Crisil believes Food Security Bill is not all that bad. Here's why

The cabinet on Wednesday pushed through an ordinance to implement that food security bill which the UPA government believes will guarantee food grains at subsidised rates to 67 percent of of the population.

The food bill proposes to supply 5 kg of rice at Rs 3, wheat at Rs 2 and coarse grains at Rs 1 per kgevery month to three fourths of the rural population and half the urban population in the country and is expected to cost the government around Rs 1.25 lakh crore.

While there has been criticism that the bill is aimed at getting votes for the UPA in the important elections that are coming up in states like Delhi, Rajasthan and Madhya Pradesh, according to Crisil Research estimates, the food bill could generate additional savings of around Rs 4,400 crore this year for each below poverty line ( BPL) household that begins to purchase subsidised food. This savings equals around 8 percent and 5 percent of the annual expenditure of a rural and urban household, respectively.

According to the brokerage, the savings would exceed the current annual medical and educational spends for rural households as a higher disposable income would allow them to spend more on protein rich food which would improve their nutritional intake. However, it cautioned that the success of the scheme and its welfare lies in identifiying the poor and making sure that they are able to avail the food subsidy.

According the report, while all BPL families are entitled to subsidised foodgrains through the Public distribution system, only 43.5 percent of all BPL households purchase rice under PDS and only around one third of them purchase subsidised wheat. In Bihar, only 16% of rural BPL households in Bihar purchased rice under PDS in 2009-10, while in Jharkhand and Uttar Pradesh less than 35 percent of rural BPL households have access to rice from PDS.

Crisil believes that if identification is carried out correctly, several BPL households which currently do not have access to the PDS, will be given some form of identity proof that will, for the first time, make them eligible for purchasing foodgrains at the subsidised rate from the PDS. This in turn will free up a part of their income that is currently being spent onbuying foodgrains at higher prices from the market

See the graphic below to understand the dynamics

Thus they will save the difference between the market price and the subsidised rates on their monthly foodgrain entitlement (25 kg of foodgrains for a family of five).

“_At current prices rural BPL households that do shift to PDS and purchase their entire entitlement will save around Rs 4,400 per year if the food security bill is implemented in 2013-14. This amount is estimated to be slightly higher for urban households taking into account the smaller household size as well as the higher market price in urban areas. Moreover, the annual household savings is estimated to increase in 2014-15 and 2015-16 since the price of foodgrains under PDS is not expected to increase for three years (as stated in the FSB) and market prices of foodgrains would increase every yea_r,” said Crisil economists Vidya Mahambare and Neha Duggar Saraf.

Crisil believes that for rural households, spending on education, medical expenditure ans demand for nutritious food items, especially milk and milk products, egg, fish & meat, as well as spending on clothing and household consumables such as toiletries (which can improve health outcomes) is also expected to rise once the FSB is implemented. For urban households, poor households will increase their expenditure on protein-rich food, fresh fruits, medical expenses and education, spending on conveyance and rent.

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But the picture is not so rosy as there are several hurdles.

Although the food bill entitles 67 percent of India’s households to subsidised foodgrains, it does not throw much light on how these households will be identified.

Implementation is key and for that the government must use Aadhaar and link income status along with biometric and demographic information in the Aadhar database, according to Crisil.

Secondly, transferring subsidies through Aadhar-enabled bank account of beneficiaries will also ensure that cashbenefits reach the intended recipients.

Using Aadhaar as an identity proof at the point of sale of foodgrains will also reduce leakages through duplicates and ghost accounts.

However, Andrew Holland,, CEO, Ambit Investment Advisors is of the view that the food security bill will not go down well with rating agencies who couldcould downgrade the country’s investment climate to “junk” status since the huge expenditure on the bill may make it difficult for India to achieve its fiscal deficit target.