When markets become risk averse, economies with high current account deficits-CAD often find themselves facing external financing pressure, the ratings agency said
Rating agency Standard and Poor’s (S&P) has cautioned that large deficit economies, including India and Indonesia could face more economic problems in the near term.
"The road may be rocky in the near term, particularly for the largest deficit countries--India and Indonesia--but we don't think this is the Asian crisis all over again," said Paul Gruenwald, chief economist for Asia-Pacific at S&P.
In a report titled ‘South and South-east Asian Economies Grapple with Growth and External Financing Risks’, the ratings agency said, the financial markets appear to be in the midst of pricing in a different path for US monetary policy. “During that process, we are likely to see bouts of volatility in emerging Asian economies, along with weaker currencies, lower asset prices, and subdued sentiment and growth. But, in our view, this is not a repeat of the 1997 Asian financial crisis,” it added.
Observing that in normal times the countries with high current account deficit (CAD) and high savings might not find it difficult to borrow in the international market, the report said: “when markets become risk averse, economies with current account deficits often find themselves facing external financing pressure.’’
India’s CAD rose to an all-time high of $88.2 billion or 4.8% of the GDP in 2012-13. During the current fiscal, the union government plans to bring it down to $70 billion or 3.7% of the GDP.
High CAD is also affecting the value of rupee, which slipped to an all-time low of 68.75 to a dollar in the intra-day trade.
On the positive side, the S&P report pointed out that domestically driven economies such as China, India, Indonesia, and the Philippines face lower growth risks than trade-dependent nations like Singapore and Hong Kong.
Gruenwald said, "The external positions for the emerging Asian economies are much stronger. The central banks are also not defending their exchange rates. In addition, the increase in leverage over the past five years has been moderate in the economies with high external risks".
“The smaller, more open, more trade-dependent economies in Asia, such as Singapore and Hong Kong, have higher growth betas, or risks to growth. In contrast, the larger, more domestically driven economies such as China, India, Indonesia, and the Philippines have lower growth betas,” the report added.
The report attributed the ongoing market turbulence largely to uncertainties around the timing of “tapering” (lowering bond purchases) by the US Federal Reserve, coincided with recent cuts in Asian GDP growth forecasts, most notably for China.
Since the announcement of US bond tapering, the rupee has declined over 20%. Besides, equity market barometer Sensex dropped nearly 10% in the last one month.
The Food Security Bill or FSB requires 62 million tonnes of foodgrains every year and will cost the exchequer Rs1.3 lakh crore per annum
The Lok Sabha on Monday cleared the United Progressive Alliance (UPA) government’s ambitious Food Security Bill (FSB). The bill will now be considered by the Rajya Sabha (upper house). Here is a primer of on the Bill.
Who will be covered?
Up to 75% of the rural population (with at least 46% from priority category) and up to 50% of urban population (with at least 28% from priority category) are to be covered under Targeted Public Distribution System. Meals for special groups such as destitute, homeless persons, emergency/ disaster affected persons and persons on the verge of starvation will also be covered.
Who and how will these people be identified?
Number of persons to be covered to be on the basis of the population estimates as per the Census of India of which the relevant figures have been published. Within the coverage determined for each State, the State Government will have to identify households eligible.
How much of food grains will be given, at what price?
7kg of food grains per person per month to be given to priority category households which include rice, wheat and coarse grains at Rs3, Rs2, and Re1 per kg, respectively
At least 3kg of food grains per person per month to be given to general category households, at prices not exceeding 50% of Minimum Support Price (MSP). After implementation of the proposed Act, about 75 % persons in villages will get wheat at the rate of Rs2 per kg and rice at the rate of Rs3 per kg. However, farmers will get more for their produce i.e. Rs12.85 per kg for wheat and Rs12.50 per kg for paddy as MSP. Food Security Allowance in case of non-supply of food-grains or meals
How much of foodgrain is needed?
FSB would require 62 million tonnes of food grain every year
What would be the cost?
The food subsidy bill would rise to Rs1.3 lakh crore per annum (1.2% of GDP), up from Rs80,000 crore currently (0.8% of GDP), or an additional fiscal burden of 0.3-0.4 percentage points every year.
Who will meet the expenditure?
Central Government will provide assistance to States in meeting the expenditure incurred by them on transportation of food grains within the State, its handling and Fair Price Shops (FPS) dealers margin as per norms to be devised for this purpose.
What are the benefits to women and children?
Women to be made head of the household for the purpose of issue of ration cards. Pregnant women and lactating mothers to be entitled to meals and maternity benefit of not less than Rs6,000. Children in the age group of 6 months to 14 years to be entitled to meals under Intergrated Child Development Services (ICDS) and Mid-Day Meal (MDM) schemes.
