Monday, August 26, 2013

Here’s why the Food Security Bill won’t disturb fiscal deficit….

The Congress’s pet project – for which it has been needlessly derided – got the Lok Sabha’s approval last night. I say needlessly, because I am still to find one opposition party that has opposed the bill. Yes, many of them are complaining in hushed voices, or in private, but that’s more because the Congress has stolen a march over them. They know this bill will be a big election issue. Their lame complaint is that this will destroy the government’s finances. That India cannot afford the Rs 1.25 lac crores estimated will be needed annually. In my mind, that’s baloney.

Here’s why. First and foremost, the central government already provides more than Rs 75,000 crores as food subsidy. Assuming that the full Rs 1.25 lac crores is needed now, that’s an additional burden of Rs 50,000 crores. Though big, that’s really not such a big deal in today’s India. There are various ways the government can “adjust” this extra allocation to food.

One major thrust of this government, and which will help in accommodating the additional food subsidy bill, is the Direct Benefit Transfer (DBT) scheme. This is perhaps what food minister Thomas had in mind when he said that the PDS has a 20-25% leakage. The way to fix it is to bypass the PDS at some point in time. DBT is the way for that. Cash in bank accounts moves electronically, without interference from corrupt middlemen. Cash in banks gives dignity to recipients, since they don’t have to go with folded hands before rapacious shopkeepers. Equally, cash in banks provides anonymity to the poor; again removing the ignominy that recipients often feel.

As per a report in the TOI dated April 29th, (, “Integration of direct cash transfer with Aadhaar will take time but the scheme will help Indian government save 0.5 per cent of the GDP, International Monetary Fund said today. The total savings could be substantial: if the combination of direct cash transfer and Aadhaar eliminates the estimated 15 per cent leakage cited above for the programmes being integrated, savings could total 0.5 per cent of GDP in addition to the gains from the better targeting of spending on the poor," the IMF said in its Regional Economic Outlook: Asia and Pacific report. That 0.5% of GDP translates to Rs 50,000 crores, exactly the excess required for the Food Security Bill. Another article in the TOI on 1st April, 2013 ( says “Commission for Agricultural Costs and Prices (CACP) calculations show that direct transfer of food and fertilizer subsidies in cash to targeted beneficiaries has the potential to save almost Rs 60,000 crore, without any major adverse impact on the beneficiaries”.

There is another thing that the Congress will do eventually. It will cut fuel subsidies; at least the ones on petrol and diesel. Fuel losses were estimated to be as high as Rs 1.6 lac crores in 2012-13, of which the Central government picked up Rs 1 lac crore (the rest was paid by ONGC etc). But with price hikes, that number is estimated to come down significantly, to something like Rs 20,000 crores in 2013-14. Had the rupee not depreciated so much, the government may well have succeeded. Unfortunately, that may take some time now. But even the Food Security Bill will take time to roll out. By the time it does, the savings in fuel subsidy would have already happened.

In short, when Sonia Gandhi said “Many people ask if we have resources for this. I just want to tell them that the issue is not if we have resources -- we will have to find the resources. Some ask if this can be done. I tell them the issue is not if we can do it or not – we have to do it”, she knew what she was speaking. The fisc is not the worry.

The Food Security Bill is really about what kind of a country we want to be. Do we want hundreds of millions of starving poor in our backyards? Or do we owe them a decent life? Its fashionable for intellectuals to complain against the subsidy culture of the Congress. These intellectuals may want to keep a few things in mind. Firstly, like I said earlier, no political party has opposed the Bill. In fact, Narendra Modi wanted even more food grains to be given and at even cheaper prices. Secondly, food security is the “burden” urban middle/rich classes must bear to ensure the country’s wealth is “re-distributed”. Sharing hurts, but it hurts more to see people dying of hunger. Thirdly, in most countries, the poor are taken care of “directly”, not via the circuitous route of higher-growth-more-jobs etc. The debate between Bhagwati and Sen is alright, but when the rubber hits the road, it is Sen who delivers to the poor. That’s why he won the Noble prize, not Bhagwati. Fourthly, the urban middle/rich classes should keep in mind that the Food Security will help them only by preventing wide-scale social revolutions arising from income disparity. A capitalistic model can only survive when there is a parallel redistribution model at work. And lastly, of course its politics for the Congress. That’s why it listed this in its manifesto in 2009. The focus of the party is the rural/urban poor. Just like the BJP’s is the urban baniyas. So what’s wrong if the Congress protect its vote banks?

One last word. Why does the debate have to be the way Bhagwati and Sen shaped it? Why does it have to be “growth” v/s “subsidy”. Because the Congress supports subsidies does not mean that it doesn’t favor growth. In fact, the highest growth rate recorded in India has been under UPA-1 and UPA-2. The Congress has shown that both can go hand in hand. The debate should be about which subsidies are good, and which are bad, not about whether subsidies are good or bad.

The real truth is that the Food Security Bill is the right thing to do. As a nation, all of us should feel proud that we take care of the poor. That’s the kind of nationalism I like. Of course, we’ll have to pay more for fuel. Of course, we’ll feel a part of the pain. But at least we will be able to sleep peacefully in the night knowing we have done our bit for the poor.

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