Plans to expand India's multi-billion dollar food subsidy programme are a likely vote-winner for the ruling Congress party as it heads into key local elections in 2012, but could worsen strained federal finances as a flagging economy crimps revenue.
Plans to expand
The Food Security Bill, introduced in parliament on Thursday and expected to win easy approval, would guarantee cut-price grains to 63.5% of
"Where will the money come from?" asked Ashok Gulati, chairman of the Commission for Agricultural Costs and Prices, in a Reuters interview.
"There is a limit beyond which you cannot spend. Oil, food, and fertiliser subsidies are already too high," he said.
Some private economists believe the economy will struggle to grow at seven% in 2011/12.
Government revenue through October was only 45.5% of the full year target, compared with 65.6% a year earlier.
"With growth slowing and consequently revenues not matching up to expectations, additional expenditures will keep the government away from the path of fiscal consolidation," Kotak Mahindra Bank wrote in a note this week.
The bank expects
Worries over a further increase in government borrowing in this fiscal year beyond its budgeted 4.7 trillion rupees -- which is already more than originally targeted -- has weighed on bond markets in recent weeks.
The bill, a copy of which is with Reuters, says the plan would cost the government more than 810 billion rupees in the fiscal year that starts in April, an increase of about 34% over the budgeted food subsidy level in the current fiscal year.
Food Minister KV Thomas has said it could cost as much as 1 trillion rupees while analysts have pegged it at 850-900 billion rupees in the 2012/13 fiscal year.
The figure would include the cost of additional grains that the Food Corporation of
Its cost could also be open-ended in a drought year when
But with 60% of
"I think it's going to cost a lot," said a senior finance ministry official who declined to be identified.
In addition, the bill's focus on rice and wheat goes against the trend for many Indians who are gradually diversifying their diet to protein-rich foods such as dairy, eggs and poultry, as well as fruit and vegetables -- all recent drivers of inflation.
Gulati said the government may have to raise procurement prices for rice and wheat to encourage farmers to increase production of these staples.
Congress has been on the back foot over a spate of corruption scandals. Dissension within the ruling coalition and the party itself have prevented it from pushing through key reforms.
Programs that help the rural poor, like one launched in 2006 that guarantees a minimum amount of work for a member of each rural household, are popular and win votes but they are costly.
"The problem with this kind of an enactment is it permanently ties up government finances and there are other cost-associated risks, especially in bad agri years," the finance ministry official said.
Assuming the fuel subsidy is similar next year and the food law takes effect,
The law could also compel the government to buy more grains, edging out private traders and pushing up retail prices for consumers not in the subsidised net.
"Overall in the medium term, food inflation risks are more skewed to the higher side", said the Kotak Mahindra research note on the food security bill.
(US USD 1=52.70 rupees)