Will there be a grievance mechanism?
Yes. It is expected to be a three-tier independent grievance redressal mechanism at District and State levels. However, States will have the flexibility to use the existing machinery or set up separate mechanism.
Who will ensure transparency and accountability?
Social audit will be done by local bodies such as Gram Panchayats, Village Councils, etc.
Other provision for transparency are: Public Distribution System (PDS) related records to be placed in public domain and Vigilance Committees
Reliance on the existing, very leaky, public distribution system or ration shops for the Food Security Bill will have adverse repercussions. The Bill promises to provide foodgrains at Re1 to Rs3 per kg, while paying farmers Rs12.85 per kg for wheat and Rs12.50 per kg for paddy as MSP. Who will pay the difference between MSP and selling price?
Where there is hunger, law is not regarded; and where law is not regarded, there will be hunger. – Benjamin Franklin
The United Progressive Alliance (UPA) government finally was able to get approval for its ambitious Food Security Bill (FSB) from the Lok Sabha. It will now be considered by the Rajya Sabha (upper house). The FSB, 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 Re1 to Rs3 per kg. Although, the UPA government aims to provide food security to poor, its implementation is left with the state government, who may or may not be a willing partner in the scheme. Already, there are concerns being raised on this front as well as FSB's possible impact on the country's exchequer.
According to Nomura Financial Advisory and Securities (India) Pvt Ltd, the country's economy can ill-afford the FSB at current juncture. "While the Bill aims to promote inclusive growth and the government hopes to garner political mileage from it (general elections are due by May 2014), we believe that a reliance on the existing, very leaky, public distribution system will have adverse macro repercussions and cause increased imbalances in the agriculture sector," Nomura said in a research note.
Industry body Confederation of Indian Industry (CII) too has raised concerns. In a release, Kris Gopalakrishnan, president, CII, said, "Such a large outlay at this point in time would definitely have a negative impact on the fiscal deficit. This needs to be managed. The larger concern is regarding the effective implementation of such a high profile and critical social agenda of the Government. The use of public distribution system (PDS or ration shops) raises questions about the efficacy of the model. Targeting is another area that would need special attention. CII hopes that appropriate focus would be given to these aspects—mainly that of targeting so that the needy can benefit from this programme."
In a statement, the government said, "Access to highly subsidised food grains to small farmers under proposed Food Security Act and assured minimum support price (MSP) for their produce will ease the burden on their earnings and allow them the option to spend the money so saved on other necessities. Hence, it is expected to help improve their quality of life. Therefore, contrary to dissuading farmers from producing more, the Act will in fact encourage them to produce more."
The FSB aims to provide subsidized rice, wheat and coarse cereals to 67% of the population. However, the consumption pattern across the country varies. 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.
According to the government, the FSB would require 62 million tonnes of food grain every year, and the food subsidy bill would rise to Rs1.3 lakh crore per annum (1.2% of GDP) from Rs80,000 crore currently (0.8% of GDP), or an additional fiscal burden of 0.3-0.4 percentage points every year. The full fiscal impact of the bill will not be felt this year, as half of the current fiscal year is already over and states will take some time to identify the list of beneficiaries.
"However, once the bill is fully implemented (likely from FY15), the total cost is likely to rise substantially for two reasons. First, the food subsidy bill will rise, and second, there will be ancillary expenditures associated with creating the infrastructure to implement this bill. Additionally, we see the bill as inflationary, because it creates a demand-supply mismatch, requires raising minimum support prices to encourage production, could create a shortage of non-grain food items and reduces the marketable surplus for the private sector," Nomura said.
The FSB lays emphasis only on cereals, neglecting other food items and overlooking the issue of nutrition, which should be the end target. In rice and wheat prices, the inflation is just around 1%. What about other items; especially vegetables, fruits and pulses, where there is substantial scarcity?
After failing to pass the FSB through Parliament, the Union Cabinet promulgated this Ordinance a few weeks before the monsoon session was to commence. At that time, Arvind P Datar, a senior advocate of the Madras High Court and the Supreme Court had raised questions over the emergency for bringing out the Ordinance.
“The gargantuan amounts that will be spent on Food Security and other schemes will necessarily reduce the amounts available for improving our infrastructure, education and, equally important, our defence sector. The Food Security Bill may well be the tipping point in our nation’s future and make economic recovery extremely difficult if not impossible. Philanthropy without productivity, welfare without wealth and charity without capital will guarantee the bankruptcy of any nation,” he had said.