Expenditure department cautions against more steps burdening the fiscal health

The expenditure department in the finance ministry has cautioned against extension of the free ration scheme beyond September or reduction in any major tax rates. The country’s fiscal health is already under stress due to additional subsidies on fertilisers, cooking gas and reduction in excise duty on auto fuels and any further relief poses serious adverse fiscal consequences, it said.

“It is vital that major subsidy increase/tax reductions are not done. In particular, it is not advisable to continue the PMGKAY beyond its present extension, both on grounds of food security and on fiscal grounds,” the department wrote in its monthly summary report for May.

“Recent decisions on continuation of PMGKAY, the huge increase in fertiliser subsidy burden (both urea & non-urea), re-introduction of subsidy on cooking gas, reduction of excise duty on petrol & diesel and customs duty on various products have created a serious fiscal situation. The budgeted fiscal deficit at 6.4% of GDP was itself extremely high by historical standards, and deterioration therein poses a risk of serious adverse consequences.”

On March 26, the government extended the PMGKAY by six months till September 2022 at an additional cost of Rs 80,000 crore. This was not factored into the Budget for FY23.

The department said each family is getting 50 kg of grains, 25 kg at a nominal price of Rs 2/Rs 3, and 25 kg free. “This is far beyond the need at a non-pandemic time.”

The government is scouting for additional revenues as extra expenditure over the Budget estimate is seen as about Rs 2 trillion on account of higher subsidies on fertiliser, free grains scheme and LPG subsidy for Ujjwala beneficiaries in FY23. The excise duty cuts on auto fuels and customs duty reduction on several items would also result in a revenue loss of about Rs 1 trillion the current financial year.

Besides some extra borrowing, finance ministry officials are banking on additional tax revenues to cover the bulk of the extra expenditure and also partly by raising more resources via the government disinvestment programme in FY23.

The expenditure department’s comment seems to dissuade the government from extending the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) beyond September. An extension would mean that in the current financial year, it could end up spending a tidy sum of Rs 1.6 trillion to run the scheme.

Until the end of FY22, the Centre had spent Rs 2.6 trillion on PMGKAY, which was rolled out as a Covid-19 relief package for the low-income population in March 2020.

The scheme has yielded political dividends to the ruling National Democratic Alliance (NDA) in the recent Assembly elections in five states, including Uttar Pradesh. The supply of free grains as part of the PMGKAY scheme was initially launched for the April-June period of FY21 and it was later extended till November-end 2020.

In the wake of the second wave of the pandemic, it was reintroduced in May 2021 and then got extended till FY22-end.
Under the scheme, 814 million people are eligible for 5 kg free wheat/rice per person per month, ie, a family of five will receive about 25 kg grains free of cost in additional to 25 kg the family is entitled to receive at Rs 2/kg under the National Food Security Act.