Food Bill is just bad economics?

Apr 10, 2013

In this issue:
» Has Indian economy 'turned around'?
» Current account deficit is unsustainable at 5%: Subbarao
» Indian auto party has come to an end?
» US states choosing gold over Bernanke
» and more....

------------------- Join 15,000 other investors who picked the right stocks 80% of the time... -------------------

There's a good reason why StockSelect is our flagship service...

It has an amazing 80.9% accuracy rate while investing in the safest stocks. And it has delivered results consistently over a 10-year period.

This is the main reason why the number of subscribers for our StockSelect service has grown greatly over the years reaching 15,442 now.

And when so many people are benefitting from it regularly, we feel YOU should be one of them too!

That's why we have come up with an easy way for you to try StockSelect without getting an yearly subscription right away.

In fact, you may have never thought it'd be this easy to try our best-performing service.

Click here for full details...

In the Union Budget 2013 , there was an additional allocation of Rs 50 bn towards the Food Security Bill. This is in addition to the Rs 850 bn of revised estimates of last year. In total the government has allocated about Rs 900 bn towards the bill. The bill aims at providing subsidized cereals to nearly 800 m people or three-fourths of our population. But an article in Economic Times (ET) questions the economics of the bill.

It has given several reasons to back up its claim that the bill represents poor economics. The government has stated that the decline in calorie intake is an indicator that people need food security. A large part of this decline is due to people shifting their focus away from cereals and towards superior foods. As per capita incomes have been increasing, people across all income groups have been increasingly consuming more of superior foods like proteins, etc. This trend is visible in the trend in food inflation. It has persistently remained high due to higher prices of this category of foods. Therefore, if people are consuming lesser amount of cereals, then would it really make sense to subsidise them?

One may argue that subsidizing does make sense because India is home to one of the largest percentage of population below poverty line. Here too ET has come up with interesting statistics. As per a survey by NSSO (National Sample Survey Organisation) the percentage of people reporting that they were hungry during the year has been steadily coming down. As of now, only 2% of the population or 25 m people fall in the category of people who need food security. In order to secure food for them, the government is trying to increase its subsidies to cover 800 m people. Where is the economic sense in that?

It has been stated umpteen number of times that the government's subsidy policies are nothing but populist measures. These populist measures may or may not help in getting it more votes. But these measures are definitely destroying the economics of the country through additional fiscal burden. The government needs to sit down and get its math right. True that the needy need to be helped. But helping those who don't need help, is just the best recipe for destroying the economy. Unfortunately that's exactly what the government seems to be doing.

Do you think that the government's food security bill will serve its purpose or do you think it is just bad economics? Please share your comments or post them on our Facebook page / Google+ page

 Chart of the day
The Asian Development Bank (ADB) has given its estimates for GDP, inflation and current account balance for India. The picture does not look too rosy. As per ADB's estimates, India should be able to rein in inflation and current account deficit. But its growth would still not reach its full potential. The reasons for this are structural and policy related issues which continue to weigh down investments. Therefore it expects India's growth to increase to 6.5% by FY 15. This is higher than the 5% growth estimate for FY13 but much lower than the 9% levels that we had seen in the past. The reason for slower growth estimates is India's twin deficit problem. To ease this situation, the government has to step up on policy reforms. Though it has taken some steps on this front, but it still has to go a long way. Only when structural hindrances are removed, will there be a revival in investment. Investment will drive consumption which in turn will boost growth.

Souce: ADB, The Mint
* As % of GDP

Anytime you ask a question to the government about faltering growth in the Indian economy the answer remains the same. And it goes like this. The economy has bottomed out. And a revival is on the cards. Though inflation is a worry it should settle down in the near future. This stereotype answer is being going on since long.

Now, with the Reserve Bank of India (RBI) lowering interest rates, there is a general consensus that the stereotyping might well come out to be true. So, is the economy really on a cusp of a major revival? But to know when revival will set in we need to know the problem and how to bring an end to that problem. However, it seems that India is unable to do that properly. Take the case of current account deficit (CAD) for example. It reached a record high recently. And there were assurances that it will decline.

High gold and oil prices are responsible for rising CAD. And considering that gold prices have corrected in recent times the government reasoned out that the deficit would decline. In short, the views on recovery here were more optimistic and did not account for downside risks. This same optimistic approach is also used to project growth rates. It may be noted that India has hardly been able to achieve the growth rate it has projected in the last 1-2 years because the target in itself was way too optimistic. Even the fiscal deficit targets are revised frequently as they appeared unachievable.

