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Financial Insecurity Guaranteed!

We in India have reveled in the success of the Indian Growth Story and the high GDP growth rates our economy enjoyed until recently. For the past decade or so, business investors abroad have been bombarded by the Indian Government with massive publicizing of our growth story but back at home, the growth story seems to ring hollow with reference to our ever hungry population. Despite being one of the world's economic pillars and future superpowers, we in India are still home to 25% of the world's hungry. This by the way, is much worse than Sub-Saharan Africa, the perennially sick child of the world economy.

The Food Security Bill : Will it really help?


 It's obviously a question to ponder over for our policymakers. For some reason, the benefits of our economic growth aren't percolating down towards the lower strata of the society. We have seen large reductions in the rate of poverty, almost 2% of our population crosses the poverty line every year. And yet India is the world's market leader in malnutrition, especially in children.

Our present United Progressive Alliance (UPA) Government thinks the solution to this problem has been prescribed in the National Food Security Bill (NFSB). In layman's terms the central idea of the bill is to ensure it's citizens the Right to Food Security by extending food subsidy to some 810 million people from the current level of 318 million.

Before going into the merits of this bill, we need to have a basic understanding of how the Food Security Bill will actually work. We have in India, a Public Distribution System (PDS) wherein there are ration shops set up by the Government across the country. Every family is given a ration card and it is given food at subsidized or cheap rates for which the Government has to pay. Currently, only the people Below Poverty Line have access to extremely cheap food here but this Bill basically gives a whopping 70% of our population this benefit with an aim to reduce malnutrition and hunger.

This ambitious bill though to be the brainchild of Mrs. Sonia Gandhi has been in the works since the 2009 polls, when it occupied a prominent place in the Congress manifesto. This  bill often described as the world's largest social welfare scheme will take up a third of annual grain production.

 The bill promises rice at 3 rupees per kg, less than 10 percent of current retail prices, and wheat at 2 rupees per kg besides millet at a rupee per kilo. This largess will effectively raise our annual food subsidy spending by as much as 45% or at a cost of 1.25 hundred thousand crores  per year to the exchequer. Food subsidy will now be as much as 1.1 % of the GDP.

So where would the extra money come from? Reducing fuel and fertilizer subsidies would be the best way of mitigating the costs. But fuel has to a certain extent already been deregulated and it is highly doubtful that in an election year, the government will risk antagonizing the farmers by hiking fertilizer rates.Other measures will also be needed to fund the plan, which may include spending cuts and higher taxes. These too are politically hard decisions to take in an election year besides being downright harmful to the economy.

 The fiscal deficit still remains a major concern even though it has lowered significantly. If India's fiscal deficit remains above the 'red line' of 4.8% of the GDP as promised by P. Chidambaram investor confidence will shrink, growth will further slow down and our investment-grade rating will be jeopardized. In short, that will be a recipe for disaster.

The government says it will provide 62 million tonnes of food a year under the bill. With the population rising steadily, this amount is bound to go up. Besides, with rising costs, the subsidy too will cost more. Clearly, the costs of this bill, put it's sustainability under question.
Mrs. Sonia Gandhi

While the bill is a good attempt by the government to ensure food and nutritional security for people who don’t have access to food at a subsidized rate it's a wee bit too over ambitious. Providing food at such nominal costs to 70% of the population is clearly not healthy for government finances.

What makes matters worse is that the Governments intends to use the crumbling PDS for it. The PDS is extremely leaky, so we risk much of the food being sold in the market for higher rates by middlemen instead of reaching the poor. This was epitomized by Rajiv Gandhi when he mentioned, way back in the 1990's that of every rupee which Delhi spends only 15 paise reached the aam aadmi We need to strengthen the PDS as we have in Chhattisgarh where 98% of the food is reaching the intended beneficiary.

Some people claim that India isn't hungry but malnourished. The proportion of people saying they are hungry in any month fell from 15 per cent in 1983 to 2% in 2004. The 2011-12 survey will probably show it at just 1%. I don't find this argument really valid because if cheaper food grains reach the poor, they will have more money in their hands to buy pulses and vegetables. This can reduce malnutrition substantially too.

A more effective measure, which everyone agrees to would be DBT (Direct Benefit Transfers). Instead of subsidizing grain, the government could transfer the subsidized amount to the bank account of the beneficiaries. Leakages would reduce considerably and so would probably, the financial burden.

Whether the FSB shall actually lead to a good decrease in malnutrition and hunger is highly debatable. Food security or not, this bill definitely does ensure the government financial insecurity!

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