National Food Security Bill expected to shave off 1.8% of GDP, says Nomura

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.

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    COMMENTS

    Ramakumar

    7 years ago

    ANATOMY OF FOOD SECURITY: PUBLIC DISTRIBUTION SYSTEM (PDS)
    Agriculture is a state subject, but central government also collects and distributes food (cereals & Kerosene only) through chain of PDS shops. Studies of national sample survey data, showed that PDS purchases are not benefiting the poor nor relates to poverty level. Delivery in rural areas are poor (Venugopal, 1992) with leakage, losses and diversion to free market
    In spite of subsidized credit and freight preference from railways, incidental of FCI is high. Various studies show that 13-22 paise out of every rupee spent reaches poor. Restructuring in 1990’s did not provide any dramatic good. (Parikh, Kirit.S.: India Development report, 1997; Oxford Univ. Press). We have seen that handling cost (app.40.4 % of production cost) is borne by end users/ govt. and that Rs2,07,000 cr. alleged to be siphoned off by middlemen. 35% is eaten by Rats
    Direct Cash Transfer (DCT)
    An Economic Survey (Kapur et al, 2008), shows that about 310 million (Mn) people or 70 Mn households are below the poverty line (BPL). If the Rs.1,80,000 crore spent on central schemes on food, fertilizer and fuel subsidies alone, were can distribute @ Rs.2,140 to 70 Mn houses. Rs.500/ to each household is given would amount only to 40% of food budget for BPL.
    Some 30 countries are testing Conditional Cash Transfer (CCT). Mexico,. Brazil Honduras, Nicaragua, Ecuador, Dominican Republic, Panama, Peru and Jamaica have programs. Bangladesh&Philippines recently introduced CCT. York City in April 2007 launched NYC (by Rockefeller Foundation). Money is handed to female member on a “social contract” that she send children to school & bring them to health centres. The exchequer BRING holistic benefit to society.
    Food Stamp: A food coupon to purchase of foodstuff from market (general stores instead of PDS). From a quantity stipulated short list recipients buy discounted food they want. In 2004 it was introduced in Andhra Pradesh.
    NOTE: WE may think of credit card type device with specific options. Freebees have the disadvantage; they curb people’s survival skill, discourage the motive to work and in the absence of engagement can pave way lethargy, drugs and anti-social activities. Substantial political, social and financial support (including R&D) for local (or at least regional) production of food and energy of animal origin and staple food may be the only way to achieve viable Food & nutrition security in an equitable manner. PRIORITIZE ANIMAL RESOURCE DEVELOPMENT (where involved are landless and marginal holders), local food/ staple food production, mixed farming, organic food production & BIODIVERSITY

    Ramakumar

    7 years ago

    ANATOMY OF FOOD SECURITY: PUBLIC DISTRIBUTION SYSTEM (PDS)
    Agriculture is a state subject, but central government also collects and distributes food (cereals & Kerosene only) through chain of PDS shops. Studies of national sample survey data, showed that PDS purchases are not benefiting the poor nor relates to poverty level. Delivery in rural areas are poor (Venugopal, 1992) with leakage, losses and diversion to free market
    In spite of subsidized credit and freight preference from railways, incidental of FCI is high. Various studies show that 13-22 paise out of every rupee spent reaches poor. Restructuring in 1990’s did not provide any dramatic good. (Parikh, Kirit.S.: India Development report, 1997; Oxford Univ. Press). We have seen that handling cost (app.40.4 % of production cost) is borne by end users/ govt. and that Rs2,07,000 cr. alleged to be siphoned off by middlemen. 35% is eaten by Rats
    Direct Cash Transfer (DCT)
    An Economic Survey (Kapur et al, 2008), shows that about 310 million (Mn) people or 70 Mn households are below the poverty line (BPL). If the Rs.1,80,000 crore spent on central schemes on food, fertilizer and fuel subsidies alone, were can distribute @ Rs.2,140 to 70 Mn houses. Rs.500/ to each household is given would amount only to 40% of food budget for BPL.
    Conditional Cash Transfer (CCT)
    Some 30 countries are testing CCTs. Mexico,1997. Brazil 2003. Honduras, Nicaragua, Ecuador, Dominican Republic, Panama, Peru and Jamaica have programs. Bangladesh and Philippines recently introduced CCT. Developed nations launched NYC in New York City in April 2007 (by Rockefeller Foundation). Money is handed to female family member on a “social contract” that she regularly send children to school & bring them to health centres. The exchequer is not heavy compared to holistic benefit accrued to society.
    Food Stamp
    A food stamp/ coupon to purchase of foodstuff from market (general stores instead of PDS). From a quantity stipulated short list recipients are free buy discounted food they want. Food stamp scheme was introduced in Andhra Pradesh in 2004.
    NOTE: WE may think of credit card type device with specific options. Freebees have the disadvantage; they curb people’s survival skill, discourage the motive to work and in the absence of engagement can pave way lethargy, drugs and anti-social activities. Substantial political, social and financial support (including R&D) for local (or at least regional) production of food and energy of animal origin and staple food may be the only way to achieve viable Food & nutrition security in an equitable manner. PRIORITIZE ANIMAL RESOURCE DEVELOPMENT (where involved are landless and marginal holders), local food/ staple food production, mixed farming, organic food production & BIODIVERSITY

