It is widely acknowledged among learned circles that a larger drawdown of inventory of stock of foodgrain (some of which rots) and corresponding subsidy payment is limited by current accounting policies of the government not shifting to an accrual basis.
Specifically, drawdown of foodgrain stocks by Food Corporation of India (FCI) and distribution to fair price shops is restricted to the provision of cash subsidy in the budget of food ministry. Out of a budget of Rs 88,000 crore as observed in the accounts for 2010-2011, expenditure on revenue account is Rs 66,328.99 crore (about 0.7 per cent of the GDP), of which the subsidy to FCI is Rs 50,729 crore and another Rs 12,200 crore is to state governments.
These payments are booked in the appropriation accounts of the government and constitute the backbone of food security for millions of citizens below the poverty line and are being sought to be enhanced in the Food Security Act (FSA).
Such expenditure contributes directly to fiscal deficit, as would all uncovered subsidy amounts, which strikes a paradoxical note since food subsidy leads to human capital formation and is desirable in our country, albeit with improved targeting and prevention of leakages.
For sale of foodgrains to identified persons under the system of fair price shops, the cash payment from the government to FCI is imperative. The current ‘Cash System of Accounts’ adopted by the government does not permit keeping any expenditure as ‘payable’ such that there would appear a ‘receivable’ figure for the same amount in the books of FCI, which uses an accrual system of accounting.
Any form of delayed payment or issue of IOU in lieu of cash, would still warrant recording a ‘payable’ in the books of the government in favour of FCI or increase indebtedness. This would still not reduce fiscal deficit pressures that operate on government and constrain increases in food subsidy, which on estimates of expenditure in 2012-13 is about 1 per cent of the GDP.
Soon the balance sheet of FCI would reflect a large receivable figure which would need to be cashed by FCI to continue its operations of procuring at MSP and selling at FSA prices.
The solution has to be one with no further adverse effects on the fiscal position of government and so the burden of payment would have to be borne by other entities.
Innovations in financing the food subsidy