Extension of free foodgrains for five years is likely to cost an additional ₹40,000 crore in the current fiscal, economists estimate. Research agency Nomura predicts that the higher revenue expenditure, also on rural employment guarantee, runs the risk of impacting the government’s FY24 fiscal deficit target of 5.9 per cent of GDP.

The free foodgrain scheme, Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), was supposed to end on December 31, 2023. However, Prime Minister Narendra Modi announced in an election rally on Saturday that the government will extend the scheme for 80 crore poor people for the next five years.

The government had allocated ₹1.97-lakh crore towards food subsidy for the current fiscal of which it has spent over ₹95,000 crore or 48 per cent during the April-September period (H1). Since the scheme is now extended, the government may need more money to fund the extension this fiscal.

“Our current year estimate is below ₹40,000,” said Aditi Nayar, Chief Economist with ICRA. This estimate was supported by other economists that businessline contacted. Research agency Nomura, in a report authored by Aurodeep Nandi and Sonal Varma, said while the near-term macro implications should be muted, the higher revenue expenditure, including on rural employment guarantees, could impact the government’s FY24 fiscal deficit target of 5.9 per cent of GDP.

“Over the medium term, the government is likely to forgo revenues from its subsidised food sales (0.05 per cent of GDP on an annualised basis). As procurement costs increase, the food subsidy bill will also increase over time. Importantly, while the need for subsidised grains for lower income households is undeniable, there are risks with announcing free schemes that lead to competitive populism,” the report said.

More challenges

The Centre is already facing challenges in the form of higher fertiliser subsidy outgo (over ₹22,000 crore approved for nutrient-based subsidies). Additional expenditure is also expected on rural employment guarantee scheme. This coincides with non-tax revenue especially from disinvestment being much lower than the budget estimate.

However, some economists believe the impact to be not negative. MK Agrawal, Professor in the Department of Economics, Lucknow University, said: “This policy initiative aims at several economic goals. These include reducing the pressure on the exchequer that is caused by parking overproduced surplus foodgrains which rot in government storage with a high degree of corruption and leakages. It ensures food and nutritional security in tune with the SDG goals and generates surplus in low income households for creating new and sustainable sources of economic growth. It possibly saves social security expenditures elsewhere.”

Manisha Malhotra, Professor in the Department of Economics, Banaras Hindu University, said, ”This will have a positive impact of reducing the cost of fertilizers for farmers which facilitates optimal use and higher crop yields that boosts agricultural productivity. This helps us retain our self sufficiency in agricultural production and enables free distribution of foodgrains to the marginalised sections.”