Will food security Act to add to fiscal woes?

Fri, 21 Oct Pre-Open

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Almost two decades of reform and a full decade or more of a nonstop media festival of growth rates and India Shining songs and chants, an acute food crisis is on our hands. Food demand in India is expanding rapidly because of robust economic growth, higher disposable incomes and relatively low current per capita consumption. In the last five years, India's food security has slowly eroded as evidenced by the decline in per capita availability of a number of food commodities including cereals. Dependence on imports is rising. In India, more than 2 m children die of hunger every year.

In order to tackle the food security situation, the government of India (GOI) is planning to introduce the National Food Security Act. The Act seeks to cover about 67.5% of India's 1.2 bn people, expanding an existing food subsidy scheme that covers about 180 m of India's poorest people. The beneficiaries are divided into "general" and "priority" households with the latter recognized as the more vulnerable group but yardsticks for this have not been decided yet. The "priority" group will get rice at a fixed Rs 3 a kg, wheat at Rs 2 a kg and coarse grain at Rs 1 a kg. The general category, both in rural and urban areas, will get grains at half the price the government sets for payment to farmers.

But implementing the food security Act could come at a cost and add to the already high food subsidy bill. Once the Food Security Act is introduced, the subsidy burden on the exchequer would rise further. There is a proposal to provide jowar at Re 1 per kilo to poor families while its market price is Rs 30 per kilo. This means government will have to bear the burden of Rs 29/kg. This would worsen the fiscal deficit situation. The government is already struggling to meet the fiscal deficit target of 4.6% this year. It is estimated that the food security act may double India's annual food subsidies to about USD $23 bn or 2% of GDP.

With global crude oil prices staying over USD $100 a barrel, the government's hefty oil subsidy is set to swell. Though gasoline prices are now fully linked to the market, the government still heavily subsidizes diesel and cooking fuels. It remains to be seen how the government balances the demand for the food security act against the backdrop of a tight fiscal situation.