India is a country of poor people. In the celebration of Indian growth story, the English speaking elites conveniently forget this basic truth. It is estimated by the World Bank that one-third of the world’s poor people live in India. In 2009-10, 75.5% rural persons could not consume food worth 2200 calories per day while in the urban areas 73% could not consume food worth 2100 calories per day. These proportions were 69.5% and 64.5% respectively in 2004-05. As per the Global Hunger Index published by the International Food Policy Research Institute (IFPRI), India ranks 65th amongst 79 countries, with countries like Niger, Sudan, Nepal etc. having a better rank than India. 48% of children below 5 years of age are stunted while 43% are under-weight in India.
The question is how we solve these pressing problems of the nation. One approach is to argue that the growth process in a market economy itself will take care of all these problems and the state should do nothing about these issues. From the above data it is seen that even after two decades since the reform process, these problems are persisting at alarming levels. So, it is clear that the so called reform process based on market economy has not been able to solve these problems. The other way is to point out that it is the duty of the state to take care of the problem of malnutrition, hunger and poverty of the people; hence, the state must take an active role in dealing with these problems.
On the basis of this second approach towards policy making with demands arising from various sections of the society, the Food Security Bill (FSB) was passed in Parliament on 26th August 2013. According to this bill 75% of the people in the rural areas and 50% of the people in the urban areas will be entitled to 5Kg of food grains per capita per month at rice for Rs 3/kg, wheat for Rs 2/Kg and millets for Re 1/Kg. According to the government, the total grain requirement for the bill is 612.3 lakh tonnes while the estimated cost for 2013-14 is about Rs 1.25 lakh crore.
The critiques of the bill have pointed towards the fact that the FSB is going to impose a very high burden on the exchequer which will increase the fiscal deficit and thereby affect the growth rate of the economy. Many economists have said that the cost of this bill is between Rs 3-6 lakh crore per annum. These calculations are clearly overestimates because of the following reasons. Firstly, already in 2013-14 the total food subsidy has been budgeted at Rs 90000 crore which in 2012-13 was Rs 85000 crore. Now, in 2011-12, 45% of the population accessed food through the Public Distribution System (PDS). With the current food security bill 67% of the population will be covered. Therefore the additional money needed for feeding this extra 22% is roughly Rs 45000 crore. Now it is estimated that in the year 2012-13, GDP at current prices is Rs 9461013 crore. Therefore, the additional money required for the FSB is a mere 0.47% of GDP and the total expenditure on the FSB should be between 1.3% and 1.4% of GDP.
The food subsidy is the difference between the economic cost of food grains and the price of food grains under the PDS (P) per Kg, multiplied by the number of beneficiaries (N) and the per capita consumption of food grain through PDS (Q). Researchers have shown that the leakages of the PDS gets plugged the more is its coverage. In 2009-10, even with a limited PDS system, the average cereals purchased from PDS per household (those who buy from PDS) was 20.7Kg per month, which is 4.14 Kg per-capita per month (assuming 5 members per household). With a larger coverage and a larger allocation of money it can be safely assumed that 5Kg per-capita per month of food grains can be provided with the additional money and a significant drop in leakage because of the additional coverage. Therefore, once the FSB is implemented Q remains constant over the years.
Let us assume that in the subsequent years, the number of beneficiaries increase according to the growth rate of population, which is 1.64%. So, in the absence of any change in P, the increase in subsidy will be 1.64%. Assuming that the growth rate of GDP is higher than this, the share of food subsidy in GDP will decrease over time, if P is constant.
But P will not be constant because the economic cost of food grains will increase over time. Again, for the coming three years the price of food grains under PDS will be constant. Therefore, the change in P is essentially the change in the economic cost of food grain. According to Food Corporation of India (FCI) data, the economic cost of rice and wheat over the last 2 years has increased by around 10%. If we assume this increase to continue then P will rise by around 10%. Taking both P and N into account, it can be assumed that the expenditure on food security will increase by around 12%. Now, the growth rate of real GDP is 5% and the nominal GDP is 13.3%. Therefore, assuming that the growth rate of nominal GDP remains around 10-12%, the share of food subsidy in GDP would increase negligibly (0-2%) and the final share of food subsidy on GDP would be between 1.33% and 1.43% (Additional 2% on 1.3 or 1.4). Therefore, even taking into account the increased economic cost of food grains, the share of food subsidy in GDP will be minimal. With an increase in the growth rate of GDP, this ratio will be even less.
To put this in perspective we must note that India has one of the lowest tax-GDP ratio in the world at 10.4%. The total tax revenue foregone in 2012-13 was Rs 573626.7 crore, which is 6% of GDP. In other words, if even one-fourth of this revenue foregone is actually collected, the entire expenditure on FSB will be met. The problem can be posed in another way. It is a fact that a large number of people in India suffer from hunger. In this situation, in the name of curtailing the fiscal deficit, the FSB is not implemented, then the so called ‘investor confidence’ in the economy will be maintained at the cost of hunger prevailing in the hinterland. The point is such ‘investor confidence’ goes against the basic demands of the people and hence should be shunned. The real question is not about whether there is enough money that the government can mobilize. The issue is about the political will of the government to mobilize the extra money for feeding the people.
The problem with the FSB is however different. Firstly, the allocation of food grain of 5Kg per person would hurt many large families who are in any case getting 7kg food grains from various state governments who are also providing rice at Rs 2/Kg instead of the proposed Rs 3/Kg. More importantly however, the agriculture sector in the country is facing a crisis. The per-capita food grain production has been declining. Between 2001 and 2011, the growth rate of population in India was 1.64% while the growth rate of production of cereals was only 1.04%. This imbalance has not precipitated a crisis because cereal consumption has been falling in the reform period. In this situation in order to meet the food security of the population, the agricultural sector in the country should be revived through a massive investment in this sector. In order to do this the government needs to come out from the path of fiscal conservatism and prioritize spending in the agricultural sector.
An edited version of this article appeared in The Asian Age