We feel that any target should account for a realistic scenario. You just cannot build in an optimistic view and roll out a target. It has to consider the downside risks as well. Thus, the government should follow a more realistic approach when it comes to rolling out targets. Or else they will no longer be of any value.

We recently wrote about the other economies that are showing Cyprus like cues in their fundamentals. Most of these displayed obscene level of bank funding as a percentage of their GDP. Luxemburg in particular is attracting a lot of attention as its bank assets are 2107% of GDP! But there are others like Slovenia and Slovakia which are also on red alert. That is because like Cyprus their fiscal deficits are nearing 5%. But what about India for which the fiscal deficit has already crossed 5%. Moreover the current account deficit is currently pegged at 5.4% of GDP!

The government did show some remorse in the Union Budget. It promised correcting the fiscal and current account imbalance. However, partial deregulation of fuel prices and imposing import duty on gold are not the complete solution. As per an article in Firstpost, the RBI governor Dr Subbarao believes that current account deficit is not sustainable at 5%. The government, however, is hoping that FII inflows redress India's problem. But relying on fickle minded FIIs could be the biggest mistake our policy makers commit.

FY13 has been an entirely forgettable year for the Indian auto industry. After witnessing 2 years of robust growth (FY10 and FY11), economic slowdown began to take its toll on the sector thereafter. As if a poor FY12 was not enough, FY13 was even worse. As per an article in the Economic Times, India's annual car sales fell for the first time in a decade in the just concluded financial year. GDP growth slowing down was only one factor. A combination of firm interest rates, high consumer price inflation and fuel price hikes had an adverse impact on demand too.

Huge discounts were not enough to lure customers. Thus, auto companies were saddled with unsold cars in showrooms and problem of overcapacity. Most segments across the auto space witnessed either a tepid rise or a fall in volumes. The only silver lining in the cloud turned out to be the impressive growth in utility vehicles. Companies have also been toning down investments into the sector as capacity utilization remains low. All this has called into question the future growth prospects of the sector. Considering the cyclical nature of the industry and how closely it is linked to the economy, a slowdown in GDP was bound to impact the industry. Thus, while concerns remain in the medium term, we believe that the long term growth story of the sector still remains intact.

The US Fed seems hell bent on destroying the value of US dollar. Thus, it is only logical to expect people to start thinking about an alternate currency system. However, little did we know that such a movement is taking shape in the Fed's own backyard. Bloomberg reports that there are around a dozen states in the US that are pushing to recognise gold and silver coins as official means of payment. In fact, one of the states even passed a bill in 2011 giving these two precious metals the title of commonly accepted currencies. But sadly things haven't progressed much on this front. There are quite a few regulatory barriers that need to be cleared. Besides, there needs to be a full-fledged system in place which is absent currently. The move nonetheless is reflective of the people's growing distrust towards US dollar. And it serves as a reminder to the powers that be that dollar's fate as world's reserve currency is not cast in stone. It can certainly fall from its lofty pedestal and pretty fast at that.

In the meanwhile after opening the day on a positive note, Indian equity markets continue to trade in the positive zone. At the time of writing, the Sensex was up by 86 points (0.5%). The other major Asian markets have closed the day in the mixed with Singapore and Indonesia trading in the red. However, markets in Japan and Korea have closed in the green.

 Today's investing mantra
We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely." - Warren Buffett

  • Warren Buffett - The Value Investor

    Editor's note: We are pleased to inform you that we have introduced a new section called 'What We're Reading'. Here, you can access some interesting articles across the web that we liked reading.

  • Today's Premium Edition.

    Recent Articles

    All Good Things Come to an End... April 8, 2020
    Why your favourite e-letter won't reach you every week day.
    A Safe Stock to Lockdown Now April 2, 2020
    The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
    One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
    A stock with strong moat is currently trading near 5-year lows.
    Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
    This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

    Equitymaster requests your view! Post a comment on "Food Bill is just bad economics?". Click here!

    19 Responses to "Food Bill is just bad economics?"


    Jan 25, 2014

    This program will make the people lazy. Britishers developed work culture. but leaders always thinking the people should be depend on government Subside pro games instead of depending on there own legs.this will helm to the nation. Already Indian Agriculture Moseley depends on agri labour probelem is very seruos. no one is working there cost of living drastically came down because of all
    subsideries. now days in india agriculture labour are costely compare to educated Emplyees. and in long run people always seeking personal needs also from government Bodeys insted of depending on there own. The government also shold concentrat emplyment generation then only there purchasing capacitey will be improved with productvite then only infrastructure also improved.the will be public assets will be created. moreover the lazyness will creates law and order problems also. ideal man mind is devils den. and they will be multiply the population also.Because the cost of the child does not know by them. the burden will be shifted to nation
    Any Economist advises create employment and automatically peoples purchasing Capacity will be Improved.that leads to improve productivity of the Nation. if the Government
    should think like that.Now a days Govt wants to Grab the votes onley. Now all are become politicians NOt Leaders


    chandra khandelwal

    Sep 2, 2013

    undoutedly it is bad economics only to increase corruption and inability of the govt to bring down the cost of affording two squire meals a day for everyone



    Aug 27, 2013

    The Bill blurred the target group, the needy ones. There should be more intrinsic rapport for implementation. If operates in true sense, the distress sale may be curbed.


