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Resource centre on India's rural distress
 
 

Food subsidy poses fiscal threat, may not help poor: World Bank
-The Times of India


NEW DELHI: Prices of globally traded food declined for the third consecutive quarter since their historical peak in August, 2012, a World Bank report has said but cautioned that uncertain weather conditions and domestic policy decisions such as extension food subsidy programmes in India and other countries need a close watch.

Prices of all the three main food categories declined between February and June, 2013. Prices of grains in June were 2% lower than in February; 3% lower in the case of fats and oils; and 1% lower for others, which include sugar and meat, among others, the July issue of the World Bank's Food Price Watch said.

Increased production, declining imports and increasing stocks exerted downward pressure on export prices, but international prices remain tight for maize, it said.

It said that the recent announcements by India, Indonesia, and Benin regarding the extension of subsidized food programmes indicate that these subsidies are not a thing of the past, a World Bank report has said but cautioned that unless properly targeted they are ineffective, distort market prices and impose a hefty fiscal bill.

The report said rising food prices and recurrent price spikes have revived the popularity of food subsidies used by developing countries in the 1950s and 1970s for poverty alleviation strategies.

Prices remain high and with recent price increases in May and June, uncertainties surrounding unstable weather conditions and domestic policy decisions among key food producers warrant close scrutiny, the report said.

"Domestic policies worth watching include public procurement policies, but also consumer price subsidies, which, far from being a thing of the past, continue to be used - even though subsidies often bring meager benefits to the poor, high fiscal costs, corruption episodes and unproven nutritional effects," the report said.

"The long-held consensus regarding consumer food subsidies ... is that when untargeted and poorly implemented, they are not effective in helping the poor. They can also distort market prices and agricultural production, while leaving nations with a hefty fiscal bill," the report said.

It cited data to highlight its point. A few figures for the Middle East and North Africa region-the region most dependent on generalized subsidies, including food, electricity, and fuel-illustrate the harmful equity and fiscal implications of consumer subsidies.

According to International Monetary Fund ( IMF) estimates, just 35% of the amount spent to subsidize food prices reaches the bottom 40% of the population (20% in the case of fuel subsidies), compared with 50%-75% accruing to the bottom 40% for well-designed cash transfers.31

"These estimates support previous evidence in other regions that food subsidies are, on average, the most regressive," the report said.

Food subsidies represent about 0.7% of the regional gross domestic product (GDP) of the Middle East and North Africa, or $22 billion annually. When electricity and fuel subsidies are included, the share of GDP spent on consumer subsidies rises to a whopping 7%, a total spending of $212 billion a year. In countries like Egypt, Jordan and Morocco, food subsidies alone represent between 1.2 and 1.8% of GDP, considerably above the resources spent on such subsidies in most of the rest of the world.

"Recently, food consumer subsidies have been linked to corruption incidences and disappointing nutritional outcomes. Pilferage in schemes that distribute grains with little public information on inputs and scarce "voice" among communities may represent up to 50 or 70% of the allocated subsidized food," the report said.

"Poorly designed food subsidies that lack transparency, accountability, and promotion of healthy foods most likely will fail to sustain positive effects on either nutrition, inequality or growth, and instead could take resources away from more productive uses and threaten macroeconomic stability, the report said.