Economy
Impact of reforms on food security

Various government bodies have warned that India should urgently slash subsidies to curb a growing budget deficit. But, considering the diverse region-specific issues, it would be near impossible to find a common solution for the problem affecting almost half the population of the country

While talking to the media after a function in Chennai on last Thursday, Reserve Bank of India (RBI) deputy governor Subir Gokarn observed that as regards fiscal problem, no solution will work unless the subsidy issue is addressed. He added that the subsidy bill is by far the largest single burden on the government finances. Reading in the context of the recent measures to tackle oil subsidy, the statement coming from the RBI could be seen neither as a threat nor a warning, but as advance information about the impending disastrous policy initiatives on the food front.

 

The RBI observation comes within days of the Kelkar panel warning that India is on the edge of a “fiscal precipice” and should urgently slash fuel, food and fertilizer subsidies to curb a budget deficit that could hit 6.1% of gross domestic product (GDP) this fiscal year.

 

While on the subject of subsidy, certain related issues deserve mention. These include:

  • Worldwide, subsidy, in one form or other exists, to protect the national economic and social interests. Technical phrases like “quantitative easing” used by the Federal Reserve (the US central bank) where interest rates are subsidized by the exchequer also factor in subsidy at various degrees. The present Fed chairman Ben Bernanke in the third round of quantitative easing is reported to have committed to keep interest rates near zero till mid-2015.
  • The government can considerably reduce subsidy intervention to protect the interests of poor, if a realistic minimum wage can be assured across organized and unorganized sectors. It doesn’t need much research to make a statement that majority of the present beneficiaries of subsidy in the low income group do work for eight to 14 hours a day, but are miserably under-paid.
  • The government should do well to assess the impact of withdrawal of existing support systems in the form of ‘controlled’ prices for essential articles via subsidy intervention or withdrawal of social security schemes like defined benefit pension scheme on future budgets, as the costs which are being avoided will resurface as social responsibility of government at some stage.

 

With these thoughts in the backdrop, this article takes a look at the position of measures needed for ensuring food security.

 

Last month, by a mere coincidence, the observations on the impact of demand-supply situation on food inflation by Chief Economic Advisor (CEA) Raghuram Rajan and the release of 2012 Global Food Security Index by American chemical company DuPont almost coincided.
 

Rajan’s observation goes like this: “One of the concerns of the last few years has been food inflation, which has been not so much within the control of the government. This is… because our population has become richer, a good thing, and therefore has demanded more high-end products such as milk, eggs, meat rather than the cereals.” According to him in order to rebalance or reduce food inflation, “we have to produce more of such products. So, productivity is going to be part of fighting inflation.” The relationship between productivity and inflation being well-known, normally, Rajan should not have attracted the criticism his statement has been subjected to in the subsequent days.

 

The DuPont report observed that with India expected to be the most populous country by 2025, feeding the population is likely to be one of the serious challenges the country will face in the coming decades. The position the report gives to India among the nations covered by the report is not that much important as such reports do not compare the comparables.

 

From the information that could be gathered, the Food Security Act (FSA) is still under the consideration stage, somewhere. The National Advisory Council (NAC) was in consultation with ministries on FSA sometime back. It is understandable that the NAC has to take a view at macro level for the whole country for advising on optimum utilization of available resources for ensuring food security. But, considering the diverse region-specific and income-strata specific issues concerning procurement, pricing and distribution at grass-root level, it would be near impossible to find omnibus fit-for all legislative solution for the problem affecting almost half the population of the country.

 

Sooner than later, we have to reconcile with the fact that, measured by any parameter, economic development has not been uniform in all the regions of the country. Therefore, the perception of poverty, share of expenditure on food in the family budget, expectations about lifestyle and development of rural markets vary across geographical boundaries within India. These aspects will need to be factored in, in any policy initiative including legislative measures to ensure food security. Some parts of the country will justify the CEA’s observations on productivity of milk and eggs, while 70% of the population will still need price management of cereals at the retail level, just for survival.

 

To read more news analysis on issue of subsidy, click here.

 

The Common Minimum Programme (CMP) of the United Progressive Alliance (UPA) government released in May 2004 had these promises on food and nutrition security:

“The UPA will work out in the next three months, a comprehensive medium-term strategy for food and nutrition security. The objective will be to move towards universal food security over time, if found feasible.

 

The UPA government will strengthen the Public Distribution System (PDS), particularly in the poorest and backward blocks of the country, and also involve women’s and ex-servicemen’s cooperatives in its management. Special schemes to reach foodgrain to the destitute and infirm will be launched. Grain banks in chronically food-scarce areas will be established. Antyodaya cards for all households at risk of hunger will be introduced.

 

The UPA government will bring about major improvements in the functioning of the Food Corporation of India (FCI) to control inefficiencies that increase the food subsidy burden.

 

Nutrition programmes, particularly for the girl child, will be expanded on a significant scale.”

