Food Subsidy in India


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Food Subsidy in India

  1. 1. SUBSIDY: IT WILL NOT STOP AT RS 60,000 CRORES HOW E CO N O M I C AL L Y S US T AI N A BL E I S F O O D S U BS I D Y ? T HE CO S T C O UL D E VE N B E D O U BL E O F W H A T T HE GO VE RN M E N T E S TI M A TE S Food deprivation and malnutrition are completely unacceptable and everything has to be done to eliminate such an evil. The prevalence of malnutrition in a country like India is in itself a cause for serious concern since malnourished children may jeopardize India’s favorable demographic dividend (as per independent estimates, close to 60 per cent of India’s population is in the age group of 15-59 years). However, the question is whether we can afford to have a food subsidy bill (FSB) and if such an endeavor is economically sustainable. This paper tries to argue that the fiscal viability of the proposed FSB is not clear and the delivery outcomes could be highly compromised given the governance weaknesses and ineffective delivery mechanisms in place. We understand that currently there are different versions of FSB. For example, the FSB on the National Advisory Council website is the initial version that had proposed to cover the entire segment of the population. The draft version on the department of food and public distribution website then proposed coverage to 75 per1 cent of rural population and 50 per cent of urban population. ThePage Prime Minister’s Economic Advisory Council (PMEAC) version proposes at least 75 per cent coverage of the country’s population with 90 per cent of rural coverage and 50 per cent of urban coverage. We have worked out the estimates as per the draft version and our simulations show that the food subsidy estimates under this version are not significantly different from the PMEAC version. As published in The Indian Express – here & here
  2. 2. The fiscal viability/ cost can be estimated in the following manner: The FSB for the rural area proposes to provide subsidized (at a fixed price not exceeding Rs 3/kg for rice, Rs 2/kg for wheat and Re 1/kg for coarse grains) foodgrains (7 kg per person per month) to 75 per cent of the rural population, with at least 46 per cent to the priority rural households and the remainder to the general rural households. It may be noted that the government of India is yet to specify the criteria for categorization of population into priority and general households. Let us call it A. The FSB for the urban area proposes to provide subsidized (at a fixed price not exceeding 50 per cent of the 2010-11 procurement prices for rice, wheat and coarse grains) food grains (3 kg per person per month) to 50 per cent of the urban population, with at least 28 per cent to the priority urban households and the remainder to the general urban households. Let us call it B. We also estimated the storage cost for the additional food procurement. The storage cost was estimated separately for (a) 5- 7 per cent of the foodgrains wastage, (b) creation of additional storage capacity for at least 13 million tonnes across 15 states as estimated by the ministry of food, consumer affairs and public distribution at an average cost of Rs 5,000 per metric tonne and (c) refurbishing existing storage capacity for the remaining foodgrains procured at an average cost of Rs 1,000 per metric tonne. Let us call it C.2 As per the ministry of food, consumer affairs and publicPage distribution, there is a leakage of 36 per cent of food grains (17 per cent through bogus cards and 19 per cent through fair price shops). We estimated the cost of such leakage separately. It is in fact an irony that such subsidized food grains meant for farmers are sold in the open market and possibly bought back by the poor people at a higher cost, thereby defeating the entire purpose. Let us call it D. As published in The Indian Express – here & here
  3. 3. There is also the additional cost of (a) providing free nutritious meals free of charge, during pregnancy and six months thereafter to women and an additional maternity benefit of Rs 1,000 per month, (b) nutritional food to children (with particular emphasis on malnourished group) in the age-group of six months till six years), and (c) mid-day meal to lower and upper primary classes. Let us call it E. The cost of transporting food grains to different ration shops is also estimated separately, as per the government estimates. Let us call it F. Hence, the total cost can be estimated as the sum of A+B+C+D+E+F (refer to the table for details). Our estimate of FSB assumes a 15 per cent per year increase in MSP. This is based on the observed increase of 15 per cent compounded annual growth rate (CAGR) between FY06 and FY11. We further assume that the FSB is implemented in full measure in the first year itself. On the basis of these two primary assumptions (other assumptions are listed in the footnote to the table) and summing A and B, the minimum cost to the