India’s main problem is proper management of demand and supply. So unless the government plugs loopholes in the PDS system, the Bill, brainchild of Sonia Gandhi, will only increase prices of foodgrain
The United Progressive Alliance (UPA) government finally took the ordinance route to implement its ambitious Food Security Bill-FSB , after efforts to have a debate in Parliament failed. The Food Security Bill, the brainchild of UPA chairperson Sonia Gandhi, aims to give legal rights to 67% of the population (those below the poverty line-BPL) over a uniform quantity of 5 kg foodgrain a month at Rs1 to Rs3 per kg. However, analysts feel that the country cannot afford such 'subsidy' luxury, which also have potential to increase foodgrain prices substantially.
According to Nomura Financial Advisory and Securities (India) Pvt Ltd, India’s current macro-economic position does not provide the space to implement this policy.”The government has budgeted its food subsidy at 0.8% of GDP (Rs900 billion) for the year ending March 2014, which will not be enough if the Food Security Bill is implemented in entirety. We do not expect a substantial fiscal impact of the bill in FY14 as it is likely to be implemented only in phases initially and since three months of the fiscal year have already passed. However, the medium-term consequences of the bill could be far reaching and will be clear from FY15 onwards,” Nomura said in a research note.
To implement the Bill in full, the government would need to procure more than 65 million tonnes of grains every year. The food security bill entitles 75% of the rural and 50% of the urban population to subsidised foodgrain. However, all the eligible households are unlikely to shift to public distribution system (PDS) under the new Food Security Bill, feels CRISIL.
“We believe that due to the preference for better quality and greater variety of foodgrain available in the open market, households above the poverty line that are currently not purchasing foodgrain under the PDS are unlikely to shift to PDS. BPL households, in contrast, will be less sensitive to quality as the resultant savings forms a significant proportion of their annual expenditure. Therefore BPL households are likely to shift to PDS once the FSB is implemented,” the ratings agency said in a report.
The bill aims to provide subsidized rice, wheat and coarse cereals to 67% of the population. However, the consumption pattern across the country is different. In fact, some states like Rajasthan do not sell wheat in its PDS shops. In Jharkhand, the quantity of rice consumed by a rural BPL household is 3.6 times its consumption of wheat. By contrast, in Rajasthan the foodgrain consumption under PDS almost entirely comprises of rice.
As per the Tendulkar Committee estimates, around 41% of rural and 25% of urban population fall under the below poverty line or BPL category. Nomura feels that while this bill is justifiable on welfare grounds, the macro-economic implications of the bill are quite significant.
“First, it will raise the government’s food subsidy burden to an estimated 1%-1.2% of GDP per annum from 0.8% of GDP currently. There would be additional expenses on creating the infrastructure related to implementing the Food Security Bill. Second, the government would need to have adequate food stocks every year for this purpose. In case of a deficient monsoon, the country may need to import grains, which could send global foodgrain prices higher. Third, with the government likely to procure a substantial part of the domestic foodgrain production, this could create scarcity for the private sector, pushing prices higher. Fourth, this bill could push up consumption demand for other items, as a lesser portion of current disposable income would need to be spent on grains. Therefore, the overall fiscal and inflationary consequences of the Food Security Bill are large,” the brokerage, said.
CRISIL however feels that the Bill will provide households with additional disposable income, which in effect would move up the income bracket. CRISIL estimates that the FSB could generate additional savings of around Rs4,400 this year for each BPL household which begins to purchase subsidised food. “For rural households the savings amount exceeds their current annual medical and educational spends. Higher disposable income would also allow BPL households to spend more on protein rich food, thereby improving their nutritional intake,” the ratings agency said.
A close above 5,865 on the Nifty would see the upmove continuing. However, if the benchmark closes below 5,760 we may see it heading towards 5,565