Apart from the positives of the Food Security Bill like affordable food being available to all, negatives like its effect on the current account deficit should be taken into account.
Speaking on the subject, Sonal Varma, chief economist at Nomura. feels the fear of the current year's fiscal deficit being overshot by the implementation of the Bill is unwarranted.
Besides Varma, Ashok Gulati chairman of the Commission on Agricultural Costs and Prices and T Nanda Kumar, former Agriculture secretary discuss the nuances of the Food Security Bill .
Gulati feels that the government's estimate of the Food Bill at Rs 1.3 lakh crore does not take into account other peripheral costs that would be needed to implement the Bill effectively, like increasing storage facilities and railway capacities.
Kumar feels another major worry would be that a totally cereal-focused kind of an intervention could distort the long-term objective of giving adequate proteins and nutrition through other means.
Here is the edited transcript of the discussion on CNBC-TV18
Q: There are varying estimates of what this bill will cost the exchequer and one of the figure from the government is Rs 1.3 lakh crore per year. But that's the cost of procuring the grain. As you have said in one of your articles this doesn’t include the cost of more people, more transportation, more storage. According to you what is the estimate of the total cost?
Gulati: The financial implication of this in the very first year of operation as per governments calculation is about Rs 1.3 lakh crore. However what it does not take into account is the other peripheral costs that would be needed to set up the thing in a manner which is more sustainable and reliable.
For example the storage facilities have to be created, railways don’t have enough capacity to carry the food grains and then the volatility in the grain production needs to be stabilised otherwise there could be years like in 2002-2003 when in a single year the food grain production dropped by 38 million tonnes. Where will you go to buy that food?
So, you need to invest in that. If you take into account these types of costs, our estimate is that it will cost you more than Rs 2 lakh crore per year.
Q: That's the economic cost. Do you see any other adverse consequences, if such a large work load and responsibility is put on the existing creaky public distribution system (PDS) or ration shops network? For instance, will there be more pilferage, more rotting of grains? What are the other possible adverse effects?
Kumar: The bill in its current form is an expanded PDS as it operates today. It takes away the Antyodaya Anna Yojana (AAY) and combines it with below poverty line (BPL) and reduces the price for BPL and calls it a priority category and then retains the above poverty line (APL) formulation in another name – called the general category.
So, there will be two categories of beneficiaries who will get rice and wheat and other grains at different prices.
The system as it is today – the PDS is run through about 5 lakh-odd private fair price shops mostly. Leakages have been estimated of the order of 50 percent in 2004-2005. Probably things have improved a bit and now there is talk of about 40 percent leakage - even that is an unacceptable level of leakage.
The second issue is, it is a centrally administered, centrally sponsored kind of a programme, which means that the responsibility of procurement of such huge quantities of grains will rest with the central government, primarily the Food Corporation of India (FCI).
Remember that wheat procurement is confined largely to the four states of Punjab, Haryana, Madhya Pradesh and Uttar Pradesh and rice from about four or five states which include Andhra Pradesh, Orissa and Chhattisgarh.
Given this logistics problem, distribution of food grains and reaching them to places where they need it most will be a major challenge.
The third issue is what does it do to the open market? Given the fact that our production of rice is about 100 million tonne and wheat is about 85-90 million tonnes and the marketable surpluses are only about 55-60 percent, if the government is going to procure most of it then the private sector will be starved of supplies and that could lead to a certain set of inflationary pressures on the open market.
As long as the government does not have a mechanism to release these grains into the open market, we will have a little bit of a problem in handling the other side of the market which is the private market.
Q: Do you see the current year's fiscal deficit itself being overshot? What about next year which will be the first full year of the Food Security Bill?
Varma: This year the first quarter has already gone by and if this Food Security Bill is introduced lets say in the next couple of months, its going to be in a phased manner. So, this estimate of Rs 1.3 lakh crore may not be the food subsidy burden this year.
What the government has budgeted this year is about Rs 90,000 crore. That could potentially go up by another Rs 10000 or so. However I think FY15 is where a substantial burden is going to come in.
Over and above this Rs 1.3 lakh crore that we are talking about right now there has to be more infrastructure building, storage, distribution costs, maintaining the buffer costs, marking it to the Minimum Support Price (MSP) increases, the cost of food that is going to go up every year and putting it altogether easily one could probably be looking at close to Rs 2 lakh crore or so.
So, I think the fiscal implications are quite significant. It means that the ability of the government to continue to give subsidies on other items is clearly going to get diminished. We will have to look for new sources to finance the food subsidy burden.
So, it has tremendous fiscal consequences. We need to have a clear thought out strategy on the implications this is going to have on the macro economy.
Q: To continue the discussion with you what maybe the other concomitant macroeconomic distortions if the Food Security Bill became law, in terms of higher deficit leading to higher interest rates, lower growth as well as perhaps distortions in the argi economy?
Varma: I think when we are thinking about the food security, we need to compare it to the National Rural Employment Guarantee because per se whatever is the expenditure on this particular scheme the macro implications can be quite substantial and there the inflationary consequence of this Food Security Bill is quite large.
Now 61 million tonnes is what the government will need every year, where is this going to come from? So, the government needs to incentivise domestic producers, which means that minimum support prices (MSPs) will actually have to go up at a higher rate inorder to incentivise, which as we have seen historically has been inflationary.
