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The UPA government which cleared and passed the National Food Security Bill ordnance is expected to put a severe dent to fiscal scenario in over the next few years and have wide reaching implications, including inflation and imbalances in the agriculture sector
Nomura Fixed Income Research expects that the National Food Security Bill (FSB) to have ramifications on the Indian economy over the next few years, which includes runaway inflation, distortion in demand-supply scenario and increases in imbalances in the agriculture sector. Nomura also expects the FSB to cost the exchequer a whopping 1.8% of the GDP over the next three years. The report addressed to clients, titled “India: Implications of the proposed Food Security Bill”, said, “We do not expect a substantial fiscal impact in FY14 as implementation will take time: our current estimate of the food subsidy bill is Rs 1 trillion in FY14, slightly above the government’s budget estimate of Rs900 billion (0.8% of GDP). However, once fully implemented, the total cost is likely to rise from 0.8% of GDP to 1.3-1.8% of GDP over the next three years due to a higher food subsidy bill and other ancillary expense.” Many investors and savers should be concerned over this dire forecast.
The United Progressive Alliance (UPA) government passed the ordnance on the controversial Food Security Bill and has raised several eyebrows, apart from the insurmountable costs involved. An ordnance does not require parliamentary debate, but requires parliamentary approval, which is expected in the monsoon session of the parliament. Many political parties have called this ‘undemocratic’ because the cost-benefits of the bill have not been discussed in parliament. Moreover, most have viewed the ordnance as a political ploy to earn brownie points before the elections next year. Despite the expected impact on the exchequer, Nomura, however, expects the bill to go through. It said, “Unless there is a parliamentary logjam, we expect it to pass as most political parties would not like to be seen opposing a pro poor bill.”
On a related note, despite being “pro poor”, not all infrastructures are in place to ensure that the grains actually reach the poor. It is pertinent to note that India’s public distribution system (PDS) is still a mess. Nomura further stated, “The current targeted public distribution system (PDS) has a significantly large level of leakage (estimated at 40%). If the government can computerize the entire food distribution system, roll out the cash transfer scheme and eliminate these leakages, then the financial impact of the food subsidy burden may not be as large. However, this is a time-consuming process and most likely the government will rely on the existing PDS to roll out the NFSB in the initial phase. As such, this will lead to a higher food subsidy burden.”
Moreover, the FSB is expected to lead to distortion in the agricultural system which could further impact inflation. The economics is stacked against farmers because costs have increased a lot but minimum support prices (MSP) have barely caught up with costs. According to Nomura, costs have increased 16% while MSP have increased just 5% for food grains. There is no incentive for farmers to produce food grains. Therefore, there will be a shortage of food grains for the government to procure. While much of the food grains will be budgeted under the FSB, the private sector will not get their due. This will simply lead to demand-induced inflation due to shortage of supply. In cases of drought, this could exacerbate the demand-supply situation. Nomura states, “We see the proposed FSB as inflationary, because it creates a demand-supply mismatch, requires raising minimum support prices, could create a shortage of non-grain food items and reduces the marketable surplus for the private sector“
There is even a possibility of the private sector importing grains from abroad, due to lack of domestic supply, especially with a weak rupee abroad. Though at the moment, there is surplus food grain; but there will be situations where droughts and poor monsoons can lead to shortage. Already India imports large quantities of food items from abroad.
The fiscal impact of the FSB is expected to cause a stress on India’s finances. One of the major expected fallout of the FSB, apart from fiscal stress, is inflation, as mentioned above. Much of India’s economic growth has been dogged by persistent inflation, which the Reserve Bank of India (RBI) has been targeting for a while. Inflation could worsen if the government (as well as the next government post-elections) is not able to manage food supply properly.
The FSB proposes foodgrain entitlements to 67% of India’s population at hugely subsidised rates for the first three years. The rates are: 5 kg per person per month of foodgrain, at an issue price of Rs3 per kg for rice, Rs2/kg for wheat and Re1/kg for coarse grains. The FSB is also expected to lead to reforms in the targeted PDS, including doorstep delivery of food grain, use of IT for end-to-end computerization and so on but, according to Nomura, is expected to take time and the benefit of the revamped PDS system will be felt only after years.
The growth outlook was slightly lower by 0.2% than the previous forecast released by the IMF in its report in April
Revising its economic outlook, the International Monetary Fund (IMF) on Tuesday marginally scaled down India's growth rate projections to 5.6% for the current fiscal and 6.3% for the next financial year.
This was slightly lower by 0.2% and 0.1%, respectively, than the previous forecast released by the IMF in its report in April.
Global growth is projected to remain subdued at slightly above 3% in 2013, the same as in 2012, the report said.
This is less than the forecast in the April 2013 World Economic Outlook (WEO), driven to a large extent by appreciably weaker domestic demand, slower growth in several key emerging market economies and a more protracted recession in the euro area.
“Global growth increased only slightly from an annualized rate of 2.5% in the second half of 2012 to 2.75% in the first quarter of 2013% instead of accelerating further as expected at the time of the April 2013 WEO,” the IMF said.
The multilateral agency said this underperformance was due to three factors—growth continued to disappoint in major emerging market economies; recession in the euro area was deeper than expected, and the US economy expanded at a weaker pace, as stronger fiscal contraction weighed on improving private demand.
In February, the apex court had directed the Centre to hold discussions for enacting a law to regulate the sale of acids and a policy for treatment, compensation and care and rehabilitation of such victims
The Supreme Court on Tuesday pulled up the union government for not being serious about framing a scheme to curb the sale of acid to prevent acid attack cases.
A bench headed by Justice RM Lodha said people are dying every day due to acid attacks but the government has failed to frame a policy despite assurances given by it on the last hearing on 16th April.
“People are dying, but you are not worried about it. Think of people who are losing their lives every day. Girls are being attacked every day in different parts of the country,” the bench said.
It also said, “With heavy heart this court had passed order in April, but the Government failed to come out with any scheme to curb sale of acid in the market.”
“Seriousness is not seen on the part of the Government in handling the issue,” the bench said, while granting one week’s time as a last opportunity to the Centre to frame a policy in consultation with the State Governments.
The court was hearing a PIL filed in 2006 by Delhi-based acid attack victim Laxmi, who was then a minor. Her arms, face and other body parts were disfigured in the acid attack.
The bench made it clear that if the Centre fails to come out with such a scheme on the next date of hearing, 16th July then it would pass orders.