Delayed release of food subsidies: FCI resorts to large short-term loans

The Food Corporation of India (FCI) has resumed accepting large amounts in the form of short-term loans and advances on salaries and wages from banks to finance its operations. The company has been relatively comfortable with the cash position over the past year as the government quickly released food subsidy monies, after the practice of NSSF loans for subsidy funding was halted in the FY22 budget for reasons of fiscal transparency.

The CFI is again resorting to short-term loans because budget constraints have slowed the release of grants to the CFI.

Sources told FE that against a request of around Rs 85,000 crore for expenditure from April to May 2022, FCI has only received around Rs 25,000 crore so far. To bridge the gap, he took out short-term loans of around Rs 25,000 crore, sources said. The wheat supply takes place mainly during these two months.

The Ministry of Finance paid Rs 10,000 crore as salary and advance means to FCI, the rest is financed by short term loans.

FCI is mandated to obtain short-term loans of 90 days duration from banks provided to address cash mismatches. These short-term loans carry an interest rate of around 3.85 to 3.9% per annum.

Advances on salaries and resources are released during the year and repayable from the grant allocation for the year towards the end of the current financial year.

Official sources said that in the coming months the government is expected to provide adequate funding to FCI, through which more than 70% of the government’s food subsidy budget is channeled.

Due to a huge mismatch between the increased expenses due to the unlimited supply of rice and wheat under Minimum Support Price (MSP) operations from farmers and the cost of storing excess inventory, between 2016-17 and 2020-21, the government provided it with funds from loans taken from the National Small Savings Funds (NSSF) from 2016-17 to 2020-21 in lieu of food subsidies.

However, Finance Minister Nirmala Sitharaman, in her Budget speech for 2021-22, had announced an end to the practice of off-budget borrowing next fiscal year by making provisions of Rs 3.35 trillion for the payment of NSSF loans. .

The central issue prices of Rs 3, Rs 2, Rs 1 for a kg of rice, wheat and coarse grains under the National Food Security Act (NFSA) have not been revised since 2013. In contrast, the economic cost of FCI (MSP to farmers, storage, transport and other costs) of rice and wheat for 2022-23 is Rs 36.70 and Rs 25.88 per kg, respectively.

FCI purchases and distributes over 60 million tonnes (MT) of wheat and rice per year. The company manages the procurement, storage and transportation of rice and wheat to states for distribution, primarily for NFSA and other social welfare programs.

For 2022-2023, the central government has allocated Rs 2.06 trillion for food subsidy expenditure, of which Rs 1.45 trillion or 71% is provided to FCI. However, following the extension of Pradhan Mantri Garib Kalyan Anna Yojana, an additional Rs 0.8 trillion will be spent on food subsidies.

Currently, FCI relies on its working capital lending through bonds, way and means advances, and short-term loans.

More than 800 million people receive heavily subsidized food grains of 5 kg per head per month under the NFSA. This includes approximately 25 million Antyodaya Anna Yojana households, which constitute the poorest of the poor. They are entitled to 35 kg per household per month at subsidized prices.

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