Six Myths about the Food Security Bill

Here is the lowdown on how the food security bill will actually pan out for all of us. A reality check on how to think through the costs of the largest ever subsidy in the history of India and how it will affect us today and tomorrow.

1. The Food Security Bill (FSB) costs 1 percent or 3 percent of India’s GDP, so it is expensive or inexpensive.

Trying to compute the cost of the FSB as a percentage of our GDP is bizarre. While this might give people some sort of anchor of understanding, it is more useful to anchor it as a percentage of government revenue or expenditure.

Let’s first do a rough estimate of what this bill might cost us. While the government says it might only be an extra Rs 25,000 crore, other economists have come up with numbers ranging from Rs 1 lakh crore to 3 lakh crore. For now, let’s just take the real cost of the bill to be about Rs 50,000 crore.

The Central Government earns, inclusive of tax and non-tax revenue, about Rs 10 lakh crore per year. An additional FSB spend of Rs 50,000 crore makes it 5 percent of all revenues, which is significant. And this percentage might actually go up if this year if revenues come in lower than estimated (last year they came in Rs 64,000 crore less than estimated).

The current estimate of the government’s ‘deficit’ (the difference between expenditure and revenue) is about Rs 5.4 lakh crore. The FSB will involve spending about 10 percent more of the deficit. This mean we will increase the deficit by 10 percent, which comes at a time when we are really spending too much.

Now, the deficit is financed through borrowing. The government will borrow over Rs 5.40 lakh crore this year. The excess caused by the FSB will also have to be borrowed, and will add up to 10 percent higher borrowing.

Let’s look at this excess borrowing in terms of total new money created in India. If you added up all the money in Indian bank deposits plus whatever currency notes the RBI has printed, you get a rough idea of our ‘money supply’. The RBI’s publications show that Money Supply on March 31, 2013, increased by about Rs 10 lakh crore from March 31, 2012 – from Rs 73 lakh crore to 83 lakh crore. Given that money supply growth is slowing, we can expect about Rs 10 lakh crore more to be added to the system this year.

In effect, the cost of the FSB (Rs 50,000 crore) will be 5 percent of new money created (Rs 10 lakh crore) – so the bill will end up taking Rs 5 of out of every new Rs 100 created. This is apart from the fact that, already, Rs 50 out of every Rs 100 created is borrowed by the government. Effectively, this leaves less for you and me to borrow since banks find it much more comforting to lend to the government.

Some have defended this bill saying that the government’s annual corporate subsidies are even greater than the cost of the FSB. But most corporate subsidies are, for the most part, not paid out – they are estimates of revenue foregone, which don’t really materialize if the subsidy was absent. For example, if you have a policy of lower taxes for solar panels, you can take the total amount of solar panel imports and then estimate what you could you have made if you had charged full duty; but that is illogical, because without the lower taxes people wouldn’t have imported the solar panels in the first place.

So we have to compare the FSB to real costs – where money has actually been spent. In 2009, there was a massive loan waiver scheme that allowed farmers who hadn’t paid their loans to not pay at all, and the government would pay the banks instead. This cost us Rs 60,000 crore and was termed vile. And yet, the FSB’s excess cost of Rs 50,000 crore over the current subsidies matches that.

The concept of computing something as a percentage of the GDP makes sense only when all else is equal; but ceteris is often not paribus, if you will forgive my Latin.

2. The FSB will not affect the larger economy – or us – that much.

Various economists and writers, including yours truly, have tried to estimate the cost of the FSB. Surjit Bhalla estimated its cost at Rs 3 lakh crore while others disagree, saying it will only be Rs 1.35 lakh crore. Some will tell you that the current Public Distribution System (PDS) provides only 2.1 kg per person. Others say the math is wrong – it's actually 4.7 kg per person, so the FSB provision of 5 kg per person isn't that much of a jump.

The FSB’s impact on prices is going to be huge. According to the Parliamentary committee report, the government procures 34 percent and 40 percent of all the rice and wheat produced in India respectively, up from the 27 percent and 14 percent it did in 2006-07. So we are expecting the government to buy and sell nearly half of the food grains produced in the country – at lower-than-market price – which will mean that the rest will have to be sold at higher prices. These higher prices will have to be paid by most of the country, regardless of large assumptions that 67 percent of the population will be covered by the FSB.

Secondly, our economic problems today are the exodus of investors, the lack of international confidence in India, the huge fiscal deficit and the slowing economy. At a time like this, to bring in a food security bill is nothing but a vote-winning gimmick. While investors have voted with their feet, the rest of us that remain will have to pay the price in terms of larger inflation, higher interest rates and lower growth.

Thirdly, the FSB’s cost will also have to include the inherent inefficiency of a bloated government. We already know that it is inefficient, and to entrust it with the responsibility of feeding us will mean that we’ll have to wait till dinner for our breakfast.