    Ramakumar

    7 years ago

    Though agriculture is a state subject centre gets involved in collection & distribution of food grain, sugar & kerosene through PDS. Studies of national sample survey indicate that PDS are not benefiting poor. Leakage, losses and diversion to free market are alleged. (Venugopal, 1992).
    Studies show that despite concession in freight by railways, incidental of FCI is heavy. Only 13-22 paise out of every rupee spent, reaches the poor. Restructuring of PDS in 1990’s did no good. (Parikh, Kirit.S.: India Development report, 1997; Oxford Univ. Press). Selection and handling of Target Beneficiary (TB) involves public funds for establishing offices of profit for some and posts of power for public men.
    Expenditure can be reduced if food can be distributed across board to all Adhaar/ NPR holders. If a computer net work can link PDS shops (through LAN/ WAN) to a main office, distribution of nutrients can easily be monitored (like medical/ other shops checking stock and daily sale). RTI, citizen’s charter or right to service can work if the masses are aware of their rights and show the courage and patience to check on the officialdom (govt. employees and people in power).
     2% people (govt employees) control the fate of the rest 98% of India. [Salaried employees in India are around 2.82 crores. Of this large and small industries employ 78 lakh people. So, 2% govt. employees are controlling the living condition of private sector employees who live in slums and shanties around SEZ’s, of the tribals, the nomands, the pastorials or that of agri.labour]
     As crimes tend to get increasingly politicized these days, commissions and monitoring committees for food distribution could get misused politically.
     Not considering the feed and nutritional security of animal resources and the disproportionately high cost of animal feed force the major stake holders of animal husbandry (ie. small holders and landless) to use subsidized grains to feed animals.
     Animal husbandry is an essential component of organic farming and bio-diversity. There is urgency for R&D on animal resource development (ARD) where inflation is least especially the socio-economics, feed technology, HRD and the service needs of animal husbandry.

    Ramakumar

    7 years ago

    The process of selecting Targeted Beneficiary (TB) can be done away if we provide low cost food to all Aadhar/ NPR holders Monitoring distribution can be done by using LAN/ WAN linked databases. under RTI, citizen’s charter or right to service can be used to verify implementation, than organiising and running committees. But grievance cells would work only if the masses are aware of their rights and has the courage and patience to stand up against the minority that rules (ie. the < 2 crore govt. employees and people in power).
     Salaried employees who form <3% of population control the fate of the rest 97%. Large and small industries has so far provided only 78 lakh employment. Living condition of employees are not uniformly ideal(slums around SEZ’s)
     As crimes are getting increasingly politicized, monitoring committees too may get misused for political ends at govt. cost.

    STAPLE FOOD Staple food is that food that is eaten regularly in such quantities as to constitute dominant part of diet. Staple foods are well adapted to the growth conditions of their source areas like drought, pests or soil nutrients.
    Subsidy at input and support price at output for agriculture had always been exploited by large land holders who sell food grains in open market at a premium. Instead of providing subsidies at input stage and support price at output stage, govt. may provide a direct, one stage support price (including intended subsidy) to farmers who sells food grains to govt. agencies. Indirect subsidies on fertilizers/ pesticides going elsewhere can thus be stopped..
    To compensate for the withdrawal of subsidies at input stage and letting the indirect subsidies go through fertilizer & pesticide manufacturers, liberal Short term loans can be arranged for the producers of coarse grains, lentils, lower grade food grains, animals products and energy food like tubers, cassava, banana etc. The short term loans can be recovered at the time of procurement.
     India holds half of the landless of developing world and most of the marginal holders of the world. NSS 1991-92 indicates that they hold only 15.6% of the land in the country with larger land holders owning nearly 84 % of operational area of agricultural land. Size of land per person is steadily decreasing.

    Agriculture being a state subject state govt.s can encourage local production of staple foods as they are well adapted to the growth conditions of their source areas like drought, pests or soil nutrients. Animal husbandry, mixed farming, and production of staple food run on a low input –low out put regimen essentially by small holders are nutritious, sustainable, cost effective, low on risk, residues, pesticides. The state can save on transport, storage, spillage, damage and can control the cost and quality of local (staple) food production for man and animals.
     The focus of food security plan has to be through regional strategies for high productive zone, low productivity-high potential zone, low productivity zone and ecologically fragile zone. The priority has to be on nutrition than hunger, fitness than fatness, quality than quantity.

    IMF lowers India's growth projections for FY14 to 5.6%

    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.

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    Supreme Court criticises Centre for not framing policy on acid sale

    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.

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