Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Economy

WTF, Food Security Bill?

The recently introduced (not yet passed) food security bill has demonstrated that the government has officially lost the plot. The bill proposes a cost of less than Rs. 5 per kg. of coarse grains to poor households and half the MSP (Minimum Support Price) to everyone else. There are limits on the number of kg distributed but come on, how difficult will it be to get any number of “cards” required to get what you want?

ET puts the cost at 6 lakh cr. in three years. While this figure may sound exaggerated, the issue is – what are we doing exactly? First, with MNREGA, the government – and thus, the taxpayer – pays Rs. 100 or more per day to rural workers, for no productivity. I mean they can dig if they want to, but they can’t use a machine. Those are the rules. So free money.

And now, free (or close to free) lunches and dinners, with grains offered at ridiculous prices. What this will do is:

a) reduce the productivity of people – free money and close to free food is there, why work hard? The wage increase will not result in a productivity increase, and in fact will reduce productivity where there was some.

b) Increase the demand and thus the price of food. If the government acquires great quantities for food security, we will have to fight for what is left over. Which will raise prices, and then the government will raise the MSP for subsequent years to match, and so on.

c) Destroy the deficit. How does the government pay for this? Total government revenues this year, till date, are about 20% less than last year, which expenses are 10% higher. The difference is compounded by higher borrowing costs – higher interest that the government is paying on borrowing. Additional spends on food security will bring no extra revenue – there are no taxes that the government will get as a result. That means the entire spend will add to the deficit. Assuming even half the figure stated by ET, that’s 100,000 crore a year extra, which is 20% of our existing deficit. Who pays? Again, the government will borrow, and their borrowing will spook markets which will demand higher rates, and that will crowd out corporate borrowing, and they’ll pay even higher rates, and so on. This does not augur well for our markets.

Finally, note this part:

Labour in FCI is highly organised and an unskilled worker (loading and unloading job) earns around Rs 35,000 per month. Hundreds of them get more than Rs 1 lakh a month and the highest is about Rs 1.85 lakh per month.

Wow. When such high wages are being paid for loading and unloading, what’s the point of even hoping for any level of productivity in the system?

The only positive is political – the voter in the rural areas will vote for the party that gave free food. We can perhaps afford this in good times, but in bad times it is just disastrous.

The government is giving horrible signals – that it simply doesn’t care about the long term consequences to the country.

  • Dark Lord says:

    Not sure where you are getting the labor for FCI. 35,000/- pm seems very large.

  • Praveen says:

    not only labour at FCI but labour at railway loading/unloading place are also carteled as “UNIONS”. In good season these guys earn around 25k to 50k. and no new person can’t simply join in these “UNIONS”.

  • Sameer says:

    As shown in well done abba, “everyone wants to stay below BPL so that they can benifit. If they go up they wont get any benifits. Idiots don’t even know how to use incentives(or maybe know how to use them politically)”

  • argo says:

    May be we are becoming new europe (Greek, France, Italy and portugal) 🙂
    Surely this is a warning signal.

  • ramesh says:

    things like this make me wonder if that damned SIP i am into will ultimately sink into a black hole … Jai Marx

  • Piyush says:

    There has been a lot of misinformation and FUD on FSB. FSB has been in the oven for a while now. The total additional outgo in terms of subsidy is going to be about 27K crore. I guess a lot of this would be covered by lowering subsidy in fuel. LPG prices would be raised significantly and so would be diesel. Petrol is already deregulated.

    • I will look at the bill and see if the metrics work out like you say. Diesel and LPG prices – I will believe it when I see it 🙂
      There are of course indirect costs – higher procurement does impact prices. 27K crore is a lot at the official level, the excess cost in terms of overall costs of infra, manpower, fertilizers etc it is bound to be higher.

  • prabe says:

    My concern is it is all good in good times…what happens when there is a famine!!

  • Srinivas says:

    This is clearly a political move to boost the fortunes of the UPA Govt in forth comming elections. When we take a relook at such measures of the psat, they merge many exisitng on going programs in the new one. This is one way of minimising the impact on funds.
    My main concern is that there is no proper delivery mechanism and the exisiting one is fraught with many problems(leakages, for one). Much of the funds may go unaccounted and gt siphoned off.

  • Lalitabh says:

    Deepak, would appreciate to know your response to following points:
    1) pl specify the source of data on salaries to FCI workers.
    2) if one reasons that FSB bill may open channel for Govt. to distribute surplus grains stored with it instead of letting it rot away. Whats your take?
    3) repeating prabe, what will be the impact when there is underproduction in India?
    Thanks.
    I will try to dig up and add something to this topic on my blog http://www.lalitabh.blogspot.com

  • bemoneyaware says:

    Surprisingly other than Jayalalitha other political parties have not not opposed the bill. Only tax payers will suffer ..

  • Tushar says:

    I used to think along the same lines till I saw Amartya Sen and Dreze on Ndtv 24/7.
    We have more under nourished children than even sub Saharan Africa and food security is an emergency.
    Also there will not be additional procurement since the food procured every year would be sufficient. The FSB only enables distribution of the food in FCI godowns which otherwise would rot.

  • Pranjal says:

    Working under Dreze in a survey 2013 has reminded me that it is concrete data that should direct social policy. This article does not do a good job of that. Although some points seem valid, the harsh reality is that India houses a large majority of the world’s hungry. This is hampering progress. Please do not focus on growth rates so much, they are only means while human happiness is an end in itself. Nregs does not use machinery since it cause certain problems. It is designed to be less productive to give work. The idea is not to produce village assets quickly, but to do so while employing people. Please be a little more thorough with your data, I suggest reading Khera in EPW.

    • Please provide the data. Telling me to read concrete data, but not providing it, is largely useless. You have no argument against the points mentioned in the article, so you choose to make a global statement about the hungry. This bill will not feed the hungry. If the government WANTED to feed the hungry, they can empty the CURRENTLY overflowing FCI godowns and feed people. Let there be no confusion about that.
      Second, NREGA is a stupid mechanism that provides short term relief for long term extreme pain. It’s like a steroid, except the government has no idea when or how to stop, so we’ll just get addicted. The no-machinery is a stupid thing – we need more productive work, not just unskilled labour (better is get all these people to learn to become truck/digger operators!) It’s very useful to give people two jobs, dig a ditch and fill it back up. That will increase jobs and do nothing other than dig up land. Oh yes, and let them use their hands.