FCI back to off-budget borrowing to meet food subsidy, other costs
Off-budget funding refers to the practice of financing an expenditure that is not fully accounted for in budgetary allocations. It often helps the government to lower the fiscal deficit number.
After a widely appreciated clean-up of the books of the Food Corporation of India (FCI) by the Union government, which paid off its ballooning debt of ₹3.39 lakh crore in 2020-21, food subsidy may again have to be funded off-budget, not an ideal thing, experts say.
Off-budget funding refers to the practice of financing an expenditure that is not fully accounted for in budgetary allocations. It often helps the government to lower the fiscal deficit number.
Presenting the Budget 2023-24 on February 1, Union finance minister Nirmala Sitharaman pegged the fiscal deficit – the gap between what the government earns and spends – at 5.9% of GDP for FY24, reiterating her commitment to bring it down to 4.5% of GDP by FY26.
The latest budget has been widely seen as signalling a path towards fiscal consolidation, or actions to reduce debt, while pushing growth through higher investment in assets.
A large fiscal deficit influences sovereign credit-worthiness ratings assigned by global ratings agencies. A poor rating increases the government’s borrowing costs.
Lower fiscal deficit projected in the budget comes on the back of a cut in the estimated spending on food, fertiliser and fuel subsidies for 2023-24. Spending on these items — which accounts for the largest revenue spend after interest payments — is estimated to be at ₹3.74 lakh crore for FY24, down 28% from the revised estimates for the ongoing financial year, Budget documents showed.
The subsidy on food for 2023-24 is estimated to be ₹1.97 lakh crore, compared to ₹2.87 lakh crore in 2022-23. However, budgetary allocations may not be enough for the FCI, which will have to resort to borrowing off-budget both in 2022-23 and 2023-24.
The FCI is the Centre’s main grain-handling agency, which utilises the food subsidy to provide grains to 800 million people.
Statement 25 of the expenditure profile of the Budget 2023 shows two things. One, the FCI is provisioned to borrow ₹15,000 crore in the ongoing financial year. Two, for 2023-24, the FCI will again borrow ₹40,000 crore through external commercial borrowings (ECB) and another ₹1.05 lakh crore through “others”, which denote borrowings from banks and a usual source, the National Small Savings Fund (NSSF).
The elimination of the FCI’s accumulating debts in 2020-21 was part of a broader policy to eliminate hidden subsidies by accounting for them in the fiscal deficit, a stance spelt out by the finance minister in the Union Budget 2021-22.
“Because the government was serious enough to clean the books of FCI, it is a little difficult to understand why the government would again fall back on this kind of borrowing. It is not logical in my view,” said N R Bhanumurthy of the Dr BR Ambedkar School of Economics, Bengaluru.
India’s accounting practices are cash-based. An expenditure is incurred only when a debit is charged against the government’s bank accounts. By making the FCI rely on incessant borrowing to fund its operations, rather than paying it directly, the government has managed to limit its fiscal deficit in the past.
