No free lunches – The free food scheme is driven by electoral considerations, but its long-term fiscal risks outweigh the short-term gains

Source: The post is based on the article “No free lunches – The free food scheme is driven by electoral considerations, but its long-term fiscal risks outweigh the short-term gains” published in Business Standard on 28^th December 2022.

Syllabus: GS 3 – Food Security

Relevance: decision of government on NFSA

News: The government has decided to allow free food grain supplies under the National Food Security Act (NFSA) until December 2023. The government is being criticized for this decision.

What are the concerns?

The government instead of reducing the food subsidy bill has made it free under NFSA. It would act as a fiscal burden on the government.

This might also encourage political parties ruling in many of the states to come up with similar schemes and bring fiscal burden on itself.

Therefore, it will have a negative fiscal consequence both on Centre and the states even after discontinuing Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY). However, it would benefit the Finance Ministry.

How would the Finance Ministry be benefitted?

The launch of PM-GKAY in April 2020 acted as a burden and affected the expenditure planning for the Union Finance Ministry. The scheme kept on extending till December 2022.

Since the PM-GKAY has been discontinued now, it is expected that it would provide the finance ministry a food subsidy saving equivalent to about 0.4 per cent of gross domestic product (GDP).

If taken together with the fertiliser subsidy saving which is estimated at about 0.3 percent of GDP, the finance ministry will have a total savings of about 0.7 per cent of GDP in 2023-24.

This will provide flexibility to the Finance Ministry in increasing capital expenditure.

Further, subsuming the PM-GKAY into the NFSA will also provide budgetary advantage for the next fiscal year. It is unlike the previous budgets where the government took decisions on the PM-GKAY after the Budget was decided.

Moreover, the PM-GKAY being discontinued, now the government will only have to focus on bringing NFSA under the central issue price regime. However, it is unexpected that it will come under it before the next Lok Sabha election.