exchequer of implementing FSB amounts to Rs 80,000 crore in the first year. If we, however, include components C, D, E and F the total outlay for FSB will amount to Rs 143,000 crore, in year one. This amount is far higher (more than double) than the budgeted food subsidy estimates for current fiscal at Rs 60,000 crore. Moreover, the incremental estimate of Rs 20,000 crore that has been put out by the government on the basis of only some incremental costs (namely A & B component) is a gross underestimate. In fact, our estimate is the minimum one3 and it still is close to Rs 4,57,000 crore in first three yearsPage (close to Rs 5,00,000 crore, if we add administrative cost). This is not very much different from estimates in the first three years that pegs it even higher (Rs 6,00,000 crore made by Ashok Gulati). This apart, we estimate that the total minimum food grains requirement for this endeavor will be 61 million tonnes. As published in The Indian Express – here & here
  4. 4. Second, there are still a lot of grey areas in the bill. For example, the draft bill does not specify for how long the subsidized prices will remain fixed (the NAC version assumes that it will remain unchanged for 10 years); what will be the inflation index; there is no definition of how the general and priority segments of population will be defined; how the destitute will be covered; the cost sharing between the Centre and states and so on. One provision, which may be a bone of contention, is that state governments will be entitled to pay a food security allowance in the event of non-delivery of subsidized food grains to designated people. Clearly, such a provision is a double whammy, since the Central government will have to procure additional food grains and bear subsidy cost because of the leakage and the state governments may also have to pay an allowance because the food will not be delivered to the beneficiary due to leakages. ….Continued4Page As published in The Indian Express – here & here
  5. 5. LAST STRAW ON THE FISC BACK THE H UG E E X PE N D I T U RE O N THE F O O D BI L L , W I T H THE A T TE N D AN T L E AK A G E S , CO UL D W E L L M AK E F I S C AL RE CO V E RY I M PO S S I B L E In the first part of this article, we have estimated the actual cost of implementing the food security bill in its current form. In this part, we now examine the fiscal sustainability of the same. The current state of the revenue and expenditure trends of the Central government (refer table) show that while revenue growth has significantly weakened, expenditure growth has accelerated sharply. In particular, during the last five years (FY11 over FY06), tax revenues have increased only by 13 per cent, as compared to 15 per cent between FY04 and FY06. On the other hand, non-Plan expenditure during FY06-FY11 (i.e. subsidies have grown by 30 per cent and interest payments by 13 per cent) is significantly higher than over the period FY04-FY06. Additionally, gross market borrowings increased by 32 per cent during FY06-FY11, against a decline of 2 per cent in the earlier period. In fact, the fiscal stress being currently faced is worryingly similar to (if not worse than) the decade of ’80s that witnessed a sharp deterioration, finally leading to the 1991 crisis. For example, market borrowings had increased by 12 per cent for the decade ended 1991, while they have increased by 32 per cent in the last five years; non-Plan expenditure had increased by 20 per5 cent during the ’80s and has now increased by 30 per cent andPage fiscal deficit itself has increased at the rate of 30 per cent during the last five years as compared to 18 per cent for the decade ending 1991. Disturbingly, it is the composition of fiscal deficit that is worrying, with revenue deficit increasing at a much faster pace than fiscal deficit (same scenario as in ’80s) and thus productive capital expenditure being squeezed out. It is clear that some very urgent and strong steps are today required As published in The Indian Express – here & here
  6. 6. to avert any fiscal crisis. In this context, the fiscal sustainability of the food security bill is seriously in doubt. Some observers, however, argue that it is churlish to argue against additional financial allocations for fighting the curse of hunger and malnutrition when the Central government regularly forgoes huge amount of revenues. This argument is based on the statement of revenue forgone included in the Annual Union Budget Statement (for the year 2010-11, the revenue foregone as stated in the budget was Rs 5,11,630 crore / 6.5 per cent of GDP). It is important to examine the veracity of this argument specially because, as eminent a person as Amartya Sen cited this in his recent P.R. Brahmananda Memorial Lecture delivered at the Indian Economic Association’s annual conference in Pune in December. A closer look at these numbers, however, reflects the following: One, excise duty concessions of Rs 198,291 crore: These are revenue forgone on