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Economy

Bhalla: Food Security Bill (FSB) will cost 300,000 cr., or 3% of GDP

Surjit Singh Bhalla has come up with a fascinating insight on the new Food Security Bill (FSB) in which he says will cost us over 300,000 cr. He was responding to comments that he has “molested” data (whatever that means) to serve his purpose.

The simplest possible summary of the subsidy is as follows (tell me where I am wrong or mad or molesting). Assume the subsidy in year BFSB (before the Bill) is 100.

According to NSS data, only 45% of the population was accessing the PDS system in 2011-12. With the Bill, it will be 67%. So based on greater coverage alone (the better for elections, my dear), the subsidy will increase to (100*67/44.5) or 150.

The NSS data states that in 2011-12, average PDS consumption was 2.1 kg per person per month. So with greater consumption, the subsidy bill increases to (150*5/2.1) or 357.

But because India is growing so fast and so can afford largesse, and it is Sonia’s explicit dream to introduce the FSB (and Congress’s manifesto promise), the subsidy per kg will increase from R13.5 per kg to R16.5 (with weighted market price staying constant at R19, the subsidised price declines from R5.5 to R2.5 per kg). This increases the subsidy to (357*16.5/13.5) or 436.

In 2011-12, total food subsidy (government figures) was R72,000 crore. So AFSB (after the Bill), food subsidy expenditures will be R72,000*4.36 or R3,14,000 crore or 3% of GDP.

The logic is that the increase in expenditure due to the FSB will be because:

  • We’ll reach 1.5x more households (from 45% to 67%)
  • Each person gets more food as part of the FSB (5 kg versus 2.1kg)
  • Since the price per kg goes down by Rs. 3 per kg, the subsidy increases by that much. (From Rs. 13.5 to Rs. 16.5 per kg).
  • And that produces a 4x increase in costs, to about 314,000 cr. (3% of GDP)

And this is if the market prices don’t go up. If the market price goes up, the Minimum Support Price (MSP) will be hiked. And that will increase the subsidy since the price under the FSB is fixed for a few years.

Why will market prices go up? If 1.5x more households will get PDS, and each person gets about 2.5x more grains, that means the government needs to get 1.5 * 2.5 = 3.75x more food than earlier.

Because of increased procurement under the FSB, what’s left to be sold in the open market is a lesser quantity. When the government buys so much more of the foodgrains, leaves lesser food for us, because honestly, no one believes that the government will actually distribute the food, the inefficient, corrupt monster that it is. So most of us will have to buy from the open market, while much of the procured food rots in FCI warehouses.  Meaning, we’ll have more demand for less supply, and that is economically equal to higher prices.

Why will the food rot in FCI warehouses? Because it is incentivised for corruption. If grains were diverted to the real market instead of distribution through PDS, some individual or group can pretend that the food was distributed at Rs. 1 per kg, but they can earn the difference into their own pocket. This is a huge incentive, and the chances of getting caught are remote, and does not come with any career or life damage (probably people get a small black mark in some register, that’s about all).

So any attempt to actually distribute this food properly will be opposed within the system. They will distribute some food, no doubt. Like nowadays, where families might get 1 kg where they are supposed to get 2. Or where they will quote a “shortage of supply” as an excuse. But the majority of food will be prepared to be diverted, and if you attempt to actually investigate, the officials will choose to let the foot rot instead (since they will presume your investigation will end and they can restart their siphoning).

Which means multiple things:

  • The cost to us as a country is huge. 3% of GDP is massive considering the central government expenditure is ALREADY 15% of GDP.
  • The increase is fiscal deficit – of, say, 2% of GDP – will make the government borrow more. That means banks will prefer to lend to the government, instead of to you and me, so we get lesser credit. Lower credit growth means lower private sector growth, meaning markets will get hit.
  • And obviously we’ll see inflation.
  • And supply shortages, since the FSB based procurement will eat
  • If this causes foreigners to exit the country – which it should, but these foreigners are crazy sometimes – we’ll see the rupee slide even more.

This is not a problem today. It is tomorrow. The FSB is stealing from our children.

All because one party seems to want votes.

It would be far better to make the current public distribution system far more efficient by spending money to enforce the rules and jail corrupt officials. In fact, I will vote for a party that opposes the FSB, and chooses other methods to feed the poor (such as helping them earn money by removing the stupid labour laws that stymie our manufacturing, removing agri restrictions, enforcing the GST and cutting police/tax collection slowdowns, making data transparent, and if needed, even paying the poor directly through cash subsidies). My vote might not matter, but I believe every citizen has the right to try and make a difference.

  • mangoman says:

    mangoman has to support the Food Security Bill. Yes. For country of this size, subsidies are important and I donot believe in the paid economists ( swaminathan aiyar and other BJP supporting analysts) view about FSB. We have larger issues to address than the subsidy which helps vast majority of the people. Share market is not the only place where people invest. Less than 1 or 2 percent invested in Share markets. If India pricks the Real Estate bubble it will help many crores of people to come out of the clutches of Inflation. But BJP is careful about not talking about that. Why there was no agitation planned by BJP about Real Estate Lobby? why no agitation about inflation? So opposing FSB is not something Mangoman will support.But Mangoman also wants congress to lose badly in the coming election.
    Down and out is not referring the rigged up Indian Markets even though Mangoman love to see crash in the Indian markets.
    The vegetable prices gone through roof. The budget of ordinary family is affected http://www.business-standard.com/article/markets/vegetables-fruit-burn-a-hole-in-the-pocket-as-prices-go-through-the-roof-113070600586_1.html . Still government is supporting Real Estate brokers community by not increasing the rates. Sadly they are looking ways to cut rates further. RBI is also singing the tune of government which is very bad for the country.
    I remember RBI Guv. Subbarao said he will have to raise rates if Rupee falls further. That was when Rupee was trading at 55-56. After that Rupee has depreciated more than 10%. I am wondering what constitutes a fall in Subbarao’s dictionary? He is one of the biggest disappointment. He should raise to the occasion.
    Either way when Monday market opens RBI has a fight in the hand. I love to see Rupee touching new lows that day. RBI dollars reserves are going down fast as per the latest reports.As I have been maintaining RBI can save face if they do what they have to do on their own instead of being forced by the basic laws of economics.
    Monday morning without no doubt chamcha singh ( Montek) will talk about bottoming out. What a cruel guy he is?Most of the vegetables are costing more than 100 Rs per Kg. But when I looked at the inflation barometer our RBI and government follows it says less than 4%. What a cheating?

  • basker says:

    Government will not implement in sprit or to be implemented to loot by stakeholders(after gaining electoral benifits) I think what bhalla says is correct

  • Sanjeev B says:

    Excellent analysis Deepak! The only thing stopping this government from destroying our wealth is their track record of poor implementation.