    Nagaraja Murthy

    Aug 27, 2013

    Instead of thinking of food bill why the Government of India is not thinking to connect the Ganga River to the states of India to concentrate on the agriculture and its modernization. If this thing will happens the agricultural product of India will increase and the prices automatically come down. Concentrate on the export of food items this will increase the exports of agricultural products. This will bring down the inflation. Increase the GDP and GNI and Gross agricultural domestic product. So that all the people engaged with agriculture they get the job and india will achieve the self food sufficiency, Is it not?

    Like (1)

    Nagaraja Murthy

    Aug 27, 2013

    Instead of spending this much of huge amount towards the food security bill why can't the Government spend this same amount towards the connecting the Ganga River to each and every state for the development of agricultural irrigation purpose? Why can't the Govt increase the modernization of agriculture?
    If the Govt of India concentrates on increase of Gross Domestic Agricultural products this will automatically increase the GNI and GDP and increase of food products exports. All the people will concentrate on agriculture. Automatically the food prices will come down and inflation will come down. This may take few years and permanent solution for the development of India.
    Hence this is better and the best solution instead of food bill.I

    Like (1)


    Apr 28, 2013

    Numbers dont add up: 800 million do not have bank accounts and nor Adhar cards to get thier money deposited into thier respective accounts.

    I am guessing if given in the form of cerels two things can happen; 1. if all the proceeds given in the form of cerels prices of these will drastically fall- which infact definetly not in favour of politicians who run these distribution cartels, 2. if given as ratio ie cerels and cash - those part given in cerels will be exported abroad (scam )at international prices which are high currently which would go into thier respective party funds etcc..)

    Like (1)


    Apr 12, 2013

    with this People do not go to work & farmers facing problem in arranging labor for farming activities. As they are getting wheat @ Rs 2/per kg & that's what they need work only to buy wheat & salt.On the other side also killing farmers with increased prices of fertilizers,seed & electricity & not increasing the min support price accordingly.

    Like (1)


    Apr 11, 2013

    Certainly more detailed study needs to be done before the target groups, food articles to be supplied to them and the quantum of subsidy are to be decided more accurately. Fortunately for us there are a lot of critical thinkers and writers like your team and that of the ET whose opinions will be weighed by the government carefully.
    I have a sense that the Government as a whole has of late become a lot more sensitive to the buzz going on in the internet media and social networks. If knowledgeable people in the ET and other financial news media start a trend on Twitter or Face book or a Web page devoted to public participation, especially inviting inputs from NGOs and others in the know about the merits of the Food Bill, (other than those who promoted it or helped draft it) maybe we can avoid a lot of wrong planning and miss-allocation of our scarce resources.
    I have not checked it out, but has the Government already invited public opinions on the Bill? If they have, they must be keeping it a secret ! No noticeable ads have been seen by me even on DD channels !
    Let's hope India gets its act together fast in crowd-sourcing vital inputs on policy decisions of far reaching consequences like the Food Bill. Other countries are doing it pretty fast. India has a large battalion of ex-bureaucrats and retiree-academic scholars who can give us plenty of inputs.
    Let's not lag behind in tapping the country's full potential here.

    Like (1)

    RAjesh Goel

    Apr 11, 2013

    Sir, all govt plans are made keeping in view dirty politics and govt officials interest. They are not concerned with Fiscal problems or people welfare. 90% of this food subsidy amt will go to govt officials and politicians and their people. This govt running for tenth year in office has ruined and looted the tax payers money like any thing. Rural un emloyment scheme/ Mid day meal all are like this. Govt has no concern for poor infra, lack of power in the country. Lots of corruption in private education sector.

    Like (1)


    Apr 11, 2013

    Subsidies like food subsidy has 2 serious aspects:
    1. It is not possible to ensure that it always reaches the benificiary.
    2. It discourages hard work and efficiency.

    Besides, we must consider the aspects of corruption, cost of distribution, etc.

    Like (1)
    Equitymaster requests your view! Post a comment on "Food Bill is just bad economics?". Click here!