Food subsidy bill: the larger picture
RAJIV KUMAR and SOUMYA KANTI GHOSH
FOOD deprivation and malnutrition are completely unacceptable and everything has to be done to eliminate such an evil. The prevalence of malnutrition in a country like India is in itself a cause for serious concern since malnourished children may jeopardize India’s favourable demographic dividend (as per independent estimates, close to 60% of India’s population is between the age group of 15-59 years). However, the question is whether we can afford to have a food subsidy bill (FSB), and if such an endeavour is economically sustainable. This paper tries to argue that the fiscal viability of the proposed FSB is unclear and the delivery outcomes could be highly compromised given the governance weaknesses and ineffective delivery mechanisms that are in place.
We understand that currently there are different versions of the FSB. We have worked our estimates according to the draft version of the Department of Food and Public Distribution (proposed coverage to 75% of rural population and 50% of the urban population).
The fiscal viability/cost can be estimated in the following manner:
* The FSB for the rural area proposes to provide subsidized (at a fixed price not exceeding Rs 3/kg for rice, Rs 2/kg for wheat and Rs 1/kg for coarse grains) foodgrains (7 kg per person per month) to 75% of the rural population, with at least 46% to the priority rural households and the remainder to the general rural households. It may be noted that the Government of India is yet to specify the criteria for categorization of population into priority and general households. Let us call it A.
* The FSB for the urban area proposes to provide subsidized (at a fixed price not exceeding 50% of the 2010-11 procurement prices for rice, wheat and coarse grains) foodgrains (3 kg per person per month) to 50% of the urban population, with at least 28% to the priority urban households and the remainder to the general urban households. Let us call it B.
* We also estimated the storage cost for the additional food procurement. The storage cost was estimated separately for the (a) 5%-7% of the foodgrains wastage, (b) creation of additional storage capacity of at least 13 million tonnes across 15 states as estimated by Ministry of Food, Consumer and Public Distribution at an average cost of Rs 5000 per metric tonne and (c) refurbishing existing storage capacity for the remaining foodgrain procured at an average cost of Rs 1000 per metric tonne. Let us call it C.
* As per the Ministry of Food, Consumer and Public Distribution, there is a leakage of 36% of foodgrains (17% through bogus cards and 19% through fair price shops). We estimated the cost of such leakage separately. It is in fact an irony that such subsidized foodgrains meant for farmers are sold in the open market and possibly bought back by the poor people at a higher price, thereby defeating the entire purpose. Let us call it D.
* There is also the additional cost of (a) providing free nutritious meals, during pregnancy and six months thereafter to pregnant and nursing women and an additional maternity benefit of Rs 1000 per month, (b) nutritional food to children (with particular emphasis on malnourished group) in the age group of six months till six years) and, (c) mid-day meal to lower and upper primary classes. Let us call it E.
* The cost of transporting the foodgrains to different ration shops is also estimated separately, as per government estimates. Let us call it F.
H
ence the total cost can be estimated as the sum of A+B+C+D+E+F (refer Table 1 for details). Our estimate of FSB assumes a 15% per year increase in MSP. This is based on the observed increase of 15% Compounded Annual Growth Rate (CAGR) between FY11 and FY06. We further assume that the FSB is implemented in full measure in the first year itself. On the basis of these two primary assumptions (other assumptions are listed in the footnote to Table 1) and summing A and B, the minimum cost to the exchequer of implementing FSB amounts to Rs 80,000 crore in the first year. If we, however, include components C, D, E and F the total outlay for FSB will amount to Rs 143,000 crore in year one. This amount is far higher (more than double) than the budgeted food subsidy estimates for current fiscal at Rs 60,000 crore. Moreover, the incremental estimate of Rs 20,000 crore which has been put out by the government on the basis of only some incremental costs (namely A & B component) is a gross underestimate. In fact, our estimate is the minimum one and it is still close to Rs 4,57,000 crore in the first three years (close to Rs 5,00,000 crore, if we add administrative cost). This is not very different from estimates in the first three years that peg it even higher (Rs 6,00,000 crore made by Ashok Gulati). This apart, we estimate that the total minimum foodgrains requirement for this endeavour will be 61 million tonnes.
S
ome observers, however, point out that it is churlish to argue against additional financial allocations for fighting the curse of hunger and malnutrition when the central government regularly forgoes huge amount of revenues. This argument is based on the statement of revenue forgone included in the Annual Union Budget Statement (for the year 2010-11, the revenue foregone as stated in the budget was Rs 5,11,630 crore / 6.5% of GDP.It is important to examine the veracity of this argument specially because as eminent a person as Amartya Sen cited this in his recent P.R. Brahmananda Memorial Lecture delivered at the Indian Economic Association Annual Conference in Pune in December 2011. A closer look at these numbers, however, reflects the following:
* Excise duty concession of Rs 198,291 crore: These are revenue forgone on account of mass consumption goods like medicines, tooth powder, candles, postcards, sewing needles, kerosene stoves, etc. Clearly, levying excise duty on these items would have worsened the fate of the poor.
* Customs duty concessions of Rs 174,418 crore: These are concessions for importable goods consumed for exports as defined under section 25(1) of the Customs Act. It is important to note in this context that import duties on components used for exports are universally exempt as taxes are not supposed to be exported. Moreover, is it anybody’s case that these import duty concessions are to be removed because by doing so, we may lose a significant part of our total export revenue? (Of this, gems and jewellery exports alone contribute close to 15% of exports.) Furthermore, a simple exercise shows that if we strip gems and jewellery exports from our foreign exchange earnings, our short-term debt (residual maturity) as a percentage of reserves touches 48% from the current level of 44%.
