Food security: Its efficient management is a win for India.
The government of India has taken a slew of measures to bolster finances required for institutionalized food security management, involving the procurement of wheat, rice and coarse grains from farmers, their safe storage and transportation to deficit regions, and then their distribution among beneficiaries. These measures started with the settlement in fiscal year 2020-21 of all the food-subsidy arrears and claims of Food Corporation of India (FCI), amounting to ₹4.63 trillion. The latest step in this direction, taken in February 2024, has been an enhancement of the authorized working capital of FCI from ₹10,000 crore to ₹21,000 crore.
Traditionally, these operations have been financed through food credit. There has been a separate arrangement for pre-emptive lending to FCI and food-procuring state governments regulated by the Reserve Bank of India (RBI). The entire volume of food credit is extended by a consortium of banks led by State Bank of India (SBI). In the past, this consortium charged higher interest rates due to uncertainty of repayment, because credit extended could be repaid only once the subsidy was disbursed after liquidation of foodgrain stock held in the central pool.
The extent of food credit extended by the consortium reduced credit available for other sectors of the economy, classified as ‘non-food credit.’ Since the establishment of FCI in 1965, food credit had been consuming a significant share of the total credit deployed in the Indian economy. According to Economic Survey reports of 2000-01 and 2001-02, it ranged from 15% to 20% until the end of year 2000, and had risen to 37.7% during April to October 2001, due to an extended period of stock holding. From 2001-02 onwards, the share of food credit started declining, due to quicker liquidation of stock. It declined further with FCI’s diversification of fund sources, such as government guaranteed bonds, National Small Savings Scheme (NSS) and ways-and-means advances, which was done to reduce interest costs. Thus, the share of food credit has been on a decline over the past two decades.
However, from the year 2010-11 onwards, the central government’s subsidy disbursement to FCI had become sticky. Usually, the government would disburse 95% of the subsidy during a given year and the rest after a complete audit of accounts. But the disbursement dropped sharply during the previous decade, and subsidy arrears were cleared only in small parts. As a result, the total subsidy arrears owed to FCI rose to ₹3.76 trillion by the end of 2019-20, and then further to ₹4.37 trillion by the end of 2020-21’s third quarter. Subsequently, in an effort to square off-budget borrowings, the government cleared the pending bill of subsidy arrears in one go during the fourth quarter of 2020-21, by disbursing ₹3.85 trillion. Thus, a total subsidy payment in 2020-21 of ₹4.63 trillion from the central budget outlay not only cleaned up the balance sheet of the government, but also helped FCI clear all its debt.
During the previous decade, spanning a period from 2011 to 2020, FCI had managed its finances by borrowing huge amounts of money from various sources that incurred an accumulated interest burden of about ₹29,000 crore (2020-21 estimate). Rising interest pay-outs weighed heavily on food-security operations, especially by raising the share of interest in the ‘economic cost’ borne of wheat and rice to a peak of about 12% in 2020-21.
High economic costs in turn leads to higher food subsidy pay-outs by the government and also places constraints on modernizing food-security infrastructure for more efficient operations. Thus the enhancement of FCI’s approved working capital to ₹21,000 crore shall help further contain the interest component of the economic cost of foodgrains, and thereby also the subsidy incurred thereupon.
Historically, in a developing country like India, financing food security operations has been a highly challenging part of public financial management. However, from 2020-21 onward, India’s government has also developed a mechanism for quick and regular disbursements of subsidy claims on almost a weekly basis, and sometimes even twice in a week, and extended support to FCI in raising funds through cheaper sources, such as bonds. These measures of the government not only exhibit efficient public financial management, but also affirm its commitment to protect the interests of farmers as well as vulnerable consumers. Efficiency brought about in the finances required for carrying out institutionalized food security management is likely to have a positive impact on the operational capabilities of the world’s largest food dispensing system, one that distributes 5kg of free foodgrains to over 810 million beneficiaries across the country every month, even as payments for the procurement of wheat and paddy at Minimum Support Prices are made to about 12.5 million farmers directly into their bank accounts.
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