (NFSA) was introduced in September 2013. As is seen in table 1 the subsidy number leapfrogged. It went up by 92% between 2011-12 and 2018-19 RE. However, the gap between the subsidy incurred by FCI and reimbursed by the government has increased starting 2014-15.

It is pertinent to ask if the then government followed Nobel Laureate Abhijit Banerjee’s experimental approach to poverty alleviation. So were “randomised trials of this intervention among the poor with control groups set up for the sake of comparison to draw evidence directly from the actual people who were expected to benefit?”  

Realistically, can any finance minister budget for food subsidy of Rs 1,84,220 crore without exceeding the fiscal deficit target by a mile?

Subsidy incurred by Food Corporation of India, 2011-12 to 2019-19

Source - http://fci.gov.in/finances.php?view=22 *Food subsidy bill per Budget July 2019.

NFSA guarantees five kg of food grains per person per month to entitled beneficiaries.  The Antyodaya Anna Yojana households which constitute the poorest of the poor, are entitled to 35 kg per household per month. The Act mandates that 67% of the population (75% in rural areas and 50% in urban areas) must receive highly subsidized food grains? Allocation of food grain is skewed in favour of wheat and rice.

According to this PRS India report, the expenditure on food subsidy is increasing whilst the ratio of people below the poverty line is falling. The ratio was 21.9 percent and number of poor 26.9 crores in 2011-12. “A similar trend can also be seen in the proportion of undernourished persons in India, which reduced from 24% in 1990 to 15% in 2014.” 

Why has the subsidy gone up substantially?   

NDA2 inherited NFSA. However, it has kept the per kg rates unchanged since 2014 ie rice Rs 3, wheat Rs 2 and coarse grains Rs 1/ whilst cost of procurement and storage have increased. If prices were increased regularly the subsidy bill would have been lower.

Two, the number of beneficiaries stood at 81.3 crore according to a July 2019 Press Information Bureau release, as against about 35 crore prior to introduction of NFSA.

Three, ‘open ended’ purchase has led to excess grains stocks being held by Food Corporation of India (FCI). According to this Business Standard report, stocks held by FCI as on Sept 1, 2019 were wheat 41.49 against a buffer of 20.52 mn tonnes and for rice 26.14 against 10.52 mn tonnes. Stocking norms were laid down on 22-1-2015 and have not been revised thereafter.  

Four, it seems that despite a decline in poverty rate, the non-poor are still identified as poor by the government.

Five, according to a 2011 report data leakages in PDS were estimated to be 46.7%. Ashok Gulati wrote that, “Later on, the Modi government introduced POS machines and weeded out some fake ration cards. But, still, leakages continue, and rough estimates range from 30-40%. Leakages can be reduced if issue price is linked to, say, 50-75% of MSP.”

How did FCI fund the subsidy?  Let us review FCI borrowings.

FCI borrowings (Published Annual Accounts)  

Data 2018-19 from ThePrint, accounts not published yet. 

Borrowings from the National Savings Fund and increase in short-term borrowings helped FCI meet its liabilities.

Note that NSS borrowing started in 2016-17, when the Central government had to fund pay-outs on account of the 7^th Pay Commission, whose annual outflows were estimated at Rs 1,02,100 crore in 2016-17. Source As food and salary pay-outs increased so did NSS borrowing.   

Despite the Centre spending over Rs 4 lakh crore, excluding what the state governments spend, the cries of farmer distress are only getting shriller. Is the shortage of funds cause for distress or is there another reason?  

  Subsidy and Grants FY20                

We forget that Agriculture is a State subject, a legacy of the Government of India Act 1935, but relentlessly expect the Centre to reduce farmer distress.  

So instead of scrapping the APMC Act (Agriculture Produce Marketing Act), introducing laws for contract farming and agricultural land lease, promoting drip irrigation, State after State is writing off farmer loans, and providing free or subsidized power. States have not agreed to an even Mandi Tax Rate for e.g. “a company procuring grain had to pay 6 per cent tax in Punjab, 4 per cent in Haryana and 0.2 per cent in Madhya Pradesh. For pulses, mandi tax in UP is 2.5 per cent, in MP it is 2.2 per cent while in Gujarat it is 0.6 per cent.” Source Economic Times September 2017.

Subsidy ensures the vicious cycle of farm distress continues and leaves States with lesser resources for investment in agriculture R&D and water management (excluding national waterways), responsibility of the State government, benefits of which shall accrue to farmers in the long-term. 

Drip-irrigation in Kutch.

Having said that, the Centre must launch a communication campaign with these objectives. One, a change national mind set, i.e. from being a food deficient to a food surplus nation. Two, educate people on what State and Central governments are responsible for so accountability is known. Three, enlighten people of the benefits from consuming millets, whose production fell post the Green Revolution (Area under millets cultivation was at 14.72 million hectares in 2015-16 as against 37 million hectares in 1965-66), and traditional rice varieties.

Set up in 1965, Food Corporation of India (FCI) best symbolises the shortages mind set. Modi had set up the Shanta Kumar Committee. Brief was how to make the entire food grain management system more efficient by reorienting the role of FCI in MSP operations, procurement, storage and distribution of grains under Targeted Public Distribution System (TPDS). Some recommendations, made in the January 2015 report, are worth revisiting. 

One, “the FCI hand over all procurement operations of wheat, paddy and rice to states (Andhra Pradesh, Chhattisgarh, Haryana, Madhya Pradesh, Odisha and Punjab) that have gained sufficient experience in this regard and have created reasonable infrastructure for procurement.” 2

Two, FCI should accept only the surplus grain (after deducting the needs of the states under NFSA) from these state governments (not millers) to be moved to deficit states. “As on December 2017, only 17 states have adopted decentralised procurement.” 1

Three, “the statutory levies including commissions, which vary from less than 2 percent in Gujarat and West Bengal to 14.5 percent in Punjab, need to be brought down uniformly to 3 percent, or at most 4 percent of MSP, and this should be included in MSP itself.” 2

Four, “GoI needs to revisit its MSP policy. Currently, MSPs are announced for 23 commodities, but effectively price support operates primarily in wheat and rice and that too in selected states.” Importantly, if subsidized wheat and rice are partially replaced by high protein pulses it would discourage their production and save water-subsidy too.

Five, committee findings “reveals that 67 percent coverage of population is on much higher side, and should be brought down to around 40 percent, which will comfortably cover BPL families and some even above that.” 2 Compare list of beneficiaries with other government databases to weed out the non-poor. 

Six, to reduce excess stocks “A transparent liquidation policy, which should automatically kick-in when FCI is faced with surplus stocks than buffer norms” is required. 

Also, the Centre must use the PM-Kisan scheme to get States to hasten the process of digitization of land records and collect farmer data. Once done, the reliability of farmer details would increase allowing government to explore payment of subsidy via Direct Benefit Transfer and providing information to farmers in real-time.

By nature most Indians are resistant to change. They accept change when a crisis erupts like it did in 1991. Are we waiting for crisis in agricultural to reform?  

The author does not claim to be an expert on agriculture.

References

1. PRS India report

2. Shanta Committee Report

First published in Financial Express and here

Also read

1. FCI under stress for rising procurement and distribution cost

2. Solution to farm distress lies with State governments

3. Traditional Rice Varieties of India