Alarmed at a whopping food subsidy of Rs 24,000 crore (Rs 240 billion), the government on Friday, in a far-reaching decision, allowed Food Corporation of India to tap the capital market to reduce its current interest burden and cut budget subsidies by at least Rs 2,000 crore (Rs 20 billion).

"Effective from April 1, FCI can borrow from the market through bonds backed by a government guarantee. It is likely to contribute to a reduction in Centre's revenue expenditure, on account of food subsidy, by a minimum of Rs 2,000 crore annually," Finance Minister Jaswant Singh announced in New Delhi.

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Giving details of a comprehensive agri-food package, he said the move will enable FCI to fund its requirements at a rate that broadly reflects the cost of capital to government. which at present averages 7.5 per cent annually.

He said the initiative will minimise the burden on the budget, as well as the financial system in terms of interest cost on funding of the buffer stock operations of the FCI.

FCI maintains buffer stocks in over 2000 godowns on behalf of the Centre to meet exigencies and run the world's largest ration shop or public distribution system.

In November last year, FCI's board of directors had agreed on borrowings from the capital market to reduce the burden of debt servicing on the company currently at a very high rate of 10.95 per cent.

Earlier the Reserve Bank of India asked the FCI to start the process of a change over from the borrowings being restricted to a consortium of banks to an entry into the money market. Talks were initiated with finance ministry which culminated in Friday's announcement, sources added.