Food Security Bill: Bad politics delivering bad economics?

Excerpts from India Business Hour on CNBC-TV18 Watch the full show »

It's been a long winding road for UPA Chairperson Sonia Gandhi. Her dream of providing food security to the poor saw the light of day, after cabinet cleared it today.

The bill, which seeks to give cheaper food grains to over 63% of the population, had met with opposition because of its financial burden and also the availability of food grains.

While the objective is laudable, given India's current fiscal predicament, questions have arisen over its huge financial implications.

Sunil Jain of The Financial Express tells CNBC-TV18 that the government's estimate that the cost would come up to Rs 95,000 crore is incorrect. "What we have got to understand is that if 66% of India's population is going to be served by the Food Security Bill, we are telling the private grain trade which provides food to most people today, that we don't need you to be here which is going to be a fundamental problem."

Bad politics delivering bad economics, is R Jagannathan of Firstpost's take on the Food Security Bill. He says that as the population increases in the coming years, more grain will be needed. He doesn't see the bill addressing India's present crisis - inflation, in any way.

Below is an edited transcript of their comments on CNBC-TV18. Watch the accompanying videos for more.

Q: While this may be a well intentioned idea, is it an idea that India can afford at this point in time? Is this really the best way to address India's issues of hunger and malnutrition?

Jain: The government has put the cost at Rs 95,000 crore. We have a piece by Ashok Gulati who puts a figure of Rs 6 lakh crore over three years, so that's about Rs 2 lakh crore a year, which means that he is actually saying that the government's estimate is wrong by half. So, there is a huge fiscal issue there is no doubt about that.

What we have got to understand is that if 66% of India's population is going to be served by the Food Security Bill as and when it completely rolls out, and we are talking about this population getting that food at sixth to half the market price or it could be actually even be the seventh or eighth of the market price, effectively saying, we are telling the private grain trade which provides food to most people today that we don't need you to be here which is going to be a fundamental problem.

Q: You have called it the nationalisation of trade?

Jain: Yes, that's right. That's a serous problem area. There seems to be an internal agricultural ministry note which says that the burden on state governments could be as high as Rs 34-35,000 crore in a drought year, which is why if you see - state governments have not been as enthusiastic about this bill.

Q: You have written a fairly scathing piece as far as the implications of the Food Security Bill are concerned. You believe this will actually achieve food insecurity and lead to a devastation of the economy. Why is that?

Jagannathan: Well, there are three-four reasons why. The first thing is can you have food security without having agricultural productivity? If the Agriculture Minister is not on board where are you going to ensure food security? So you are going to have bad politics delivering bad economics. That's at the fundamental level.

The second issue is that if you are going to have a drought in any one year you will need about 65 million tonne to feed this giant Food Security Bill every year. Remember, every year the population is going up. So, one assumes that the requirement of grain will keep going up in the same proportion. Since we are not saying poverty is going to come down because of the Food Security Bill it means your grain requirements will keep increasing.

So you are not budgeted for a simple thing like one crop failure in one year which means you will end up importing the grain. You have not being in the grain market abroad. So you are going to push up the international grain prices and you will have even bigger subsidies.

If you are going to have Rs 100,000 crore which is an incorrect number by the government and which Professor Gulati says might be Rs 200,000 crore, if you are going to have a bad year you might have more than Rs 200,000 crore because suddenly you will have to import a quarter of your grain to feed the Food Security Bill's needs and you are going to be in trouble. So it is going to devastate the central budget.

Q: The larger issue is also of the distribution mechanism. This is going to be distributed through the old leaky PDS system which hasn't been efficient and hasn't worked and now you are suddenly going to expect it to turnaround and deliver a miracle?

Jain: Absolutely. What we are all forgetting is the impact on the banks because all of this has to be done through the Food Corporation of India (FCI). The loans through the Food Corporation of India have to come from the banks. We are talking about a potentially huge liability on the banking system as well.

We are expecting a broken tricky FCI to deliver. If you look at the amount of grain that FCI will now have to move, we are talking about a multiple of two to three times. Don't forget that the FCI has a target today and it doesn't reach that target today, because today it's not compulsory, it's not a constitutional thing. Once it becomes the right, once it's the right to food then the FCI just needs to pick absolute food, FCI doubling or trebling its capacity which as you said is completely impossible.

Q: I also want to talk about the problem of inflation. How this bill, if it actually goes through, will enhance that problem?

Jagannathan: Absolutely. The prime cause of the current inflation is the consistent increase in the minimum support prices for procuring grain. With the Food Security Bill, you are going to be procuring even more and more grain every year. That means you will have to keep raising your MSP. MSP is the prime cause of your food inflation. How is the Food Security Bill going to help us reduce or stabilize food prices, unless your productivity is going to grow even faster? I don't see any scheme for that.

Q: I want to talk to you about the larger issue of the politics of entitlements. We have seen it happen with the NREGS, we are seeing it happen now with the Food Security Bill. The problem is that we are now talking about schemes or methods or ways to actually enhance rural productivity or productivity in general. We are talking about doling things out. We are talking about dolling out subsidies and the consequences of that are going to have to be borne by several generations. What are the implications of that?

Jain: You are absolutely right. We have got into the politics of entitlement. I haven't calculated the number, but I am pretty certain that if you look at the amount of welfare payments that India makes relative to its GDP, it's probably on par, if not higher, than what Europe does. We have seen what politics of entitlement has done to Europe; it's brought them down on its knees.

We have talked right now about the Food Security Bill, NREGA, I look at something like Right to Education bill. You have got a flourishing private education sector and suddenly the government tells it that 25% of all your seats have to be reserved for people that I want to reserve it for. So, we are bringing the politics of entitlement. We are bringing the bureaucracy back into the area.

Q: You clearly believe that this will have serious implications as far as India's fiscal situation is concerned. Do you believe that this will lead India to become Greece by 2014?

Jagannathan: That's right. There are two things. One, I am not against ensuring food security, but the World Bank says that about nearly 60% of the grain through the PDS is not reaching the right people. That means with Rs 1,00,000 crore or even with Rs 65,000 crore subsidy provided, 60% is wasted. That means you can actually finance your Rs 1,00,000 crore by eliminating the waste in the system. But instead of that, if Professor Gulati's numbers are right, you are going to Rs 2,00,000 crore.

How is the government finance it, when the growth is going down and revenues are slipping? So, you are going to actually add to debt. India's debt to GDP ratio is already well above 80%, you are going to be 100% in another two years. Greece is at 120% or whatever, so how much longer will it take you to where Greece is?