This is one of the best answers i read for this title.

Answer by Vivek Mandal:

Is the Food Security Bill good for India?

This is a very complex & technical issue, one which directly decides if India will be a ‘Breakout’ or ‘Breakdown’ nation. I believe everyone should be aware of the government policies that affect them directly, so I’ll try to phrase my answer simply, without jargon. I hope you find this useful and worth sharing.

The idea behind my answer is not to cover the political motives of either the ruling party or the opposition. This is my personal opinion about the Food Security Bill purely from an economic stand point.

The Lok Sabha(Lower House of the Parliament) on 26th August passed the ambitious National Food Security Bill, 2013 that seeks to provide highly subsidized food grains to nearly 67% of the population.

A) Impact of the Food Security Bill on the Indian Budget

At a high level you must know already that the food security bill is something to do with economic subsidy for the less privileged and the government will foot the bill. The idea behind this part is to go over the key impact this food security bill will have on the Indian Budget.

  • What is this Food Security Bill?

The Food Security Bill guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 67% of the population of India.

Food is one of Man’s most basic needs and the government is trying to make it more accessible to the people who are on or below the poverty line. This is an ambitious attempt and personally I feel that this scheme will be useful to the low-wage earners in our country if implemented properly. Anyways, how it is implemented or whether it will be implemented properly is not our concern from this answer perspective. Let’s worry only about the Economic impact.

  • So, how much will this Food Security Bill cost our Government?

67% population means around 85 crore individuals (Assuming our population as 130 crores)

The selling price of any average quality Rice is around Rs. 20 per kg. So, if the Government is planning on selling it at Rs. 3 per kg, then the difference Rs. 17/- will be the subsidy the government is offering. So, for 5 kgs the subsidy is Rs. 85/- per person. For 85 crore people imagine how much subsidy the government has to give. You can take the average selling price of all these items that come under this bill, subtract the selling price from market price and voila, you will end up with the total subsidy per person.

The highlight is, this is on a monthly basis. Which means, the government will incur this subsidy bill every month and forever.

An estimate by the Government suggests that the overall impact this Food Security Bill will have on its tax payers will be around 1.2 lakh crores. Economists and industry experts feel that this estimate is highly optimistic and may go up to 2.4 lakh crores.

A point to remember here is that, this estimate is just for the subsidy the government will be offering. The additional expenditure that is required to set up system through which this scheme will be brought to the common man, setting up operations, movement of the food grains, storage of the grains and so on is not part of this estimate. If we include all those factors the actual bill the government will foot will be much higher than this estimate.

Another important point to remember here is that, the food security scheme is an open ended scheme. This means that, there is no end date or expiry date for this scheme. It will be a never ending phenomenon that covers 67% of our population irrespective of whether they need that subsidy or not. This means, as our population goes up, the expenditure too would keep going up.

  • What is the Government Saying about this huge expenditure?

The government is using our GDP for comparison purposes and is saying that the expenditure for this Food Security Bill will be between 2-3% of the nation’s GDP. 2 to 3% doesn’t sound big, right???

  • Is this a fair % comparison?

After reading the last line you may have thought, 2-3% doesn’t sound so big. What impact would that have…

Did you think that?

GDP stands for Gross Domestic Product and is the total value of all goods and services that are produced within our country. It does not refer to the total amount of money the Indian Government earns through taxes and other revenue channels. Now, go back and read the claim in the previous paragraph and think if this 2-3% is a reasonable comparison.

I am sure you will agree that a more accurate comparison would be as a % of the country’s total income.

  • So, what is our country’s total income?

The projected Income for our country in the financial year 2013-2014 is around 11.2 lakh crores. This is the difference between our total revenue/earnings and the loan interest & repayments we do from the various entities we have borrowed money from.

So, 1.2 lakh crores as a % of 11.2 lakh crores works out to 10.7% and if we take the higher limit estimate of 2.4 lakh crores the % soars to 21.4%

The government is proposing to spend between 10-20% of its gross income to meet the cash needs of this Food Security Bill. This scheme will put immense pressure on the nation’s fiscal deficit.
Fiscal deficit is defined as the difference between what a government earns and what it spends.

  • How will this extra expenditure be financed?

