The Food Security Bill is a fiscal extravagance we can ill-afford.

The Food Security Bill, 2013 (FSB) has the approval of the Central government and will soon be discussed in Parliament. If press reports are to be believed, irrespective of the fate of the Bill in Parliament, FSB will be implemented in the States in which the Congress is in power. This, indeed, is a unique stance, for in a vibrant democracy such as India, batons change regularly between parties and there are no permanent jagirs.

In the current situation, especially when the global economy is recording depressed economic growth, maintaining some fiscal space is very critical for any country. India already recorded a gross fiscal deficit (GFD) of Rs 5,20,925 crore (5.2 per cent of GDP) in 2012-13 which is expected to increase to Rs 5,42,499 crore (4.6 per cent of GDP) in 2013-14. And the food subsidy, as per the Budget, is estimated to increase from Rs 85,000 crore to Rs 90,000 crore over the period. Though the Expert Committee headed by C. Rangarajan had indicated earlier in 2011 that the cost implications of FSB would be large, recently, the Commission for Agricultural Costs and Prices (CACP) provided a starkly high estimate, meticulously calculated in its discussion papers released in December 2012 and May 2013.

To illustrate, the CACP estimates an expenditure of Rs 6,82,183 crore in the first three years of launching the scheme, with Rs 2,41,263 crore in the first year itself. If the scheme is initiated in 2013-14, the gross fiscal deficit of the Centre would substantially shoot-up to 6.7 per cent of GDP, a level not reached since 1993-94.

This still could be an optimistic level because, given the grim industrial production domestically, depressing external environment and IMF forecasts, revenue from direct and indirect taxes could be lower than budgeted.

International investors and rating agencies closely watch the fiscal trends and are unforgiving in their decisions which ultimately impact foreign investment, especially reliable direct investment.

Fiscal position of States

To stem the rise in gross fiscal deficit, the government could consider reduction in capital expenditure, or raising revenue through tax/cess and market borrowings. A reduction in capital expenditure would imply lower potential for investment and growth. An increase in tax/cess in times of low economic growth may not yield necessary revenue. And raising market borrowings implies higher debt to GDP ratio, implying higher interest payments which in turn imply higher tax rates to service the rising debt. Interestingly, interest payments are already estimated at 3.3 per cent of GDP in 2013-14, similar to large revenue deficit for the year.

There still is another major concern and that is the fiscal position of the State governments. In general, State governments would also incur some costs, generally ranging 10 to 25 per cent of the project.

The fiscal health of some States, irrespective of the party in power, is not rosy pink (Table). And these figures do not include the impact of government guarantees, which every State government has extended. So, initiating implementation of FSB in select States may spiral into competitive populism, given the election year, and may imply an irreversible nose-dive into the fiscal abyss.

The Food Security Bill, conceived in 2010, needs re-consideration in view of the recently released NSSO survey result showing that population below the poverty line has declined from 37. 2 per cent in 2004-05 to 21.9 per cent in 2011-12.

The Food Security Bill has noble objectives but as fiscal costs outweigh benefits now, the grim implications of fiscal profligacy, given the record of Greece and Brazil, are difficult to ignore.

(This article was published on August 6, 2013)
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