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Wednesday, August 28, 2013

The Food Security Ready to Take its Toll


What is National Food Security Bill (NFSB)

The much-awaited and much-debated Food Security Bill ultimately got passed in the Loksabha (Lower House) a day before yesterday. This bill is supposed to entitle around 67% (or 80.4 crore) of Indian population to subsidized food- each eligible individual shall get 5 kg of rice, wheat and coarse grains at Rs. 3,2,1, respectively.This programme shall cover 75% and 50 % of the rural and urban population respectively.
Under this scheme, every year around 62 million tonne (6.2 crore tonne) of food-grain shall be distributed among 80 crore people of India.
The government estimates an outlay of Rs. 1,30,000 crore per year towards this scheme but as per a Reuters columnist the actual cost for the same will be around Rs. 1,60,000 crore per year.
Though opposition questioned the timing of this bill and termed it as a measure to garner votes in the oncoming general election but this bill got passed quite effortlessly.

The Impact of NFSB

The cost incurred for NFSB will be more than 10% of all government receipts (the total revenue that government earns through taxes excluding the borrowed money).
This additional burden shall increase India’s Fiscal Deficit (the difference between expenditure and income of the government) and this deficit shall be plugged by higher borrowing.
When government borrows more, already heightened interest rates shall soar further and already ailing Indian economy shall be negatively pressurized and the GDP growth rate shall further decelerate. Debt-ridden companies shall reach on the verge of being bust.When interest rates start going up overall inflation increases and economy starts decelerating.
Since long Indian corporate have been waiting for a policy rate cut and even a slightest increase in the same shall be a big morale dampener for corporate India and overseas investors.When an economy is struggling, overseas investors start pulling their money out and as a result local currency depreciates eventually. increasing the current account deficit (CAD) as imports become more expensive.All these outcomes getting All these parameters when aggravated are sufficient to drag Indian economy into a negative spiral. 
Simply put, NFSB will be a big burden on the already ailing Indianeconomy.

How Fruitful this Programme is?

In India, tobacco consumption is very common and a pack of bidi costs Rs.4- is there any sense in providing 1 kg of rice cheaper than a pack of bidi? (A bidi user easily consumes at least 1 packet a day)
Even if, it is considered ok, then is there any sense in entitling 70 % of the population eligible for it, when only 33 % of population is leaving below poverty line?
Roti, chapati or rice is eaten with either vegetables or pulses and cooking oil is required to make vegetables and lentils too need to be fried. Under NFSB, pulses or cooking oil will not be provide and when vegetable and edible oil prices are sky-rocketing, how many of eligible beneficiaries  shall afford to mange a full course of meal? Rising food inflation only has so for prevented a cut in interest rates.
We should not forget that a subsidy increases fiscal deficit  which ultimately translates into  higher inflation so NFSB benefits are nothing but a zero-sum game for beneficiaries.
Indian government is already going slow on financial reforms and this is why deficits are widening.
If Indian economy shall not perform well, even domestic investors shall start buying gold as they shall no longer have faith in the local fiat currency.
Indian government can restrict its citizens from investing in US treasury products but it will not be able to stop them from buying gold. Rising demand for gold coupled with higher import duty shall artificially boost domestic gold prices and gold smuggling shall again surface up and parallel economy shall get a boost just the way during the Indira regime.
Simply put, NFSB is like putting some goodies in one pocket and clandestinely taking out goodies (of same monetary value if not more) from other pockets but without letting the subject realizing it.

What is more perturbing  is- what if government shall fail to meet the quantity of grains to be distributed by domestic supply? Then India shall have no option but to import grains.
While the FM is striving hard to narrow the trade deficit by curbing gold imports, can India afford to have an additional item added to its import list especially when India's trade deficit is widening and Indian rupee is depreciating?

What is grass-root level reality?

A lady who works as a domestic help told me that they get the ration but half the quantity is husk and grit. Consumable quantity of rice comes out to be so low that this lady has no option but to add that small quantity of rice to wheat and the same is grinded to  flour to make chapattis. 
Does this serve the purpose of providing subsidized rice?

Middlemen shall be selling quite a chunk of distributable grains in the open market and shall be adding husk and grit to compensate the quantity loss and poor people shall then be losing interest in buying these grains (as it shall take a hell lot of time to sort and clean grains and they shall not be able to afford this time sacrificing their working hours) and thus middlemen only will be benefited.
Even the official advert of NFSB portrays a PDS outlet owner denying grains to eligible people and only after getting admonished by an activist, agrees to comply.
Shall every time when an eligible person will be denied, an activist shall pop up?

Has government any solution to these impediments?

How market Reacted to it?

The benchmark Nifty closed 189 points or 3.45 % down. The rupee tumbled to 66.5 levels against the USA dollar. FIIs were net sellers to the tune of Rs. 1375 crore in the equity market.
Interestingly but not surprisingly gold price soared.
The money outlay under NFSB means, rupee shall further weaken and CAD shall worsen and Indian economy shall continue to remain pressurized.

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