Pitfalls of the food security bill

April 16, 2013

(Any opinions expressed here are those of the author and not of Thomson Reuters)

The food security bill will be introduced in the current budget session of parliament, more because of its populist appeal than any economic urgency. Even when the bill was discussed by the Cabinet, Finance Minister P. Chidambaram and Agriculture Minister Sharad Pawar reportedly had reservations. They had valid reasons.

Subsidized food distribution is nothing new. Already 400 million people avail of it from over 500,000 fair price shops. What the bill intends is to widen the scope of the present scheme and cover two-thirds of the population with five kg of grain per beneficiary at nominal rates.

The finance minister has provided for 900 billion rupees as food subsidy in Budget 2013. That’s about 40 percent of the total subsidies and 2 percent of India’s GDP. Under the food security bill, the subsidy for the full year would be 1.2 trillion rupees, which will take the budget deficit to 4.85 percent from 4.8 percent.

C. Rangarajan, chairman of the Prime Minister’s Economic Advisory Council has suggested that if total subsidies are contained at 1.2 percent of the GDP, there should not be any budgetary problem. That means that if subsidies on food have to increase, subsidies on other products, such as petroleum, will have to be lowered or withdrawn. Whether this financial balancing is politically feasible is anybody’s guess.

The question is not only of budget distortion that food security can cause. Equally important is whether there will be enough food grain to go around. Presently, the government procures about 40 million tonnes of cereals. With the need to distribute additional food grains to a larger section of consumers under food security, the government will have to procure an additional 35 million tonnes. That will instantly reduce the amount of grain sold in the open market, creating scarcity and inflation.

Farmers are worried that the government will emerge as the single major buyer of food grains and will regulate the margin between procurement price which farmers get and the issue price which consumers have to pay. Since the latter is nearly fixed, procurement prices may not be allowed to increase. That is what farmers fear.

It is tempting to look upon the food security bill as an election gimmick like the loan waiver scheme adopted five years ago. But food security is also an excellent political instrument to accelerate economic growth. That is the experience of most countries. Food security enables a better diet for all people and enhances labour productivity which is critical for higher GDP growth.

But to eliminate the possible adverse consequences and make food security economically efficient, it is necessary that agricultural production is simultaneously increased and petroleum subsidies substantially reduced. With that, the additional procurement will not result in market shortages and inflation and total subsidies will not exceed 1.2 percent of India’s GDP.

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