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It will not stop at Rs 60,000 crore by Soumya Kanti Ghosh

How economically sustainable is food subsidy? The cost could even be double of what the government estimates

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 jeopardise India’s favourable demographic dividend (as per independent estimates, close to 60 per cent of India’s population is in 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 not clear and the delivery outcomes could be highly compromised given the governance weaknesses and ineffective delivery mechanisms in place.

We understand that currently there are different versions of FSB. For example, the FSB on the National Advisory Council website is the initial version that had proposed to cover the entire segment of the population. The draft version on the department of food and public distribution website then proposed coverage to 75 per cent of rural population and 50 per cent of urban population. The Prime Minister’s Economic Advisory Council (PMEAC) version proposes at least 75 per cent coverage of the country’s population with 90 per cent of rural coverage and 50 per cent of urban coverage. We have worked out the estimates as per the draft version and our simulations show that the food subsidy estimates under this version are not significantly different from the PMEAC version.

The fiscal viability/ cost can be estimated in the following manner:

The FSB for the rural area proposes to provide subsidised (at a fixed price not exceeding Rs 3/kg for rice, Rs 2/kg for wheat and Re 1/kg for coarse grains) foodgrains (7 kg per person per month) to 75 per cent of the rural population, with at least 46 per cent 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 categorisation of population into priority and general households. Let us call it A.

The FSB for the urban area proposes to provide subsidised (at a fixed price not exceeding 50 per cent of the 2010-11 procurement prices for rice, wheat and coarse grains) foodgrains (3 kg per person per month) to 50 per cent of the urban population, with at least 28 per cent 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 (a) 5-7 per cent of the foodgrains wastage, (b) creation of additional storage capacity for at least 13 million tonnes across 15 states as estimated by the ministry of food, consumer affairs and public distribution at an average cost of Rs 5,000 per metric tonne and (c) refurbishing existing storage capacity for the remaining foodgrains procured at an average cost of Rs 1,000 per metric tonne. Let us call it C.

As per the ministry of food, consumer affairs and public distribution, there is a leakage of 36 per cent of foodgrains (17 per cent through bogus cards and 19 per cent through fair price shops). We estimated the cost of such leakage separately. It is in fact an irony that such subsidised foodgrains meant for farmers are sold in the open market and possibly bought back by the poor people at a higher cost, thereby defeating the entire purpose. Let us call it D.

There is also the additional cost of (a) providing free nutritious meals free of charge, during pregnancy and six months thereafter to women and an additional maternity benefit of Rs 1,000 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 foodgrains to different ration shops is also estimated separately, as per the government estimates. Let us call it F.

Hence the total cost can be estimated as the sum of A+B+C+D+E+F (refer to the table for details). Our estimate of FSB assumes a 15 per cent per year increase in MSP. This is based on the observed increase of 15 per cent compounded annual growth rate (CAGR) between FY06 and FY11. 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 the table) 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 still is close to Rs 4,57,000 crore in first three years (close to Rs 5,00,000 crore, if we add administrative cost). This is not very much different from estimates in the first three years that pegs 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.

Second, there are still a lot of grey areas in the bill. For example, the draft bill does not specify for how long the subsidised prices will remain fixed (the NAC version assumes that it will remain unchanged for 10 years); what will be the inflation index; there is no definition of how the general and priority segments of population will be defined; how the destitute will be covered; the cost sharing between the Centre and states and so on. One provision, which may be a bone of contention, is that state governments will be entitled to pay a food security allowance in the event of non-delivery of subsidised foodgrains to designated people. Clearly, such a provision is a double whammy, since the Central government will have to procure additional foodgrains and bear subsidy cost because of the leakage and the state governments may also have to pay an allowance because the food will not be delivered to the beneficiary due to leakages.

Rajiv Kumar is secretary-general, FICCI, and Soumya Kanti Ghosh is director, economics & research, FICCI. The authors thank Nibedita Saha for research. Views are personal. (To be continued)