Before I start a full fledged discussion and why this is a big mistake, let me introduce the Food Security bill.
The Food Security Bill guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 67% of the population. The government estimates suggest that food security will cost Rs 1,24,723 crore per year.
Let me be just brief here and take on the facts of the above Food Security bill in detail.
Although I have been discussing this bill with few of my friends and getting some really, well, interesting remarks, I would like to start this article with the fact that the weakest point of the right to food security is that it will use the extremely “leaky” public distribution system to distribute food grains. As it has been found out by a recent study, there are estimates that in 2004-05, 70 per cent of the poor received no grain through the pubic distribution system while 70 per cent of those who did receive it were non-poor. They also estimate that as much as 55 per cent of the grain supplied through the public distribution system leaked out along the distribution chain, with only 45 per cent actually sold to beneficiaries through fair-price shops. The share of food subsidy received by the poor turned out to be astonishingly low 10.5 per cent!
And I have not even started on the facts that how will the govt. identify the people who will receive the benefits under this new Food bill? Let me ask a few questions before I delve deep into the discussion of the issue.
Notwithstanding CAD and all, this scheme is the saddest part of Indian history after the early demise of Lal Bahadur Shashtri. The food bill looks all good on the paper and with the promise of feeding almost 67% of the population, it does ring a bell. However, consider the following:
1. The govt. says that there are only 21% poor people in the country. Then why give this to 67%? Why put this burden on the people paying taxes? Or were they lying when they so gloriously said the poverty has gone down? Either this is a lie or a major scam in the making.
2.The biggest question is how will the govt. identify the 82 Crore people it plans to provide the subsidized? That my dear friend is where the Bill fails! Only 16 Crore people have Ration Card and i am pretty sure the poorest of the poor don't have them. Even for argument's sake, say all the poor have one. How will you identify the rest? What is the formula for the same? The limits and all? For me, this is simply an ill-planned measure for the next elections, nothing more.
3. Now, say the above problem was, by some magic, solved. How will the govt. procure so much of food grains and from where? I will explain this part later on, but again say they procure it somehow, in the process lowering the rupees further. Now, when they don't even have the storage and the distribution mechanism for the present PDS foodgarins, how are they supposed to store almost thrice the amount? This is something I can't digest.
The Other question is: From where the money will come for this plan? For sure, it will not rain?
The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. Some Economists puts the cost at around $25 billion. The Commission for Agricultural Costs and Prices(CACP) of the Ministry of Agriculture in a research paper puts the cost of the food security scheme over a three year period at Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs 2,41,263 crore.
Some say (And I doubt the credibility of these so called Economists)the cost is only around 1.35% -3%of GDP. The problem here is that by expressing the cost of food security in terms of percentage of GDP, we do not understand the seriousness of the situation that we are getting into. In order to properly understand the situation we need to express the cost of food security as a percentage of the total receipts less borrowings of the government. The receipts of the government for the year 2013-2014 are projected at Rs 11,22,799 crore.
The government’s estimated cost of food security comes at 11.10%(Rs 1,24,723 expressed as a % of Rs 11,22,799 crore) of the total receipts. The CACP’s estimated cost of food security comes at 21.5%(Rs 2,41,623 crore expressed as a % of Rs 11,22,799 crore) of the total receipts. Bhalla’s cost of food security comes at around 28% of the total receipts (Rs 3,14,000 crore expressed as a % of Rs 11,22,799 crore).
Once we express the cost of food security as a percentage of the total estimated receipts of the government, during the current financial year, we begin to see how huge the cost of food security really is. This is something that doesn’t come out when the cost of food security is expressed as a percentage of GDP. In this case the estimated cost is in the range of 1-3% of GDP. But the government does not have the entire GDP to spend!
It can only spend what it earns.
The interesting thing is that the cost of food security expressed as a percentage of total receipts of the government is likely to be even higher. This is primarily because the government’s collection of taxes has been slower than expected this year. The CAG has said the same. For the first three months of the financial year (i.e. the period between April 1, 2013 and June 30, 2013) only 11.1% of the total expected revenue receipts (the total tax and non tax revenue) for the year have been collected. When it comes to capital receipts(which does not include government borrowings) only 3.3% of the total expected amount for the year have been collected.
What this means is that the government during the first three months of the financial year has not been able to collect as much money as it had expected to. This means that the cost of food security will form a higher proportion of the total government receipts than the numbers currently tell us. And that is just one problem.
