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National Food Security Bill

Mainstream, VOL LI, No 37, August 31, 2013

A Macroeconomic View of the 
National Food Security Bill

Monday 2 September 2013, by Arun Kumar

The National Food Security Bill (NFSB) has been contentious. Economic arguments have been presented against it confusing the public. The rich farmers are worried that farm prices would fall because cheap food would find its way into the markets. Businessmen argue that the economy would further slow down with an increase in the burden on the Budget. The elite say that subsidies and inflation would rise sharply due to profligacy. Unfortunately, most of these arguments are based on a partial economic perspective which ignores the full impact of the economic processes that the scheme would set into motion.

There is legitimate concern about corruption, diversion of food and the problems associated with the implementation of the provisions of the Bill. No doubt, given the state of governance in large parts of the country, the full implementation of the provisions of the Bill would take many years. Given that the Congress party may lose politically by bringing in the scheme so close to the next general elections, those whose expectations would remain unfulfilled by the time the elections are held would be disappointed. The moot question is: should corruption be the reason for not implementing what may be a good policy? Should the allotment of spectrum or of coal mines be stopped because there has been corruption in these cases? Can the baby be thrown out with the bathwater?

The case for the NFSB is a macroeconomic one. The nation has the responsibility to feed its citizens. However, due to a lack of incomes and the choices sometimes made by the individuals because of the social pressures, many are unable to buy enough food for their family and that is why there is hunger and malnourishment. Thus, hunger is not an individual problem but has its roots in the country’s macroeconomics. For instance, it depends on the nature of employment generation, the distribution of incomes, investment policies, global factors in an increasingly open economy (including consumerism), production technology encouraged by policies, position of agriculture in the economy and the related issue of terms of trade between agriculture and the other sectors. None of these factors can be changed by individual efforts.

The government, through its policies, deter-mines these macroeconomic factors. Since the launch of the New Economic Policies in 1991, the problem of unemployment, distribution of incomes and so on has got aggravated and worsened the situation of the marginalised in society. Hence in spite of growth, hunger persists. The government is the only entity that can provide the correctives and ameliorate hunger. In this sense, the NFSB is only a corrective to the market-oriented policies currently being pursued and does not resolve the fundamental economic problem of lack of adequate incomes of the poor.

Those who would benefit from the cheap foodgrain provided under the NFSB will get an additional income since they will buy a given amount of food for less. This would leave some money for buying other goods and services including more protein and vegetables. This amount could be substantial since 50 per cent-60 per cent of the budget of the poor is spent on food. If it is assumed that 50 crore people were already benefiting from various State level schemes under which they were getting cheap food, an additional 30 crore people would get the cheaper food and buy not only more food but more of other items of consumption. This would help reduce poverty in the country.

In the present situation of a demand slow-down and a falling rate of economic growth, there would be a stimulus to the economy. This boost would be strong since little of the additional demand would leak out of the economy as happens with the additional incomes of the well-off. Further, there could be additional requirements of infrastructure for storage and distribution of the additional food and this would result in more investment and, therefore, spur growth.

The implication also would be that the rate of inflation for the poor would fall. The total consumption of food would rise leading to an increase in the free market price of foodgrains. That would hurt those not covered by the NFSB and for them the rate of inflation would rise. The lower middle classes would be hurt but the others with inflation indexation can adjust to it. However, the immediate rise in inflation would be small since the government already has huge stocks of foodgrains which, when released in the market, would moderate the price rise. As of March 1, the food stocks were 62.8 million tonnes and with the procurement in the new season these would have increased to above 80 million tonnes while the buffer stock norm for July 1 is only 27 million tonnes. Thus, there is a lot of cushion to keep prices in check. But, as the extra stocks above the statutory requirement get exhausted in a few years, the prices would rise. To check this, the government would have to pursue policies to encourage an increase in output rather than resort to fire-fighting later on.

The higher free market price would lead to a higher price for the farmers and this could lead to an increase in supply. This would also mean that the government would have to give a higher support price to the farmers to be able to procure additional amount for expanded distribution. This would further incentivise the farmers to produce more.

Some argue that the poor do not need more foodgrains but require other items of food. This is only partially correct. Foodgrain availability (proxy for consumption) in India peaked in 1991 at 510 gm per person per day and declined after that (in 2001 by 18 per cent). This has been attributed to a shift in the consumption pattern. However, whenever the monsoons have been bountiful and food prices have dropped, consumption has gone back to around 500 gm.

This suggests that the consumption pattern may have shifted some but a lot of people are unable to buy adequate amount of foodgrains when the prices rise. The well-off consume more of foodgrains indirectly through consumption of animal protein but their consumption is hardly sensitive to prices since they have enough income. Thus, the fall in availability of foodgrains when the prices rise is a reflection of the squeeze of the consumption of the poor. The NFSB would help the poor by making their consumption independent of inflation. The implication also is that the current high foodgrain stocks are not an indication of food self-sufficiency in the country but of inadequate purchasing power of the poor. Further, as the NFSB gets implemented, India may have to import foodgrains unless the production rises.

It is estimated that the subsidy bill on food would rise to more than Rs 1,24,000 crores (around one per cent of the GDP). The additional amount over and above what is being currently spent may be around Rs 35,000 crores. This is insignificant compared to the Rs 5.5 lakh crores of tax expenditures (a kind of subsidy) given to the well-off in society or the revenue loss of Rs 20 lakh crores due to the black economy. The question then is: who should be subsidised? The choice should clearly be in favour of the poor. There will be additional expenditures on storage and other infrastructure. But, the total requirement of storage could decline since foodgrains would be distributed rather than held in the open where they rot adding to the subsidy burden. The losses of the FCI should decline since the food distributed would get some revenue, even if small, as opposed to its complete write-off when it rots and correspondingly the subsidy element could fall.

The real problem would be corruption and identification and delivery to the additional families to be covered. That is why some suggest cash transfer using the UIDAI cards. Examples of Brazil and other countries are mentioned but the recent public demonstrations in Brazil point to the prevailing corruption there. It is not obvious that the UIDAI would be free of corruption. Ingenuity of the Indian elite has fostered corruption in whatever scheme is launched. There is much corruption in transfer of money through banks and post offices. Already corruption cases are surfacing with regard to fictitious cards, etc. even when the scheme is not yet operational. Further, cash transfer may not lead to expenditure on food but diversion to other wasteful expenditures. That danger exists even when cheap food is given but it would be less than with cash transfer.

It is unfortunate that the NFSB was initially brought through an Ordinance rather than being implemented after approval in Parliament. This deprived the scheme of a political consensus which would have helped its implementation. However the politics plays out, in macro-economic terms the NFSB is highly desirable and reflects the nation’s commitment to its citizens and that would help in nation building.

[This is an enlarged version of the article on the subject in Hindustan Times on August 21, 2013. —A.K.]

The author is the Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail: arunkumar1000@hotmail.com/nuramarku@ gmail.com

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