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 per
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cent of rural population and 50 per cent of urban population. The
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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. 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.
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As per the ministry of food, consumer affairs and public
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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.
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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 one
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and it still is close to Rs 4,57,000 crore in first three years
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(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. 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.
….Continued
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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 per
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cent during the ’80s and has now increased by 30 per cent and
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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. 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 exports
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alone contribute close to 15 per cent of exports). Furthermore, a
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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. 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 more
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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. 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.
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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