So far, we have discussed the direct cost of implementing a bill that means to give people a fish rather than teach them to. But what about the collateral damage? We have created an open-ended subsidy yet again. Why should we continue to feed our people at subsidized costs forever? Why should the country bear this cost ad infinitum? Even if we argued that such measures are necessary today, they will not be tomorrow as people move out of poverty. So if we assume there are benefits to implementing this bill, then why can’t we set an end-date to it – say, 10 years from now – continuously pruning the amount provided by, say, 0.5 kg per person per year?

3. The FSB will cover 67 percent of the population.

This is a lofty goal, but the wording of the bill has now been diluted to mean something like: “We want to target poor people but won’t tell you what we mean by poor.”

This decision – who gets it and who doesn’t – is going to be decided at a later point. Leaving this decision for later means that there could be onerous qualification criteria, or documentation requirements, that instantly disqualify most people that deserve to get this food.

The beggar on the street who would be quite happy to pay Rs 3 per kg of rice will probably not qualify because he can’t prove that he or she exists. The homeless mother with a baby to feed will not get wheat at Rs 2 per kg simply because she doesn’t have an official address.

The real poor will not benefit from the FSB. The middle class will forge their papers as if they were below the poverty line and thus qualify for the subsidy. And realizing the potential, some of the ultra-rich, too, will create a system of non-existent people with fake names and fake addresses in order to siphon out the cheap food and sell it on the market elsewhere. And the statistics will look like we have fed the poor, when in fact we will have not.

4. All we have to do is plug the leakages.

While the government provides more than 50 million tons of rice, wheat and grains to states already, a high portion of that never reaches actual households. This means there is a lot of leakage. And if we reduced that leakage we will have solved world hunger in an as-it-applies-to-India sort of way.

I will argue the very opposite. Leakages are an intrinsic part of our public distribution system and people will die hungry before these leakages are plugged. The current system is, by most accounts, a well-oiled machine that siphons out government money to line the pockets of intermediaries. These positions will not be given up easily. If this means that the general public will not get their food grains, so be it. To plug leakages we have to dismantle the system, not enlarge it.

5. Warehousing reforms can fix the rot.

Of all the food grains that are procured as part of the PDS, about 40 percent rot. This is bad – so all we have to do is to build better warehouses, right?

Now for the real data: How much do we procure versus what is really required?

As of 1st August 2013, we have a ludicrous 696 lakh tonnes of rice and wheat in government warehouses, despite a maximum buffer requirement of only 319 lakh tonnes. The argument against dumping the rest in the market is that it will depress prices and hurt farmers. So the alternative is to keep buying from them at high prices, using my taxes, and then let the food rot?

There is zero economic benefit in this concept, and as we know, farmers are used to fluctuations in prices. If this is the situation, we will simply procure more food and let it rot. Warehouse reform will not help the government if the problem is that it already buys too much.

6. We could easily afford the FSB if we just paid more taxes.

Some people argue that in India, a country with a very low tax-to-GDP ratio of 17 percent, we should just pay more taxes to pay for a bill that will feed millions.

According to the Parliamentary committee on Direct Tax Code, there are about 3.5 crore taxpayers in India and out of this, 85 percent earn less than 5 lakh rupees. There are only 4,06,000 taxpayers earning more than Rs 20 lakh per year, and less than 50,000 people who earn more than Rs 1 crore per year. Of total taxes, 63 percent are collected from people who make more than Rs 20 lakh per year.

Increasing tax rates will not help. One way is to bring farmers into the tax net, but that, according to leftist arguments, cannot not be tolerated. Another way is to find and fine black money hoards like real estate and cut all the subsidies given to that sector. Yet another way is to cut subsidies to fertilizers and fuels, marking them to international prices, which will both increase revenue through taxes and reduce expenditure. But all these measures are unpalatable for the very reason the food security bill exists: they cost votes.

Overall, the FSB will be a bad implementation of a shaky idea. A better solution would be to dismantle the food subsidy entirely and pay people directly. The cost of wheat or rice in the market today is about Rs 30 per kg for PDS-provided rice. Buying five kg costs Rs 150. A direct transfer of Rs 150 into the accounts of the very same 67 percent of population will cost about Rs 1.2 lakh crore (for 70 crore people), without any of the cost of all the warehousing, the procurement, the rotting and the wastage. We could dump all the stored wheat and rice in the market over time and prices would be contained. And direct transfers would be easily traceable, so leakages would be lower.

Deepak Shenoy is a founder at Capital Mind, a financial data, commentary and analytics site and lives in Bangalore with his family. You can follow him at https://twitter.com/deepakshenoy and reach him at deepakshenoy@capitalmind.in

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