Free Reports

If FCI was Paid What Govt Owes It, Fiscal Deficit Would Have Been 4% of GDP

Feb 5, 2019

Vivek Kaul

No number fudged, Prime Minister wanted honest budget. - Piyush Goyal, finance minister of India.

It all depends on what we mean by meaning. - Jonathan Franzen, The End of the End of the Earth.

In response to yesterday's piece, some readers wrote in wanting me to discuss the role of the Food Corporation of India (FCI) in the government's fiscal deficit, in a little more detail. Fiscal deficit is the difference between what a government earns and what it spends, and is expressed as a percentage of the gross domestic product (GDP).

Let's try and understand this pointwise.

1) First and foremost, it is important to understand the role of FCI, in the Indian economy. FCI was founded in 1965 to basically fulfill these three objectives: a) provide the right price to farmers and in the process protect their interests. b) distribute foodgrains through the length and breadth of India through the public distribution system (or ration shops as they are better known as). c) ensure food security by maintaining buffer stocks of rice and wheat.

2) The FCI fulfills these objectives by buying rice and wheat directly from farmers at a minimum support price (MSP), which is set by the government every year. There is a lot of politics involved in the setting up of MSP, but this is not the place to discuss it.

3) Once FCI buys the rice and wheat it stores it in its godowns. From there, the rice and wheat is moved from the surplus states (which produce much more rice or wheat than they consume) to the deficient states (which consume much more rice or wheat than they produce), and sold through the public distribution system, at a very low price. This is to meet the requirements of the National Food Security Act and other welfare measures of the government.

4) Hence, in that sense, FCI is offering a subsidy to those who are entitled to buy rice and wheat from the public distribution system, at a very low price. The FCI does not have access to an endless supply of money and given this needs to be compensated by the government for this.

5) The government compensates the FCI through the money it allocates towards food subsidy in the budget. Take the case of the current financial year. The government has allocated Rs 1,71,298 crore towards food subsidies. Of this Rs 1,40,098 crore is supposed to go to FCI.

This payment is essential because FCI needs to continue to be in operation, so that it has the money to buy rice and wheat when the next year and the next cycle of buying comes around.

6) So far so good. Everything seems straightforward. But this is where things start to get complicated. The expenditure of the government works on a cash basis. This basically means that unless a government has paid for something, with money leaving its bank account, it is not counted as expenditure. This is a loophole (for a lack of a better word) that the government makes use of when it comes to FCI. The accounting of the government does not work on an accrual basis as it does in case of corporates.

7) Over the last few years, every year, the government does not pay FCI, the amount it should actually be paying to settle all its dues.

While, the government has budgeted Rs 1,40,098 crore to pay FCI during the course of this year, it is not enough. This is not something new and has been happening for nearly two decades. Nevertheless, earlier it used to happen in a small proportion. It has now become gargantuan.

In 2000-2001, 90.4% of the subsidy incurred by the FCI was paid by the government. By 2016-2017, this had dropped to 48.9%.

The payment not made, gets carried over to the next year. It is referred to as a carryover liability. The carryover liability has gone up year after year. In 2011-2012, it was at Rs 23,427 crore. By the start of this financial year (2018-2019) this had reached Rs 1,35,822 crore.

The government has allocated Rs 1,40,098 crore to FCI during this financial year. This means that the carryover liability will get paid off totally.

Further, Rs 4,276 crore (Rs 1,40,098 crore minus Rs 1,35,822 crore) will go towards paying the subsidies incurred by the FCI during this financial year. The net subsidies incurred by FCI during 2018-2019 stand at Rs 1,25,198 crore. Hence, in reality Rs 1,20,922 crore (Rs 1,25,198 crore minus Rs 4,276 crore) of subsidy will remain unpaid.

This will become a carryover liability for the FCI and move on to next year. And this is the money that the government should technically be paying FCI, but it's not. Given this, no money is leaving the government accounts, and hence, no expenditure is being incurred. Since, no expenditure is being incurred, the government expenditure comes down to that extent and so does the fiscal deficit.

8) If FCI does not get compensated correctly, how does it continue to operate. It borrows money. Like the interim budget, presented by the finance minister a few days back tells us that during 2018-2019, FCI raised total of Rs 1,56,943 crore from "others". The budget does not tell us who these others are.

In fact, in 2016-2017, the FCI had borrowed Rs 70,000 crore from National Small Savings Fund. This went up to Rs 1,21,000 crore in 2017-2018. National Small Savings Fund is where the money invested in small savings schemes like the Public Provident Fund, post office savings deposits and certificates, lands up.

Technically, all this borrowing should show up on the books of the government, as expenditure and then as borrowing to finance that expenditure, but it doesn't. This, as explained earlier, happens because government accounts work on a cash basis.

9) Of course, FCI pays interest on this borrowing. This interest also gets added to what the government owes it, and gets carried forward to the next year.