account of mass consumption goods like medicines, tooth powder, candles, post cards, sewing needles, kerosene stoves, etc. Clearly, exacting the excise duty from these items would have worsened the fate of the poor. Two, customs duty concessions of Rs 174,418 crore: These are concessions for importable goods consumed for exports as defined under Section 25 (1) of the Customs Act. It is important to note in this context that import duties on components used for exports are universally exempt as taxes are not supposed to be exported. Moreover, is it anybody’s case that these import duty concessions be removed because by doing so, we may lose a significant part of our total export revenue (of this, gems and jewellery exports6 alone contribute close to 15 per cent of exports). Furthermore, aPage simple exercise shows that if we strip gems and jewellery exports from our foreign exchange earnings, our short-term debt (residual maturity) as a percentage of reserves, touches 48 per cent from the current level of 44 per cent. Three, personal income tax concessions of Rs 50,658 crore are primarily related to exemption limits for income tax — these will have insurance premia, contribution of charities and political As published in The Indian Express – here & here
  7. 7. parties, interest payments on loans for higher education, etc. This could arguably be eliminated, but are we prepared for the distress that it will cause to the salaried class? Finally, tax concession of Rs 88,623 crore is primarily related to export undertakings established in Special Economic Zones and to 100 per cent export-oriented units. Other areas for concession under this head are accelerated depreciation for industries established in new and hilly regions, scientific research and even contribution to political parties. However, studies including one by ICRIER in 2007 (“Impact of Special Economic Zones on Employment, Poverty and Human Development” by Aradhna Aggarwal) and by Panduranga Reddy C., Prasad A. and Pavan Kumar G. show that SEZs have a significant positive impact on foreign exchange earnings, employment generation and hence poverty reduction. The net cost benefit impact of SEZ is therefore highly positive. Given the above details, it may not be completely misplaced to argue that the additional expenditure for implementing the food security bill is far greater than any actual revenue forgone for promoting economic activity in the country. So where do we go from here? We believe what is important is that we must strive to improve our tax base now. As Graph shows, India’s tax revenue as a percentage of GDP is much lower compared to its neighboring countries. As a case in point, consider the following facts. The total number of assessees expanded at a measly 3 per cent for the five-year period ending 2009-10, the number of returns in excess of Rs 1 crore is only 0.06 per cent of 34 million assessees and the number of PAN card holders was 96 million for the year ending 2009-10 (hence the filing gap is more7Page than 60 million).We must, therefore, expand our tax base immediately. Second, to implement such food safety bills, we need to improve our delivery mechanisms drastically to plug leakages. A significant portion of food grains, mainly rice and wheat, meant to be distributed to eligible families under the PDS gets diverted to the open market. The diversion rate was estimated to As published in The Indian Express – here & here
  8. 8. be around 36 per cent in 2004-05 (study quoted by the ministry of food, consumer affairs and public distribution). Measures like involving gram panchayats, self-help groups, van suraksha samitis and other community institutions in the running of fair price shops could be used as an effective delivery mechanism to plug leakages (Banerjee and Tiwari, ET, January 28, 2012). These apart, delivery mechanisms like cash transfers/ food stamps could also be successfully replicated in India. For example, the largest cash transfers such as Brazil’s Bolsa Família and Mexico’s Oportunidades cover millions of households. The food stamp programme is also a central component of America’s nutrition assistance safety net. The stated purpose of this: “to permit low-income households to obtain a more nutritious diet by increasing their purchasing power” (The Food Stamp Act of 1977, as amended, P.L. 95-113). Food security, an urgent necessity, will be ensured only when Indian agriculture is modernized and productivity and yields rise in the coming years. In our view, it will, therefore, be far more effective and sustainable to allocate additional public resources for developing agriculture, infrastructure and delivering new technologies to the sector. This will more effectively ensure food security in the country.8Page RAJIV KUMAR IS SECRETARY-GENERAL, FICCI, AND SOUMYA KANTI GHOSH IS DIRECTOR , ECONOMICS & RESEARCH, FICCI. THE AUTHORS THANK NIBEDITA SAHA FOR RESEARCH . VIEWS ARE PERSONAL As published in The Indian Express – here & here