Government extends free food-grains programme for 5 years, raises medium-term risks

• The government will provide 5kg of food grains per person every month, under the programme.
• The extension could impact the government's fiscal deficit target for FY24 say economists.
• Free schemes can lead to competitive populism and pose risks to the economy, they claim.
  

The government has decided to extend its free foodgrains programme for another five-years. Under the programme, the government will provide 5kg of food grains per person every month. This move, which was expected to be discontinued by the end of 2023, reflects the challenges of withdrawing populist policies, especially ahead of elections, claim economists. While the near-term macro implications are expected to be muted, there are concerns about the medium-term risks associated with the extension. According to Nomura, food procurement cost of the government is expected to increase and so will the food subsidy bill, which has been coming down over the years.

The extension of the free foodgrains programme is not expected to have a significant near-term impact. The scheme, which costs ₹2 trillion or 0.7% of GDP annually, is already part of the government's existing subsidised foodgrains programme. However, the extension could impact the government's fiscal deficit target for FY24, as higher revenue expenditure, including on rural employment guarantees, may strain the budget.

Over the medium term, the extension of the free foodgrains programme raises concerns about the government's revenue and food subsidy bill. As the government forgoes revenues from its subsidised food sales, estimated to be around 0.05% of GDP annually, the procurement costs and food subsidy bill are likely to increase, says Nomura. While the need for subsidised grains for lower-income households is undeniable, the announcement of free schemes can lead to competitive populism and pose risks to the economy.

The announcement by Prime Minister Modi extends the free foodgrains programme for the next five years, until December 2028. This programme allows eligible citizens to purchase 5kg of food grains per person per month at highly subsidised prices. During the pandemic, an additional 5kg of food grains were provided free of cost under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY). The recent announcement effectively cements this policy for the medium term.

The extension of the free foodgrains programme can be attributed to political compulsions, particularly with upcoming elections. Populism has become a dominant theme, with promises of "freebies" from various political parties. The ruling Bharatiya Janata Party (BJP) is also attempting to sound populist to counter its rivals. However, the unsustainability of the previous system, which led to high fiscal costs and complicated procurement, necessitated a change in approach.

While the fiscal impact for the current year is manageable, the government will forgo revenues from subsidised food sales, and the food subsidy bill is likely to increase over time. However, the extension is not expected to have a significant inflationary impact, as the programme is unlikely to lead to enhanced stress on cereal stocks.