 

It was expected that policy formulations by the GOI affecting food security will be broadly guided by the spirit of the CMP. But, it took more than seven years for the above promise to find expression in the form of an intention to introduce a Food Security Bill in Parliament. The burden of subsidy which disturbed the former FM’s sleep (luckily he could get a change of berth and can sleep well now!) is now threatening the hunger levels of the common man, as subsidy has become a bad word in the current “Reforms dispensation”.

 

During the last two decades, agriculture as a sector and foodgrain cultivation particularly lost the national priority they enjoyed during the pre-reforms days, marked by stagnant foodgrain production and dwindling share of crops in agricultural GDP. The neglect has resulted in under-utilization of land available for cultivation, the country not taking advantage of modern agricultural practices and inadequate storage and processing facilities for the agricultural produce.

 

A change in approach to cropping patterns, agricultural practices, storage and processing facilities factoring in the changes in food habits like the urban bias towards processed food, non-availability of traditional food articles in villages and the need to ensure minimum nutritional needs to the under-privileged is overdue and in this context the Food Security Bill is to be welcomed. Only a small section of the urban population can afford the prices of imported processed food and bottled drinking water. The well-being of the remaining one billion people is dependent on the food and water available locally.

 

From a short-term point of view, the FM should keep in view the following factors while considering lowering of ‘subsidy’ intervention as an instrument to support food security:

  • By policy disincentives, discourage states and political leaderships competing about supply of foodgrain in larger measure, at lower prices (it has reached a ridiculous level of Re1 a kilogram of rice in some states) to more and more number of families. Some state government spokespersons and even the Supreme Court at one stage, have gone to the extent of arguing that as storage facilities are inadequate, better distribute foodgrain to the poor, free. Storage and transport are the other two aspects that need immediate attention.
  • The government should work out the possibility to put systems in place for supply of food packets instead of raw foodgrain at subsidized prices at least to workers and employees dependent on outside food. This will throw open opportunities for processing and supply chains which will create employment. Initially, caterers or hotels coming forward to participate in these efforts could be supported with soft loans and subsidies for supplying quality food packets at pre-decided costs.
  • By policy incentives, encourage increase in production of foodgrain, vegetables, milk, eggs and meat. Subsidy in these areas to make production units viable will reduce future burden of subsidy.

 

Lest I will be misunderstood, let me clarify that my case is not for continuing the status quo. What I am trying to say is that instead of cutting and pasting reform measures tried elsewhere in different periods of time in different historical contexts and in different geographical regions, we should tailor-make India-specific measures to meet our present day needs.

 

To read more articles by the same writer, click here.

 

(MG Warrier is a freelancer based in Mumbai. He can be contacted at [email protected].)

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Economy & Nation Exclusive
Why the power sector reforms could collapse

Only if the states and Discoms “walk the talk” with the mandatory conditions outlined in the financial restructuring scheme, would the chronic “payment security” risk for power sector in India be addressed

 
The proposed financial restructuring scheme announced by the government for the state electricity boards (SEBs), would translate to just another bailout, unless the state governments and SEBs fulfil the mandatory conditions, remind Nomura Financial Advisory and Securities (India) Pvt Ltd.
 
The brokerage, in a research note, said, “the detailed working mechanism of the financial revamp plan for SEBs confirms that state governments and lenders would assume the bulk of the burden, the Central government would provide support in the form of ‘incentives’ via a ‘transitional finance mechanism’ and compliance with mandatory conditions to avail this ‘scheme’ would ensure ‘fiscal discipline’ by Discoms in terms of retail tariff revisions and focus on aggregate technical and commercial (AT&C) loss reduction.” 
 
Earlier, following approval of the Cabinet Committee on Economic Affairs (CCEA) a fortnight back, the ministry of power (MoP) has notified the “Scheme for Financial Restructuring of State Distribution Companies (Discoms)” over the weekend.
 
Besides revamping the balance sheet of ailing Discoms, the financial restructuring scheme entails sustained “fiscal discipline” on the part of Discoms, including adherence to stipulations of the Appellate Tribunal’s (APTEL’s) landmark order in November 2011 on retail tariff revisions. 
 
“We believe it is a long-term positive for power utilities. Within our coverage universe, while private IPPs such as Lanco Infra, which have sizeable receivables from ailing Discoms, and JSW Energy, which is awaiting final tariff orders from the electricity regulator in Rajasthan, are near-term beneficiaries, as fuel security remains the overarching risk for private IPPs, Power Grid Corporation of India and NTPC remain our preferred picks. In our view, any move to restore the financial health of SEBs also augurs well for Coal India,” Nomura said.
However, the brokerage feels that loss-laden Discoms are more likely to adopt this scheme. It said, “In our view, besides the Discoms in seven focus states (for which this exercise was primarily undertaken), states with loss-laden Discoms are likely to utilize this ‘scheme’ as: 1) working capital refinancing is already contingent upon commitment to a ‘cash flow’ restoration roadmap and adherence to APTEL’s Order; 2) the central government would be sharing part of the financial burden, in this case; and 3) a ‘special arrangement’ to fund near-term operational losses and interest payment could be worked out.” 
 

 

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