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Jul 20, 2013, 04.44 PM IST | Source: Moneycontrol.com

What Food Security Bill means for India's subsidy burden

A huge percentage of the Indian population lives below the poverty line where getting one square meal a day is a challenge. The food security bill aims to satisfy this basic want and in that sense although it encourages welfare economics, the intention is noble. This is what would need to be weighed against other economic considerations.

What Food Security Bill means for India's subsidy burden
By Dhanraj Bhagat

The National Food Security Bill 2013 was recently passed as an ordinance by the Union Cabinet. The bill aims to provide 5 Kg of food grains per person per month at subsidised prices from State Governments under the targeted public distribution system.

The eligible households will be entitled to food grains at a subsidised price not exceeding Rs 3 per Kg for rice; Rs 2 per Kg for wheat and Re 1 per Kg for coarse grain.

Implications:

Welfare economics:

A huge percentage of the Indian population lives below the poverty line where getting one square meal a day is a challenge. The food security bill aims to satisfy this basic want and in that sense although it encourages welfare economics, the intention is noble. This is what would need to be weighed against other economic considerations.

Rising Subsidy burden:

To gain a perspective on the subsidy portion let us look at the per kg price. Government procurement price would be approximately Rs. 13.45 per Kg for rice and Rs. 12.85 per Kg for wheat. The subsidy portion works out to Rs. 10.45 per kg of rice and Rs. 10.85 per kg of wheat. When we take into account the total number of beneficiaries and the quantity of food grains that would be distributed, the burden on the exchequer is projected at a whopping Rs. 1.3 lakhs crores per year. The increase in subsidy burden will only add to the current fiscal account deficit woes.

Inflationary pressures:

Procurement by the government of such huge quantities of rice, wheat, and other grains would result in less quantity available in the open market, thereby pushing up food prices. This would be further aggravated in a year of low production which would necessitate procurement through imports, which in turn will again push prices up.

Public distribution system and leakages:

The current system of distribution is though the approximately 5 lakh fair price shops spread across the country. In addition there are logistics issue of picking up the food from the source, storage and onward transportation. Leakages on account of pilferage, rotting of grains and logistics inefficiencies account for nearly 40% to 50% of the total food stock. Should this trend continue, the incremental losses on account of additional procurement under the Bill is something we as a nation can ill afford.

Agriculture opportunity:

With additional demand the agriculture sector would receive a boost and this could lead to more investments in improving agriculture productivity and making it more competitive.

Infrastructure opportunity:

To overcome the inefficiencies in the distribution of grains, substantial investment would be required in creating infrastructure like warehousing and storage facilities, roads, improving rail connectivity etc. This could create a huge opportunity for the private sector which could turn out to be one of the catalysts for a renewed economy.

(The writer is Partner, Transaction Advisory Services, Grant Thornton India LLP)

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