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Here's why Food Bill will cost more than we think-Prachi Mishra
-The Economic Times


The revised, but not yet passed, National Food Security Bill (NFSB) represents a crucial political-economic approach to welfare. But how well do we understand the financial and, more importantly, distributional consequences of the revised Bill? Although the revised Bill is likely to simplify the identification of beneficiaries, financial implications will still be substantial.

Calculating these implications must include not only the cost of food subsidy, but also additional costs of setting up and running of new institutions and bureaucracies, and costs likely to arise if there are political pressures to protect existing beneficiaries. Many of the latter are not likely to be grandfathered even in the revised Bill. Calculated this way, the amended NFSB may entail significantly higher burdens than commonly perceived.

The Bill proposes to cover 75 per cent and 50 per cent, respectively, of rural and urban populations. The entitlement is 5 kg per person per month of food grain at issue prices of Rs 2 and Rs 3 per kg for wheat and rice, respectively. This proposal has only two categories: covered and uncovered. The Antyodaya Anna Yojana households will receive an additional 10 kg of food grain per household to protect existing allocations.

The food subsidy cost under NFSB is estimated at Rs 1,24,502 crore for 2013-14 and total food grain requirement is estimated at 61.2 million tonnes. The cost is estimated to rise to Rs 1,40,192 crore and Rs 1,57,701 crore in 2014-15 and 2015-16, respectively. The "incremental" food subsidy over and above the existing subsidy is estimated at Rs 23,951 crore, or 0.2 per cent of GDP in 2013-14.

But non-food subsidy costs of NFSB are being ignored. These include the setting up and running of State Food Commissions and District Grievance Redressal Offices, expenditures on intra-state transportation of food grain, and cash benefits to pregnant and lactating women. Including these additional quantifiable expenditures, the total incremental fiscal cost of implementing NFSB is estimated at Rs 44,711 crore for 2013-14. This will increase to Rs 47,392 crore and Rs 50,591 crore in 2014-15 and 2015-16, respectively.

These estimates should still be considered lower bounds for the actual expenditures to implement the Bill. There are various additional expenditure items stated in the Bill, the incremental costs of which cannot easily be quantified (such as costs of a new system for identification of beneficiaries, strengthening the capacity of Food and Civil Supplies Corporations, etc).

Further, the open-ended procurement policies of the government have implied that procurement has typically been much higher - on average, 40 per cent over 2002-03 to 2011-12 - than the required quantity of food grain. This can increase fiscal costs. Costs can also rise if procurement of additional grain in the next two years requires an increase in the minimum support price of more than the 10 per cent assumed in baseline calculations. In addition to the aggregate fiscal costs of implementing the Bill, there will be distributional implications as well.

The existing above poverty line (APL) beneficiaries who move out of coverage will be worse off; and the below poverty line (BPL) individuals whose entitlement is reduced by 2 kg could also lose. If there is political necessity to ensure no existing beneficiary is made worse off, the estimated incremental food subsidy cost can increase.

Similarly, everyone who currently holds a BPL card may not be truly poor. If the misclassified are new entrants into NFSB - they were not a part of the public distribution offtake, but NFSB entitlements at much lower issue prices are attractive enough for them - then the cost of subsidising them can be substantial.

To summarise, the total incremental costs of implementing NFSB over the above current subsidies could range from Rs 44,711 crore to Rs 76,486 crore in 2013-14. The smaller estimate is the baseline incremental cost, while the larger estimate includes the costs of grandfathering the existing beneficiaries and subsidising the BPLs who are currently misclassified. If we add to this the cost of procuring additional grain, incremental costs of NFSB go up to Rs 81,411 crore (0.7 per cent of GDP).

And, importantly, even this estimate represents the lower bounds. Fiscal optimists argue that the Bill is going to be rolled out slowly, hence fiscal implications may not be immediate; and the by the time the Bill is rolled out fully, the government will succeed in reducing other subsidies, keeping the overall subsidy Bill under control.

Only time will tell how true the fiscal soothsayers will be.

(The writer is senior economist in the office of the chief economic advisor, finance ministry. Views are personal)