* Personal income tax concessions of Rs 50,658 crore are primarily related to exemption limits for income tax assessees – these will have insurance premia, contribution to charities and political parties, interest payments on loans for higher education, etc. This could arguably be eliminated provided we are prepared for the distress that it will cause to the salaried class.
* Finally, tax concession of Rs 88,623 crore are primarily related to export undertakings established in Special Economic Zones and to 100% export oriented units. Other areas for concession under this head are accelerated depreciation for industries established in new and hilly regions, scientific research, accelerated depreciation, industries in backward and hilly areas and even contribution to political parties. However, studies including those by Aradhna Aggarwal1 and by P. Reddy, A. Prasad and P. Kumar,2 show that SEZs have significant positive impact on foreign exchange earnings, employment generation and hence poverty reduction. The net cost-benefit impact of SEZ is therefore highly positive.
Given the above details, it may not be completely misplaced to argue that the additional expenditure for implementing the FSB is far greater, by order of magnitude than any actual revenue forgone for promoting economic activity in the country.
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TABLE 1 Minimum Cost to the Exchequer as Estimated from National Food Security Bill (Rs crore) |
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Food subsidy for Rural – Priority |
Food subsidy for Rural – General |
Food subsidy for Urban – Priority |
Food subsidy for Urban – General |
Total excluding storage & transport provision, for pregnant women & children & leakage |
Provisions for pregnant women and children (mid-day meal and nutritional meal) |
Storage & Transport |
Leakage |
Total |
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Year 1 |
53.000 |
12,000 |
10,000 |
5,000 |
80,000 |
12,000 |
15,000 |
36,000 |
1,43,000 |
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Year 2 |
61,000 |
14,000 |
12,000 |
6,000 |
93,000 |
13,000 |
10,000 |
36,000 |
1.52,000 |
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Year 3 |
70,000 |
16,000 |
15,000 |
7,000 |
1,08,000 |
14,000 |
10,000 |
30,000 |
162,000 |
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Memoranda |
Total consumption of rural population ~48 mn tonnes in year one |
Total consumption of urban population ~13 mn tonnes in year one |
1) Cost for pregnant women based on nutritional requirement as stated in food bill 2) Nutritional meal for children below six years(with particular reference for malnourished children 3) Mid-day meal for children in lower and upper primary classes |
Storage cost estimated by Assuming 1) a national loss of 5% in foodgrains, 2) an additional requirement of new storage capacity of 13 mn tonnes(govt. estimates) 3) Govt. estimates of transport cost of food grains in excess of buffer stock |
Leakage, as per govt., is estimated at35% of total foodgrains in year one |
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Source : FICCI Research and National Food Security Bill.Note: 1) We assume that the target group population (rural, urban and pregnant women) is constant over the years. We factor in the possible increase in procurement prices based on historical trends. 2) 6% administrative cost is not included in the estimation. 3) For pregnant women, nutritional requirement is factored in the estimation for year two and year three, we assume that the monthly allowance increases at a rate of 5% per annum, while procurement prices go up by an average of 10%. 4) For children, we go by the consensus estimates that 70% of children below six years are malnourished. The number of children enrolled in lower and primary classes is taken at 200 mn and it is supposed to grow at 5% per annum. The nutritional requirement is also factored in. |
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So where do we go from here? To implement such types of legislation, we need to drastically improve our delivery mechanisms to plug leakages. A significant portion of foodgrains, mainly rice and wheat, meant to be distributed to eligible families under PDS gets diverted to the open market. The diversion rate was estimated to be around 36% in 2004-05 (study quoted by Ministry of Food, Consumer Affairs and Public Distribution). Measures like involving gram panchayats, self help groups, van suraksha samitis and other community institutions in the running of fair price shops could be used as an effective delivery mechanism to plug leakages.3
These apart, delivery mechanisms like cash transfers/food stamps could also be successfully replicated in India. For example, the largest cash transfers such as Brazil’s Bolsa Família and Mexico’s Oportunidades, cover millions of households. The food stamp programme is also a central component of America’s nutrition assistance safety net. The stated purpose of this is, ‘to permit low-income households to obtain a more nutritious diet by increasing their purchasing power’.4
Food security, an urgent necessity, will be ensured only when Indian agriculture is modernized and productivity and yields rise in the coming years. In our view, it will therefore be far more effective and sustainable to allocate additional public resources for developing agriculture, infrastructure and delivering new technologies to the sector. This will more effectively ensure food security in the country.
Finally, though the budget hopes to contain central subsidies under 2% of GDP in 2012-13, bringing it down from the current 2.4% will not be easy. This is because the cost of implementing the food security bill alone will amount to a minimum of 0.7% of GDP and could be as high as 1.5% of GDP. We believe that the estimates of food subsidy in the budget may have a downward bias, as they do not include subsidy, storage and transport, leakage costs etc. (food subsidy is projected to increase by only 3% in 2012-13, against a five year CAGR at 22.1%). Clearly, there is enough food for thought for the government.
Footnotes:
1. Aradhna Aggarwal, Impact of Special Economic Zones on Employment, Poverty and Human Development, ICRIER Working Paper, 2007.
2. P. Reddy, A. Prasad and P. Kumar, ‘Employment Generated by Special Economic Zones in Southern India’, Journal of Economics 1(1), 2010, pp. 1-11.
3. Ritwik Banerjee and Ritika Tewari, ‘Multi Approach Towards PDS Reform’, The Economic Times, 28 January 2012.
4. The Food Stamp Act of 1977, as amended, P.L. 95-113.