Let us say there is a year where we have a drought, this is clearly going to mean we have to import, so the moment India steps out in the global market to try to import, global prices are going to up, so we will be importing at a much higher rate and then if you give this free food to people at a lower rate more income is available, disposable income is available to spend on other items.
So, this is by definition also inflationary. So, the inflationary consequences are quite significant and we have been fighting five years of protein food inflation. If this scheme leads to scarcity of available produce for private sector because government is basically going to procure bunch of this then we would potentially be starring at double digit cereal price inflation for also a sustained period of time. So, the inflationary consequences are quite significant apart from the impact it has on the twin deficits and on the current account if we have to import.
Q: This point about protein inflation has been interpreted by some experts to say that the large part of the population has perhaps moved away from cereal to other kinds of consumption and therefore by simply concentrating on rice and wheat there could be serious distortions that the bill will introduce in the cereal economy itself, with farmers producing something which perhaps the population is not looking for. That the population is actually looking for probably pulses, milk, vegetables, fish, eggs and other kinds of things. With your experience in the agriculture ministry are you sensing that these distortions are going to creep in, this is worthwhile fear?
Kumar: Yes, this fear is quite justified. If you look at either the National Sample Survey Organisation (NSSO) data or even look at how the Indian diet is changing, the cereal consumption is coming down on a per capita basis except probably for the last bottom five percent of the population, even that the recent NSSO shows has stabilised, whereas the consumption of other things like vegetable, pulses, milk eggs whatever are increasing and this is also the impact of growth in the Indian economy and any poor family the aspirational level is to also include more items in their Thali as compared to what they were used to earlier.
So, if by policy we encourage only cereals by giving much higher MSPs and the rest of the it is left to the market forces, there are only two things that will happen – one is that there will be a scarcity of those items which will drive up prices and when you see good prices farmer would probably start getting into producing those.
There are serious challenges in those production systems like cold storages, logistics etc. So, one of the major worry’s would be that totally cereal focused kind of an intervention could distort the long-term objective of giving adequate proteins and nutrition through other means.
Q: What is the administrative bandwidth in the states and in the centre to be able to implement something that is so ambitious even if it is worthwhile and secondly what will be the political resistance given the fact that the bill reads in such a way that it is actually imposing responsibilities on the states and if there are resistant state governments either because they lack the political will or even the financial and administrative will, will that lead to the bill just falling flat on its face, expenses happening but the goods not getting delivered?
Kumar: Let me take the administrative issues first. The real core issue is this is to be delivered every month, every month delivery from a procurement point to a distribution point without fail and it has to reach every single consumer who has been identified as a beneficiary, forget the problems in identification, forget the problems that identifying BPL versus APL will have etc. those problems will continue to remain.
But even you reach this the logistics that is required, the storage that is required, the kind of administrative backing that is required I don’t think exists today.
We are taking on something which is very large and which is not ready to be implemented in many of India and if you look at the leakage figures, the states which have higher levels of poverty are the ones with higher levels of leakage, which also shows the governance deficit in those states, which is extremely important to address if you are really looking at the issue of poverty.
Now the other question about states resisting this - one is we are moving away from a decentralised procurement and distribution situation to a centralised procurement situation, which is not good either for agriculture or for food security.
The major change that the Food Bill may need to have is to give adequate freedom to state governments to procure and to distribute locally produced grains, which will probably take care of a large number of problems and will also boost agriculture.
Q: Do you think the government should approach the food security issue more like it has approached the goods and services tax (GST) - in a spirit of coordination with the states and see how each state can contribute or take from the centre and from each other?
Gulati: I think the best thing is – because the deliver at the end of the round is on the states. Are all the states onboard? This needs to be sorted out.
Comments have been taken into account and all that but personally at our level and commission on agricultural costs and prices we feel there are better ways to do it and much more cost effective. That is the route that most of the best practices internationally have revealed.
There were many countries which used to physically handle all these grains procuring and distributing – almost all of them have moved away from it and gone in for more of conditional cash transfers and those are today the best international practices because the technology of information technology (IT) allows you to reach them.
We have to take this that it is not going to happen tomorrow, but at least the technology is available to reduce those leakages to the minimum possible. We should work more towards that rather than carry a system which is 60 years old and highly leaky and inefficient.
Q: The fashion of the day is to talk about cash transfers. But at the moment we have a mountain of grains 80 million tonnes to be precise, which have been accumulated because of our price support to farmers. Won't it make sense to distribute this grain rather than allow it to rot and give cash food subsidies to the poor?
Gulati: What is happening is you want to ensure good income level to the farmer – that is the ultimate objective. It depends upon what is the productivity level and what is the price. You can take last three years prices and last three years productivity and say this is the average income level.
You can get that insured. US is discussing the Farm Bill exactly on these lines. More than 60 percent of the premium is going to be paid by the state. If whether the productivity goes down below that or the prices go below down so that his net income goes below what is insured then the farmer is compensated for.
So, they are using so called risk management. These are the new tools which are less distorting the production structure. What we should be doing is basically procuring as strategic reserves which is not more than 10-15 million tonnes you need. The rest of things the state should come as a last resort not the first one to buy.
What happens is you ban exports and then everything falls on you. You put controls on private trade to hold stocks, so everything falls on you. You put levy on rice millers so the states procure. All these things and inter-state movement when you start banning all these and use very restrictive market practices, the market collapses.
So, first you have to free-up and get the markets right. Then come as a last resort when the market still fails because of one reason or the other the state should come.