Food Subsidy in India: Trends, Causes and Policy Reform Options

India has one of the largest food subsidy programmes in the world that has created a relatively effective social safety net but is also under increasing criticism because of its large contributions to government budget deficits, economic inefficiency and poor targeting. The Food Corporation of India is always under attack from all quarters for perceived operational inefficiencies leading to increase in the food subsidy burden. This paper analyses the trends in volume of food subsidy in the post-reforms period (1991-92 to 2012-13) and then examines various components of food subsidy, which are under the control of FCI and those beyond the control of FCI, and relative contribution of these components to total subsidy during the last decade. Broad policy options for containing food subsidy are also suggested in the paper. The data on food subsidy clearly shows that subsidy has increased significantly in the post-reforms period in general and during last 6-7 years in particular reaching a record level of Rs. 72283 crore in 2011-12. The total cost of food subsidies that amounted to about 2.2 per cent of agricultural GDP during the 1990s increased significantly to about 5 per cent during the last decade. Increase in procurement price was main contributor to increase in economic cost of foodgrains which is responsible for rising food subsidy. Other components, which contributed to food subsidy, included open-ended procurement policy, increase in procurement costs mainly statutory charges by state government on procurement of foodgrains, constant central issue prices and distribution costs. However, most of these variables are decided by the government and are beyond the control of FCI. Despite increase in absolute value of subsidy components that are under the control of FCI, there has been an improvement in the efficiency of Corporation’s operations, e.g. share of administrative charges of procurement costs, and storage losses have declined during the last decade. Improvement in operations of FCI, though desirable, may not lead to significant reduction in the subsidy. Therefore, steps need to be taken to reduce other costs through appropriate procurement price policy, public-public participation through involvement of more states in procurement and distribution of various foodgrains including coarse cereals, reduction in statutory and non-statutory charges charged by state governments, encourage private and/or public-private partnership in creating scientific storage facilities to reduce losses, need-based procurement of foodgrains, and periodic and affordable increase in central issue price.