10) As mentioned earlier, FCI is also responsible for food security and needs to maintain food stocks. As of January 1, FCI needs to maintain a buffer of 214 lakh tonnes of rice and wheat. The actual stocks it had amounted to 454 lakh tonnes, more than double of what is required. This was an excess 240 lakh tonnes of rice and wheat. This has its acquisition cost and as well as carrying cost. This tells us at some level that the procurement policy of FCI is flawed. It's buying much more than what is required. In the process, it encourages farmers to grow rice and wheat in quantities which are not required. When farmers grow rice and wheat, they end up not growing some other agricultural crop in enough amounts.

This also tells you that given the lack of a proper agriculture market in a country, farmers simply prefer selling to the government, wherever FCI has procurement centres. This is too big a problem to be discussed just here. So I will leave it at that.

11) Basically, all the borrowing that FCI does actually should be on the books of the government. If the entire amount due to FCI had been paid off this year, and everything else had remained the same, the right fiscal deficit of the government would have been Rs 7,55,320 crore (Rs 6,34,398 crore plus Rs 1,20,922 crore, subsidy which remained unpaid) or 4% of the GDP, instead of the Rs 6,34,398 crore or 3.4% of the GDP that has been reported in the interim budget.

12) The interesting thing is that at smaller levels, this strategy is also followed to delay payments to fertilizer as well as oil companies.

13) What this shows is that if the government accounts were presented in the right spirit, the fiscal deficit would have easily been more than 4% of the GDP. The extra borrowing the government carried out to meet this extra expenditure would have been on its books. Further, the interest paid on this extra borrowings would have been a part of the annual budget, every year. It currently gets postponed into the future.

The government of India clearly has the assets, which it can sell, and pay off this amount that is outstanding. But there are no plans to do so. For 2019-2020, the total subsidy bill of FCI is expected to amount to Rs 2,63,518 crore. In contrast, the government has allocated Rs 1,51,000 crore to be paid to FCI. This means Rs 1,12,518 crore will be the carryover liability. And so the story will continue.

14) Sadly, and I hate to point this out, you will not see fat cat corporate economists in general, make this point at all. For them, all is well, with any government. Their incentives are totally misaligned.

To conclude, the operations of FCI have been abused by governments (the current one as well as the ones before it) for too long, to show a favourable fiscal deficit number. This needs to stop. The nation needs to know the right fiscal deficit of the government.

Regards,

Vivek Kaul
Vivek Kaul
Editor, Vivek Kaul Publishing

PS: Now you can follow Vivek Kaul on Social Media and get Vivek's updates on the critical issues affecting the economy and your wallet... as they happen. Follow Vivek on Facebook, Twitter, and Google+.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "If FCI was Paid What Govt Owes It, Fiscal Deficit Would Have Been 4% of GDP". Click here!

6 Responses to "If FCI was Paid What Govt Owes It, Fiscal Deficit Would Have Been 4% of GDP"

Virag

Feb 7, 2019

Informative. But if FCI has additional source of borrowing and they too are paying intrest on same which is ultimately being accured from govt only than there should not be an issue. But yes regarding fiscal deficit it holds true .. The govt mathematics on cash v/s accural cant be changed due to mutliple factors but yes limiting the portion of "Carryover Liability" from 1 fiscal to another should always be capped to have a control on either side rgds virag

Like 

Jayant Gharpure

Feb 6, 2019

You are missing the point.if Govt has not paid for procurements in the current year but it must have accounted for payments due carried forward from last year.so the effect FD can't be significant unless the difference in CF is high. Can you present income & expenditure account of FCI?

Like 

Riaz

Feb 6, 2019

A big fan of all your articles which is designed so well and narrated. Pls keep up the great work!!

Like 

R ASOKKUMAR

Feb 5, 2019

FCI borrows from the banks also. The outstanding food credit as on 4th January 2019 was Rs. 72,340 cr. This includes loans to FCI and State Agencies. If the Govt pays the entire subsidy to FCI, there is no need to borrow for FCI and the banking system will have adequate liquidity to meet the requirements of MSMEs, one demand of Govt from RBI.

Like 

Vikram Bhatt

Feb 5, 2019

Respected Sir, As usual your article is very informative and full of merits. However of late one (at least i) get feeling that you tend to lean against present central Government. As you have admitted in your article that what current Government is doing is just continuation of procedure adapted by previous Governments as far as FCI matter is concerned. In light of this is it fair to use "Fudget" word? As you very well know, the most of proven and known corrupt politicians have ganged up against PM only because he is visibly after cleaning up the system. Your words carry lot of weight and it would be a disservice to the nation if you directly or indirectly end up acting against current Government. Of course as a voter you could still Express your feelings at time of voting Looking forward to read your regular words of wisdom. Best. Regards Vikram Bhatt

Like 

Gopal Sureka

Feb 5, 2019

Why international rating agencies like Fitch, S & P cannot make the calculations to find out the the true deficit. Or demand from the Government the figures separately.

Like 
  
Equitymaster requests your view! Post a comment on "If FCI was Paid What Govt Owes It, Fiscal Deficit Would Have Been 4% of GDP". Click here!