Prime Minister Narendra Modi’s announcement extending the free foodgrains programme by five years beyond its current end-date of December, adds to medium-term risks but may not impact the fiscal math for the current financial year significantly unless more populist measures are unveiled ahead of the Lok Sabha elections, Nomura economists said on Monday.
“PM Modi’s announcement has effectively cemented this into a policy for the medium term… We had expected a six-month extension instead,” Nomura’s economists Sonal Varma and Aurodeep Nandi wrote in a research note. “In our view, this reflects the difficulty in withdrawing populist policies, especially ahead of elections… Once announced, free schemes are always difficult to roll back and can lead to competitive populism,” they added.
Although the near-term fiscal and inflation impact of the extension of the 5 kilograms free food grain scheme, which costs ₹2 lakh crore or 0.7% of GDP annually, is manageable, the economists reckoned that the government’s food subsidy bill would increase over time with procurement costs. Moreover, the government would be foregoing revenues from the subsidised food sales to the poor, which could amount to 0.05% of GDP annually.
While the need for subsidised grains for lower income households was “undeniable”, there were risks with announcing free schemes that led to competitive populism, the economists underlined.
Mr. Modi, they noted, had recently spoken out against populist measures and a spate of freebies promised by the opposition Congress party ahead of the Karnataka polls, where it had defeated the BJP, and the upcoming State elections. “It is unsurprising that the BJP is also attempting to sound ‘populist’,” they concluded on the political compulsions behind the extension of the foodgrain scheme.
While the scheme’s extension should have a minimal fiscal impact this year, the “higher-than-budgeted rise in revenue expenditure, including rising rural employment guarantee spending and the propensity to announce further populist measures in the run-up of the general elections” could impact the fiscal deficit target of 5.9% of GDP.
The Centre’s expenditure on food subsidy in the first half of this year has been about ₹1 lakh crore, about 15% below the previous fiscal, with the full year’s Budget pegged at ₹2 lakh crore or 0.65% of GDP, down from a high of 2.7% of GDP in 2020-21.
