Food Bill will torpedo Budget

The National Food Security Bill seems almost a fait accompli with the BJP too supporting it. The Parliamentary Standing Committee has okayed the Bill in January 2013. The Finance Minister has said in his Budget speech that the Bill would be presented before Parliament soon. He has also set apart Rs 10,000 crore over and above the existing food subsidy, to meet the incremental cost under Food Security Bill. But he has carefully avoided mentioning the amount of incremental cost – the most critical factor.

In their speeches, finance ministers normally withhold inconvenient truths that will harm the rating of their Budgets by the instant media. But the Budget documents generally disclose most of what the Finance Minister withholds.

DEAFENING SILENCE

However, even the statutory budget documents dealing with fiscal deficits -- Medium Term Fiscal Policy Statement, Fiscal Policy Strategy Statement and Macro Economic Framework Statement – carefully avoid mentioning the food security. These statutory statements say that government stands committed to extending food security to all and to carve out adequate fiscal space for its adequate provisioning, but not say how much is that 'fiscal space'. They talk about additional funding required for the Bill, but remain deafeningly silent on the numbers.

They talk about massive overhaul of the food subsidy regime with the introduction of the Bill, but at the same time contradict themselves by saying that without focused subsidy reforms, the process of fiscal consolidation will be impossible. But what does all this add up to? In one word: pontificating.

Obviously, the government must have its own calculations on the cost. But the very fact that it has not disclosed the numbers in the Budget shows that, if disclosed, the picture would not be very comforting. Last year, the media had reported that, by the Bill, the food subsidy would go up to Rs 120,000 crore. If this were correct, the current budget provision of for Rs 90,000 crore would leave Rs 30,000 crore uncovered. But that is not even a quarter of the story. Here is the full story – a story that can dynamite the Budget.

LEAKAGES, AND TOTAL COSTS

Ahead of the budget, in December 2012, the government had a discussion paper -- “National Food Security Bill: Challenges & Options’ – in its hands. It was prepared at the instance of the Commission for Agricultural Costs and Prices (CACP). The paper discloses the facts about the extra cost involved in the food security Bill which the Budget speech and the budget document on fiscal deficit withhold. The Bill, it says, seeks to provide subsidised food grain at 7 kg per person per month to almost two-thirds of the people of India. It adds that the annual cost of Rs 120,000 crore estimated “is merely the tip of the iceberg”. Before unearthing the hidden underestimated cost – the iceberg – it exposes the shocking leakage under the present Targeted Public Distribution (TPD) system.

It brings out that out of the 29 million tonnes of off-take for TPD in 2004-05 what poor households got was just 46 per cent of it – the balance 54 per cent got pilfered along the way; in 2009-10, out of the offtake of 42 million tonnes, poor people got 60 per cent with 40 per cent having been lost on the way. It points out that how the food subsidy has vaulted from Rs 12,000 crore in 2001-02 to Rs 73,000 crore in 2011-12. (For 2012-13, it is Rs 85,000 crore and projected at Rs 90,000 crore for 2013-14.) Then it goes on to say how the cost of procurement has gone up by 9-10 per cent annually for five years ending 2012-13. It points out that the costs of production of wheat and rice have gone up by 45 per cent in three years to 2012-13 – which, it says, is primarily due to the huge labour shortage that has cropped up in the last three years, pushing labour costs by 100 per cent, squeezing the margins of farmers. It says that when the cost of production rises, the cost of procurement (Minimum Support Price) cannot remain frozen. It projects that some 75 million tonnes or 38 per cent of the production would have to be procured – a massive task for which the machinery is not in order.

Then it goes on to estimate the Food Security Bill cost. It says, according to the government's estimates the Bill will cost Rs 95,000 crore at the start and rise to Rs 125,000 crore and finally to Rs 150,000 crore. The paper brings out two critical aspects overlooked by the government that has led to under-assessing the cost. First, it says that, to ramp up the food production, the Department of Agriculture has projected an expenditure of about Rs 110,000 crore over the next three years. Of this amount, the spending in the first year will be Rs 60,000 crore; Rs 33,000 crore in the second year and Rs 11,000 crore in the third year.

DEFICIT TARGET OVERSHOT

Incidentally, against this the provision in the Budget 2013-14 for the National Food Security Mission is only Rs 2,250 crore – a fifth of the projection by the Department of Agriculture. In earlier budgets, it was even less – Rs 1,286 crore (2011-12) and Rs 1,674 crore (2012-13) – all peanuts as compared to the huge requirement. Next it says that with labour cost doubling and other costs going up, government cannot help raising the MSP. If the government does hike it by 25 per cent in three years, food subsidy will straight away go up, besides the rise in cost of handling which is up by 6-7 per cent every year.

On this basis, the paper fixes the financial cost of the Food Security Bill at Rs 6.82 lakh crore over the next three years – Rs 2.41 lakh crore in the first year; Rs 2.23 lakh crore in the second year and Rs 2.17 lakh crore in the third year. This is more than two and a half times the provision in the Budget.

Assuming that the food security Bill is passed in the Budget session as promised, most of the first year impact of the Bill – Rs 2.41 lakh crore – will be felt in 2013-14 itself. Against this, the Budget provides just Rs 90,000 crore for food subsidy and Rs 2,250 crore for the National Food Security Mission. So the actual spending would be way above the Budget.

Assuming the impact for 2013-14 is three-fourth of the projection by the CACP for the first year, the deficit for 2013-14 could go up by almost Rs 100,000 crore! It needs no seer to say that the promise in the Medium Term Fiscal Policy Statement that the government would be Kelkar-report compliant and would contain the fiscal deficit at 4.8 per cent in 2013-14, bring it down to 4.2 per cent in 2014-15 and 3.6 per cent in 2015-16 would go up in smoke.

The medium term fiscal policy statement (para 45) says with great concern that major subsidies, including food security subsidy, are extremely critical in determining the government's success in achieving fiscal deficit target. It suggests a two-pronged strategy to cut major subsidies, including food subsidy – one, to raise the prices of subsidised goods to reduce the subsidies; two, better targeting of subsidies.

But the food security subsidy defies both conditions. As it covers two-thirds of the population, targeting is impossible. And the very philosophy of subsidised foodgrains militates against raising the selling prices.

QED: The Food Security Bill, which seems to make all talk of fiscal consolidation and control of fiscal deficit ridiculous, can dynamite the Budget and finances of the government.

The author is a commentator on political and economic affairs, and a corporate advisor.

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