Why PM Modi’s announcement extending the PMGKAY by five years may not impact the fiscal deficit target so soon

At an election rally in Chhattisgarh’s Durg, Prime Minister Narendra Modi made a surprise announcement that the government will extend the scheme to provide free foodgrain for five more years until December 2028. Of course, it wasn’t expected to come to an abrupt end.

Launched at the height of the Covid-19 pandemic in 2020, the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) provides 5 kg of free foodgrain per person per month and was set to be discontinued by December-end, 2023. The scheme has had a huge impact with an estimated 813.5 million beneficiaries, or nearly two-thirds of the country’s population.

The extension makes for good optics, and is being seen as the Bharatiya Janata Party (BJP)-led government’s largesse to woo voters in the ongoing state elections, and has rankled the Opposition that called it a violation of the model code of conduct. But in terms of the fiscal math, it may not have much of an impact. Government officials and experts believe the Centre is likely to meet its fiscal deficit target of 5.9 per cent of the GDP for the current financial year. The fiscal deficit is the difference between the government’s expenditure and its revenue. But, for now, buoyant tax revenue and controlled expenditure are expected to cushion the impact of continuing the scheme.

The Math

Consider this: between 2020-21 and 2022-23, the central government has spent a total of Rs 3.91 lakh crore on the PMGKAY. For the one-year period starting January 1, 2023, the likely expenditure on the scheme is Rs 2 lakh crore. In the first six months of the current fiscal, the central government spent Rs 99,243.92 crore on the food subsidy bill. This was about 14.6 per cent lower than the Rs 1.16 lakh crore spent between April and September 2022.

This is much in line with the Centre’s overall expenditure trend as well, where only 47.1 per cent of the overall expenditure target of Rs 45.03 lakh crore for the fiscal was spent between April and September 2023, with a greater focus on capital expenditure. Revenue receipts have been robust at Rs 13.9 lakh crore in the period, or 53 per cent of the Budget Estimates.

However, with five months of the fiscal year still left, the question is whether revenue expenditure will see a massive push in the backdrop of the impending General Elections.

“The fiscal burden on account of the extension of the PMGKAY is limited, as the government has been able to absorb its impact given that it has been continuing for some time. It is also a welfare measure and is aimed primarily at low-income groups,” notes D.K. Srivastava, Chief Policy Advisor of EY India, while cautioning that there could be pressure if global crude oil prices remain volatile.

To be sure, this isn’t the scheme’s first extension. Last December, ahead of elections in Himachal Pradesh and Gujarat, the government announced the merger of the PMGKAY with the National Food Security Act for providing free food grain to Antodaya Anna Yojana (AAY) and Primary Household (PHH) beneficiaries for a year.

Nomura economists Aurodeep Nandi and Sonal Varma, in a recent note, also said the near-term macro implications should be muted. “Over the medium term, the government is likely to forego revenues from its subsidised food sales (0.05 per cent of GDP on an annualised basis). As procurement costs increase, the food subsidy bill will also increase. Importantly, while the need for subsidised grains for lower-income households is undeniable, there are risks with announcing free schemes that lead to competitive populism,” they said.

Welfare Bill

Experts are also closely monitoring the impact of volatile crude oil prices and higher outlays for other welfare schemes. Crude oil prices, particularly, continue to be a worry in light of the conflict in the Middle East. The Centre is expected to maintain the pause on retail crude oil prices in a bid to keep inflation under control and keep voters happy. Retail oil prices have not been changed for a year and oil marketing companies that have been making a profit in the recent past, may be able to absorb the impact of the unchanged prices.

But higher allocations to welfare schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme could dent the fiscal math to some extent. According to Nomura, the higher-than-budgeted rise in operational (revenue) expenditure, including rising rural employment guarantee spending, and the propensity to announce further populist measures in the run-up to the elections could impact the FY24 fiscal deficit target of 5.9 per cent of GDP.

Another round of increases in the LPG cylinder subsidy may also be in the offing under the Pradhan Mantri Ujjwala Yojana after hikes in September and October.

Andrew Wood, Director, sovereign ratings at S&P Global Ratings, in a recent webinar said that more expenditure initiatives are possible through this election cycle. “In the very near term, these

could be supportive of consumption, as we tend to see around these periods of time. But it’s unlikely that they’re going to have a major impact on medium-term finances,” he, however, said.

What is a source of comfort is that, by and large, the government has managed to stick to its fiscal consolidation plan. But how these developments pan out over the next few months will be critical.

@surabhi_prasad