Food Security Bill: Good politics to deliver bad economics

The ambitious proposal should be seen in the context of India being home to roughly one third of the world’s poor; where over 70 per cent of children are malnourished and about 10 million or more people die of chronic hunger or hunger-related diseases every year.

The Food Security Bill, the UPA-II’s flagship scheme, envisages the distribution of wheat, rice and coarse grains at just Rs 2, Rs 3 and Re1 a kilo each to about 65 per cent of the population — 75 per cent of them in rural areas and the rest in cities and towns. Add to that, some entitlements to ‘special groups,’ like destitutes or homeless persons, who will be entitled to at least one meal a day.

Through this world’s largest experiment of providing food grain to poor, the government plans to double its food subsidies to 2 per cent of the GDP. If the government machinery is able to deliver on Congress chief Sonia Gandhi’s pet project, it could mean the end to country’s widespread malnutrition and poverty relatively soon!

“It’s a most thoughtful and timely action, in the light of coming UP elections and thereafter the 2014 general elections,” said Prof B B Bhattacharya, eminent economist and former vice-chancellor of Jawaharlal Nehru University.

Then what is the clamour all about?  Why are some people hell-bent on opposing it? The general view is that if the government can pull it off, it can be the biggest trump card for the UPA government, at a time when nothing seems to be working in its favour at the moment –- neither politics nor economics.

Bad economics
But, one very important factor worth taking notice is: the scheme can severely impact on India’s economic growth prospects, should the populist measure be brought into force.

The proposed Food Security Bill came on a day (Thursday) when the Reserve Bank of India also came out with its Financial Stability Report, which categorically states that India’s inflation risk  remains high and a slowdown in revenue collections and higher spending on subsidies may make it challenging for the government to achieve the fiscal deficit target of 4.6 per cent of the Gross Domestic Product (GDP) this financial year (2011-12).

It also said that India’s trade deficit for this fiscal is expected to widen sharply to between $155 billion and $160 billion from a little above $104 billion a year ago.
Economy watchers say, both these deficits will only bloat immensely in due course, should the bill be passed and implemented. But, it is the trade deficit, which will soar manifold since the government will have to resort to large scale import of food grain as our own grain output is not adequate to handle such a voluminous expenditure programme.

“It will worsen the fiscal deficit situation, but more than that it is India’s trade deficit which will be hit hard as the programme will require 70-80 million tonnes of more food grain every year. India obviously does not produce that much and the shortfall will have to be met from imports,” said Prof Bhattacharya.

The country produces 225-230 million tonnes of food grain every year barring a bumper crop year when the output surges by a few million tonnes more. Where will the rest come from, if not from overseas market! Economists opine, it will increase food inflation.

Analysts at Kotak Mahindra Bank said that besides skewing the food inflation to a higher side, the move will also result in rise in prices of food grain for non-beneficiaries of the programme. “There will be pressure on prices of food for those outside this scheme,” an economist of Kotak said.

Procurement problem
As regards the increased requirement of food grain for distribution under the Act, Union food minister K V Thomas said only 15 per cent more supplies would be needed as the Centre is already distributing 526.8 lakh tonnes through public distribution system, while the estimated demand under the Act will be 607.4 lakh tonnes. He said government can even procure more for the purpose. Currently, government procures only 30 per cent of the total production.

But, what about government’s delivery mechanism? “If the government goes in for enlarging the public distribution system without revamping it, where is the guarantee that the intended food grain will reach the poor?,” Bhattacharya asked. Then there is problem of storage. Currently, the state-run Food Corporation of India and the Central Warehousing Corporation have the capacity to store 87 million tonnes of grain. The CWC has 487 warehouses with a capacity of 10.6 million, while the FCI, with 1,500 godowns, accounts for the rest.

The new measure, according to experts, will cost an additional sum of Rs 27,000 crore annually to the exchequer, while the government puts it at Rs 21,000 crore by way of subsidies. But, the question is: can a government, burdened with whopping food, fuel and fertiliser subsidies, afford such a large expenditure programme, especially when the Mahatma Gandhi National Rural Employment Guarantee Scheme is already drilling a large whole in the nation’s kitty?

Policymakers say that the government can find resources provided it cuts down or ends the oil subsidy to offset the additional burden arising out of the Food Security Bill. But the government is unlikely to do that, as it will not go down well among the voters in an election year.