Context

In her budget speech, the Union finance minister (FM) said: “At the centre of everything that we do, we keep gaon, garib aur kisan in mind.”

Background

• Here then is a small mantra for her to transform the lives of the kisan and the poor in rural areas.

• Just streamline the food and fertiliser subsidies by converting them to direct cash transfers to identified beneficiaries.

• This can be done through the JAM trinity (Jan Dhan, Aadhaar and Mobile). Such a measure would not only empower the poor and farmers but also usher in a policy shift that can save the exchequer least Rs 50,000 crore every year.

• The government can invest this in agri-R&D and better water management, in measures to ensure the country’s food security for the next 25 years and to augment farmers’ incomes.

1.Food Subsidy

• The food subsidy allocation in the budget is Rs 1,84, 220 crore — let us say Rs 1.84 lakh crore.

•  Pending Dues – The pending dues of the Food Corporation of India (FCI) stand at Rs 1.86 lakh crore.

• Under-provisioning of the food subsidy- Year after year, there is under-provisioning of the food subsidy in the budget and the FCI is being asked to borrow from the banks so that the fiscal deficit can be shown under control.

• The FCI’s loans from the banks have now crossed Rs 2.48 lakh crore.

 2.Efficiency, equity and sustainability

•  Does 67 per cent of the population covered under the NFSA cannot afford basic food?

• There is more than 90 per cent subsidy on rice and wheat under the PDS — the economic cost of rice hovers around Rs 35 per kg and that of wheat is about Rs 25 per kg, while rice is being sold via the PDS at Rs 3 per kg and wheat at Rs 2 per kg

Selling price is less than MSP  –

• Interestingly, in rural areas in a majority of states, rice (paddy) is sold at less than the minimum support price (MSP).

• The landless labourers and small and marginal farmers, most of whom are covered under PDS, produce these staples.

• The government first buys paddy and wheat from rural areas and, after adding almost 50 per cent cost for procurement, stocking and distribution on top of the MSP price, sells the back most of this grain to people in rural areas.

Benefits of cash transfer to beneficiary

• The government can achieve its ends in a much more cost-effective way if it transfers an equivalent amount of food subsidy in the form of cash to the beneficiary’s accounts.

• More Choices – The beneficiary will have the freedom to buy anything — rice, wheat, coarse cereals, pulses or even milk and eggs, which are more nutritious. Diversified diets will signal the need for diversification in farms.

• Environmentally Sound – The government can keep some stocks for strategic purposes but gradually reduce procurement and shrink the size and operations of FCI, especially in areas where the water table is depleting fast — the northwest of the country, for example.

Coverage under FSA

• Further, the government has to think whether the coverage under PDS should be 67 per cent of the population or if it should be brought down to, say, 40 or even 30 per cent.

• Why should the price of rice be kept at Rs 3 per kg and that of wheat at Rs 2 per kg?

• This leads to massive diversion of PDS supplies to the open market.

• Leakages – The Shanta Kumar Panel had estimated the leakages in PDS at 46 per cent.

Fertiliser Subsidy

• The FM has allocated Rs 80,000 crore for fertilisers in the budget.

•  Under Provisioning – The fertiliser industry says that there is massive under-provisioning.

• Pending Dues- The industry also claims that Rs 38,000 crore of its dues are pending with the government.

CHALLENGES IN  RATIONALISING SUBSIDY IN FERTILISER SECTOR

• The problem is that the government does not have the will to revise the urea price, which at roughly $80 per tonne, is the lowest in the world.

• The average cost of production of the industry is around $250 per tonne, import parity hovers around $300 per tonne and keeps fluctuating, depending on global prices.

• The government has revived some almost dead plants (for example at Gorakhpur and Ramgundam) that produce urea at more than $400 per tonne.

Lack of economic rationale –

• It seems there is no economic rationale either in the pricing of urea for the farmers at $80 per tonne or producing urea, at the margin, at $400 per tonne.

• This is leading to large leakages and inefficient use, besides polluting the groundwater table — in fact, the environment at large.

• Interestingly, crops do not absorb more than 25 per cent of the urea being applied in India.

• So, basically, we are subsidising the pollution of the environment.

Conclusion

Can the Modi government rationalise these subsidies by converting them into direct cash transfers on a per hectare basis?  Back-of-the-envelope calculations show that the government can save about Rs 50,000 crore every year through such measures. The money can be invested in agri-R&D and water management. That would be the biggest reform in agri-food space