Another major problem is the government estimate of the cost of food security at Rs 1,24,723 crore is very optimistic. This estimate does not take into account “additional expenditure (that) is needed for the envisaged administrative set up, scaling up of operations, enhancement of production, investments for storage, movement, processing and market infrastructure etc.” Where will the money from this and how will they be accounted?
Food security will also mean a higher expenditure for the government in the days to come. And the question is how will this higher expenditure be financed? Given that the economy is in a breakdown mode, higher taxes are not the answer. The government will have to finance food security through higher borrowing. And this push up the higher rate of interest and this means that the era of high interest rates will continue, which will not be good for economic growth.
Another thing is that the food security scheme is an open ended :there’s no expiry date, no sunset clause. It covers around two-thirds of the population—even those who are not really needy. This means that the outlays will have to increase as the population grows.
This might also lead to the government printing money to finance the scheme. The easiest way for the government to obtain money by printing it rather than taxing its citizens. Money printing would always be the first device thought of by a finance minister when a large quantity of money has to be raised at once, as it has been said.
Money printing will lead to higher inflation. Prices will rise due to other reasons as well. Every year, the government declares a minimum support price (MSP) on rice and wheat. At this price, it buys grains from farmers. This grain is then distributed to those entitled to it under the various programs of the government.
The grain to be distributed under the food security program will also be procured in a similar way. But this may have other unintended consequences which the government is not taking into account. Farmers will start producing more cereals since they know they will be getting customers (Govt.) for the same. And this will reduce the production of vegetables and other non-cereals, resulting in an even higher inflation for the food items!
And this will hit the very people food security is expected to benefit.
I have not even considered the fact that if Monsoons are bad and govt. is unable to procure the food grains, they will have to import the same from other countries. And Importing food grains, especially rice. Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets simply mean that any slight changes in production or consumption in major rice-trading countries have an amplified effect on world prices.. And buying rice or wheat internationally will mean paying in dollars. And more woes for rupee! A century is not that far, if things like this go on!
Having said all that, better idea would have been to make sure the current PDS system works efficiently, food grains worth lakhs of Crores doesn't rot rather than to make grand, illusory plans.
PS: This article takes data from various sources and is not completely the author’s work.
The Food Security Bill guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 67% of the population. The government estimates suggest that food security will cost Rs 1,24,723 crore per year.
Let me be just brief here and take on the facts of the above Food Security bill in detail.
Although I have been discussing this bill with few of my friends and getting some really, well, interesting remarks, I would like to start this article with the fact that the weakest point of the right to food security is that it will use the extremely “leaky” public distribution system to distribute food grains. As it has been found out by a recent study, there are estimates that in 2004-05, 70 per cent of the poor received no grain through the pubic distribution system while 70 per cent of those who did receive it were non-poor. They also estimate that as much as 55 per cent of the grain supplied through the public distribution system leaked out along the distribution chain, with only 45 per cent actually sold to beneficiaries through fair-price shops. The share of food subsidy received by the poor turned out to be astonishingly low 10.5 per cent!
And I have not even started on the facts that how will the govt. identify the people who will receive the benefits under this new Food bill? Let me ask a few questions before I delve deep into the discussion of the issue.
Notwithstanding CAD and all, this scheme is the saddest part of Indian history after the early demise of Lal Bahadur Shashtri. The food bill looks all good on the paper and with the promise of feeding almost 67% of the population, it does ring a bell. However, consider the following:
1. The govt. says that there are only 21% poor people in the country. Then why give this to 67%? Why put this burden on the people paying taxes? Or were they lying when they so gloriously said the poverty has gone down? Either this is a lie or a major scam in the making.
2.The biggest question is how will the govt. identify the 82 Crore people it plans to provide the subsidized? That my dear friend is where the Bill fails! Only 16 Crore people have Ration Card and i am pretty sure the poorest of the poor don't have them. Even for argument's sake, say all the poor have one. How will you identify the rest? What is the formula for the same? The limits and all? For me, this is simply an ill-planned measure for the next elections, nothing more.
3. Now, say the above problem was, by some magic, solved. How will the govt. procure so much of food grains and from where? I will explain this part later on, but again say they procure it somehow, in the process lowering the rupees further. Now, when they don't even have the storage and the distribution mechanism for the present PDS foodgarins, how are they supposed to store almost thrice the amount? This is something I can't digest.
The Other question is: From where the money will come for this plan? For sure, it will not rain?