If the government has to spend 10-20% of its income on this scheme, it means that the corresponding amount has to be reduced from other schemes like Infrastructure projects or educational projects and so on. The nation’s income is not going to go up by 20% to meet this additional cash requirement overnight. So, the finance ministry will have to either borrow to meet this additional cash demand or cut expenses on other projects to accommodate this.

Given that our economy is in a bad place right now, hiking taxes is not a good option. Add in the fact that we have elections next year; the option of hiking taxes is ruled out. Budgets for most projects for the next few years are also allocated and earmarked from our revenue and hence cutting expenditure too is ruled out. So, the only option available for the Government is to“Borrow”
Schemes like National Savings Certificate (NSC) or Infrastructure Bonds etc. are classic examples of Government Borrowing.

So, to summarize, the Government is planning to borrow many more lakhs of crores in order to fund this ambitious scheme. As you may have guessed by now, this will have a significant impact on the Indian Economy as well.This brings me to the second part of my answer.
B) Impact of the Food Security Bill on the Indian Economy

The government would resort to borrowing to fund the Food Security Bill. When the government enters the borrowing market, in order to entice investors, it would have to offer good interest rates. The private sector too would have to hike their interest rates in order to stay competitive. This means, the Interest Rates will continue to remain high. High Interest rates is never good for economic growth.

Verdict:

  • Impact on Food Inflation

Have you heard of the term – “Minimum Support Price or MSP”?

This is something the government sets/declares every year as the price at which it buys grains from farmers. This grain is then used by the government for all its various schemes. The grains to be distributed under this Food Security Program too will be procured like this.

Minimum Guaranteed prices means, farmers will have more incentive to grow rice/wheat and other grains covered under this scheme. This might result in Vegetable production getting affected which will further affect the nation’s Food Inflation.

In the last 5 years, food inflation contributes to over 41% of our overall Inflation. So, by subsidizing the price of rice, wheat and a few cereals, it might result in an unintended consequence of other items becoming costlier which will result in overall higher food inflation.

Verdict:

  • Impact on Overall Inflation

An alternate to funding this scheme is for the government is to “Print Money”. World History is full of classic examples where governments resorted to printing more currency to fund its cash requirements. This is never a good idea and will result in the country’s overall Inflation going higher.

Let us just hope that the finance ministry does not resort to this technique otherwise our economy would be doomed for a very long time

Verdict:

  • Impact on Savings

Higher food prices mean higher inflation. Higher inflation means people will end up spending a higher % of their income to meet their day to day needs. This will result in much lower savings.

Verdict:

  • Impact on Economic Growth

Lower Savings and lower surplus income means – people will spend a lower amount of money on consuming good and services and therefore the economic growth will slow down further.

Verdict:

  • Impact on the Current Account Deficit

We all know that Importing of Gold and Petroleum products is the biggest contributing factor to our nation’s Current Account Deficit. Right?

The Food Security Bill guarantees food for the people covered under the scheme. So, if in a particular year, the in-country production of either rice or wheat is not sufficient we would be forced to import it. So, if we start importing rice, wheat or any other food grains, it will further widen the Current Account Deficit.

Verdict:

  • Impact on the Rupee

The Rupee is bleeding left, right and center. It is falling freely and God knows when it will stop. Anyways, lower savings and wider current account deficit will impact the rupee.

If India does not save enough money, it means that, we will have to borrow capital from foreign countries/investors. When these foreign borrowings need to be repaid, it will almost always be using dollars. This will put pressure on the rupee and lead to further depreciation against the dollar.

On top of this, buying rice or wheat from the international market means, we will be paying in dollars. This will lead to increased demand for the dollar and result in further depreciation of the rupee.

Read my answer here: Vivek Mandal’s answer to Economy of India: What is the reason behind recent Rupee depreciation in August 2013?

Verdict:

  • Impact on Fertilizer and Power Subsidy

In order to grow food grains, farmers use fertilizers and electricity. Both of these items are already heavily subsidized for farmers. The procurement needs of the Food Security Bill will result in intensive cultivation using more fertilizer and power, which will push up central subsidies on fertilizer and state subsidies on power.

So, in order to procure enough food grains, the government will be forced to shell out more subsidies for both fertilizers and power which again will leave a big dent in the nation’s budget.

Is the Food Security Bill good for India? 1

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