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Cheap Food Plan Could Cost India Dearly

By Anant Vijay Kala and Mukesh Jagota

Munish Sharma/Reuters
A man unloaded foodgrains from a truck near the city of Amritsar, Punjab, May 7. 

With just three days left in Parliament’s budget session, time appears to be running out for lawmakers to vote on a proposal to massively scale up India’s food subsidy program. That may be just as well, since economists say the financial implications still aren’t clear. 

Some economists say the program – which intends to make cheap foodgrains available to about two-thirds of the country’s population — could cost the exchequer more than double annually than what the government has projected. 

The government has estimated that it will need to budget 1.2 trillion rupees (a little over $22 billion) each year to fund all food subsidies, including the new ones added under the proposed program. India’s existing food benefits program costs about 950 billion rupees ($17.5 billion), most of which covers the cost of providing highly-subsidized grains to about one quarter of the population, those who fall below the poverty line. 

The 1.2-trillion figure might be a rather large underestimate, according to the Commission for Agricultural Costs and Prices, a body that is part of the Ministry of Agriculture. It advises the government on pricing policy related to farm commodities. 

“The stated expenditure of Rs 1.2 trillion rupees annually…is merely the tip of the iceberg,” it said in a December report.

The body believes that the cost of India’s food program would balloon to 6.82 trillion rupees (nearly $126 billion) over the first three years that the new commitments are implemented. That would mean the government would need to budget 2.27 trillion rupees (about $42 billion) for food subsidies each year, according to the report. 

This, it says, would be because of the need to invest massively in infrastructure, in order to scale up the existing distribution system, warehousing and transportation facilities, as well as provide incentives to farmers to boost production. 

The Center for Budget & Governance Accountability, a public advocacy group, also has estimated the program would cost the government as much as 2.38 trillion rupees annually starting April 1, 2014, by when the program is expected to be implemented in full force if it passes Parliament this year. 

Under the food security program, the government plans to distribute five kilograms of food grains at highly-subsidized rates – three rupees a kilo for rice, two rupees a kilo for wheat, and one rupee a kilo for some other types of foodgrains. At private stores rice presently costs at least 20 rupees per kilo, seven times the amount it could be purchased for under the program. 

The proposed law is being billed as a flagship program by Prime Minister Manmohan Singh’s government, which appears to be pinning hopes on the program to help revive its waning popularity ahead of general elections scheduled to be held by May 2014. 

The bill was supposed to be discussed in Parliament starting Monday, but that hasn’t happened. Instead, opposition parties have been disrupting proceedings over the latest scandal to envelop the Congress Party-led government, which has been buffeted by a series of corruption allegations since its second term began in 2009. 

In this case, opposition parties are calling for Law Minister Ashwani Kumar to stand down for allegedly tweaking a report by a federal investigating agency into how coal blocks were allotted between 2004 and 2011. The investigation began last year after a federal auditing agency said the government could have raised billions more dollars by auctioning the blocks instead of directly allocating them. Mr. Kumar hasn’t commented on the issue. Congress party spokesmen have said Mr. Kumar will not be asked to resign unless he is implicated in court and the government has denied any wrongdoing in the allotments. 

The food bill, if it becomes law, would mean an massive expansion of the current welfare program. The government currently offers cheap food grains to about 325 million people. It also makes available somewhat subsidized food to hundreds of millions more who live just above the poverty line, although these families pay much closer to the cost price. 

Under the proposed bill, India plans to expand the coverage of highly-subsidized food grains to 75% of the rural population and 50% of the urban population, which could cover as many as 800 million of India’s 1.2 billion population. 

The consequent higher spending on food subsidies would mean the government would have to make spending cuts elsewhere if it is to keep its fiscal consolidation plans on track. 

The government has said it plans to narrow its fiscal deficit to 3.0% of gross domestic product in four years, compared with 5.2% in the financial year that ended March 31. However, weak revenue growth due to an economic slowdown and the pressure for populist spending in the run-up to the elections pose risks to that target. 

Even if the government is willing and able to make the investments needed to boost food production to meet the demands of the bill, another question mark hangs over the program. Raising agricultural output sharply over a short period of time is going to prove tough in a country where farmers rely heavily on seasonal rainfall, often unpredictable. 

The government may have a particularly hard time meeting the new obligations if drought or flood conditions occur in the initial stages of the program. 

“Whether the system is capable of absorbing the extra demand at a time of lack of supply is a really difficult question,” said Samiran Chakraborty, head of research at Standard Chartered Bank.

In that case, the government may be forced to resort to food imports, an alarming prospect given India’s ballooning current account deficit, which reached a record-high of 6.7% of GDP in the three months from October to December.

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