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Giving a thumbs down to the Food Security Bill, rating agency Moody’s today said that the measure is credit negative as it will weaken the Government finances and deteriorate the macroeconomic situation.
“The measure (Food Bill) is credit negative for the Indian Government because it will raise the Government spending on food subsidies to about 1.2 per cent of GDP per year from an estimated 0.8 per cent currently, exacerbating the Government’s weak finances,” Moody’s said in a statement.
Moody’s currently assigns ‘Baa3’ rating on India with a stable outlook. ‘Baa3’ means medium grade with moderate credit risk.
The Food Security Bill was passed by the Lok Sabha earlier this week. The Bill seeks to provide cheap foodgrains to 82 crore people in the country, ushering in the biggest programme in the world to fight hunger.
The Food Bill seeks to provide highly subsidised foodgrains to 75 per cent of the rural and 50 per cent of the urban population through the public distribution system.
It will guarantee 5 kg of rice, wheat and coarse cereals per month per person at a fixed price of Rs 3, Rs 2 and Rs 1 respectively.
Financial burden
The annual financial burden after its implementation is estimated to be about Rs 1.30 lakh crore at current cost.
As the Bill is likely to be implemented in the remaining months of the current fiscal, its impact on Government finances will be less in 2013-14, but much more in the years to come, Moody’s said.
The total food subsidy budgeted in the current fiscal is Rs 90,000 crore, of which Rs 10,000 crore is towards the implementation of the programme.
“It will raise future subsidy expenditure commitments, hindering the Government’s ability to consolidate its finances,” Moody’s said, adding that the government subsidies will contribute to the already high food inflation.
Fiscal deficit
The agency further said India’s fiscal deficits are already higher than those of its emerging market peers.
It said that the high fiscal deficit contributes to the current account deficit (CAD) by keeping domestic demand high and increasing the imports.
A high CAD, the difference between inflow and outflow of foreign currency, puts pressure on the domestic currency and fuel prices.
The rupee has depreciated about 25 per cent this year and touched a record low of 68.80 to a dollar yesterday.
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