The government estimates suggest that food security will cost Rs 1,24,723 crore per year. But that is just one estimate. Some Economists puts the cost at around $25 billion. The Commission for Agricultural Costs and Prices(CACP) of the Ministry of Agriculture in a research paper puts the cost of the food security scheme over a three year period at Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs 2,41,263 crore.
Some say (And I doubt the credibility of these so called Economists)the cost is only around 1.35% -3%of GDP. The problem here is that by expressing the cost of food security in terms of percentage of GDP, we do not understand the seriousness of the situation that we are getting into. In order to properly understand the situation we need to express the cost of food security as a percentage of the total receipts less borrowings of the government. The receipts of the government for the year 2013-2014 are projected at Rs 11,22,799 crore.
The government’s estimated cost of food security comes at 11.10%(Rs 1,24,723 expressed as a % of Rs 11,22,799 crore) of the total receipts. The CACP’s estimated cost of food security comes at 21.5%(Rs 2,41,623 crore expressed as a % of Rs 11,22,799 crore) of the total receipts. Bhalla’s cost of food security comes at around 28% of the total receipts (Rs 3,14,000 crore expressed as a % of Rs 11,22,799 crore).
Once we express the cost of food security as a percentage of the total estimated receipts of the government, during the current financial year, we begin to see how huge the cost of food security really is. This is something that doesn’t come out when the cost of food security is expressed as a percentage of GDP. In this case the estimated cost is in the range of 1-3% of GDP. But the government does not have the entire GDP to spend!
It can only spend what it earns.
The interesting thing is that the cost of food security expressed as a percentage of total receipts of the government is likely to be even higher. This is primarily because the government’s collection of taxes has been slower than expected this year. The CAG has said the same. For the first three months of the financial year (i.e. the period between April 1, 2013 and June 30, 2013) only 11.1% of the total expected revenue receipts (the total tax and non tax revenue) for the year have been collected. When it comes to capital receipts(which does not include government borrowings) only 3.3% of the total expected amount for the year have been collected.
What this means is that the government during the first three months of the financial year has not been able to collect as much money as it had expected to. This means that the cost of food security will form a higher proportion of the total government receipts than the numbers currently tell us. And that is just one problem.
Another major problem is the government estimate of the cost of food security at Rs 1,24,723 crore is very optimistic. This estimate does not take into account “additional expenditure (that) is needed for the envisaged administrative set up, scaling up of operations, enhancement of production, investments for storage, movement, processing and market infrastructure etc.” Where will the money from this and how will they be accounted?
Food security will also mean a higher expenditure for the government in the days to come. And the question is how will this higher expenditure be financed? Given that the economy is in a breakdown mode, higher taxes are not the answer. The government will have to finance food security through higher borrowing. And this push up the higher rate of interest and this means that the era of high interest rates will continue, which will not be good for economic growth.
Another thing is that the food security scheme is an open ended :there’s no expiry date, no sunset clause. It covers around two-thirds of the population—even those who are not really needy. This means that the outlays will have to increase as the population grows.
This might also lead to the government printing money to finance the scheme. The easiest way for the government to obtain money by printing it rather than taxing its citizens. Money printing would always be the first device thought of by a finance minister when a large quantity of money has to be raised at once, as it has been said.
Money printing will lead to higher inflation. Prices will rise due to other reasons as well. Every year, the government declares a minimum support price (MSP) on rice and wheat. At this price, it buys grains from farmers. This grain is then distributed to those entitled to it under the various programs of the government.
The grain to be distributed under the food security program will also be procured in a similar way. But this may have other unintended consequences which the government is not taking into account. Farmers will start producing more cereals since they know they will be getting customers (Govt.) for the same. And this will reduce the production of vegetables and other non-cereals, resulting in an even higher inflation for the food items!
And this will hit the very people food security is expected to benefit.
I have not even considered the fact that if Monsoons are bad and govt. is unable to procure the food grains, they will have to import the same from other countries. And Importing food grains, especially rice. Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets simply mean that any slight changes in production or consumption in major rice-trading countries have an amplified effect on world prices.. And buying rice or wheat internationally will mean paying in dollars. And more woes for rupee! A century is not that far, if things like this go on!
Having said all that, better idea would have been to make sure the current PDS system works efficiently, food grains worth lakhs of Crores doesn't rot rather than to make grand, illusory plans.
PS: This article takes data from various sources and is not completely the author’s work.
No comments:
Post a Comment