Food Security Bill: What PM, other jholawalas can learn from Indira Gandhi
The food bill envisages to distribute highly subsidised food grain to almost two-thirds of India's population of 1.2 billion and in its current form is a sheer recipe towards financial disaster and consequently very high inflation.
Prime Minister Manmohan Singh tweeted on Wednesday saying that "the Food Security Bill is a very important legislation for the Govt. The UPA is committed to make this law after considering all opinions." But the hurry in which the Congress led UPA seems to be to get the Food Security Bill passed, largely negates Singh's statement.
Nevertheless, since Singh has stated that he is in the mood to consider all opinions, here are a few points that he as an economist and the Prime Minister of India, should take into consideration.
These points are over and above the points that this writer made in a column yesterday. (10 reasons why Amartya Sen is wrong about food security bill)
The Bill envisages to distribute highly subsidised food grain to almost two-thirds of India's population of 1.2 billion and in its current form is a sheer recipe towards financial disaster and consequently very high inflation. Here are a few points that suggest the same:
1. Currently the government procures rice and wheat from farmers at mandis throughout the country. The state governments are allowed to implement a mandi tax, which the procurer of grains, in this case the government working through the Food Corporation of India (FCI)) or any of the state agencies, has to pay. The central government meets the entire expenditure incurred by the state governments on procuring rice and wheat.
Punjab has a mandi tax of 14.5 percent on top of the minimum support price. In case of Haryana the mandi tax is around 11 percent. This is a major source of revenue for these governments. As Sunil Jain pointed out in a recent column in The Indian Express "The mandi taxes accounted for nearly 18 percent of the state's(i.e. Punjab) taxes. In the case of Haryana, mandi taxes accounted for around 7 percent of the state's own tax revenues."
The possibility that states might increase the mandi tax, exists. In fact it is already happening. "Orissa hiked its mandi tax on paddy from 8.5 per cent to 12 per cent," writes Jain.
In fact, it is in the interest of states to increase their mandi tax. One reason, as already pointed out, is the fact that mandi tax is an easy source of revenue. The second reason is that implementing a mandi tax on the minimum support price allows states to give out a bonus to its farmers over and above the minimum support price(MSP) which the central government sets.
As an editorial in Business Standard points out "Madhya Pradesh has gone a step further and has begun offering hefty bonuses - Rs 100 a quintal last year, hiked to Rs 150 this year - on top of the minimum support price to maximise procurement. Though the fiscal burden of the bonus is borne by the state government itself, this is offset to a large extent by the higher tax collection from increased procurement as a result of this incentive."
This is something that Jain also writes about in the Indian Express "Typically, the state government buys the grain on behalf of the FCI and then bills it for this. So if a state now announces a "bonus" of 20 percent, it promises to buy the grain brought by the farmers at Rs 120 per unit. This is not just fiction, Madhya Pradesh offers farmers 11 percent more for wheat and Chhattisgarh 22 percent more for paddy (i.e. rice)."
Now how does this link up with the Food Security Bill? Nearly two thirds of the Indian population is expected to be eligible for subsidised rice and wheat under the Food Security Bill, as and when it becomes an Act. This means that the procurement of rice and wheat by the government will have to go up. As the procurement goes up, so will the total amount of mandi tax being collected by the state governments.
This will mean higher expenditure for the central government. A higher expenditure will mean the government running a higher fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.
It is in the interest of the state governments to increase mandi tax and thus award a higher bonus to farmers on top of the minimum support price.
"Little wonder that Madhya Pradesh last year emerged as the second largest procurer of wheat, after Punjab, relegating Haryana to the third spot...Taking a cue, Chhattisgarh, which has now become surplus in rice...has stepped up market levies on these purchases," the Business Standard points out. With the Food Security Bill becoming an Act this phenomenon is likely to increase.
2. With Food Security Bill becoming an Act, the government will have to procure more rice and wheat than it does now.
The trouble is that FCI does not have economies of of scale i.e. its cost of procurement goes up as it procures more. One reason for this is the increasing cost of labour.
As a report titled titled National Food Security Bill: Challenges and Options authored by Ashok Gulati, Jyoti Gujral and T.Nandakumar (with Surbhi Jain, Sourabh Anand, Siddharth Rath, and Piyush Joshi) belonging to the Commission for Agricultural Costs and Prices (CACP), which is a part of the Ministry of Agriculture, points out "For the quarter ending March, 2012, FCI employed 1.55 lakh workers out of which 1 lakh are contract workers, 19441 are departmental labour, 30112 are Direct Payment system (DPS) workers...The average handling cost per metric tonne for FCI for 2010-11 for contract labour was Rs 41.4 while for departmental labour, it was Rs 311.1 (7.5 times the cost of contract labour) and for workers under the DPS it was Rs 136.9 (3.3 times the contract labour). This indicates contractual labour of FCI were the least expensive.
However, the Ministry of Labour and Employment, has prohibited employment of contract labour in the depots of FCI."
So what this means that in the years to come contract workers and direct payment system workers are likely to be regularised. This will raise costs of labour by three to seven times. This extra cost will have to be borne by the central government. This again means higher expenditure for the government and hence a higher fiscal deficit.
Expenditures like this one are not taken into account when the jholawalas in favour of food security point out that the right to food security will cost Rs 1,00,000 -1,20,000 crore per year. As this writer mentioned in a column yesterday, the CACP find this estimate of the government, just the tip of the iceberg. This expenditure does not take into account "additional expenditure (that) is needed for the envisaged administrative set up, scaling up of operations, enhancement of production, investments for storage, movement, processing and market infrastructure etc."
The CACP estimates that "the total financial expenditure entailed will be around Rs 682,163 crore over a three year period." Imagine what this will do to the fiscal deficit of the government along with fuel and fertiliser subsidies and NREGA. What do the jholawalas have to say about that?
3. The right to food subsidy is currently structured as an unlimited subsidy. The government will buy as much rice and wheat the farmer can bring to it to sell. In fact, given the scope of the right to food security the government may have to buy as much rice and wheat that it can lay its hands on. But with the government buying huge amount of rice and wheat, what will it do to the availability of these grains in the open market? What will be the impact on their price? Are these questions even being considered?
In fact this is already playing out over the last few years. As the CACP report points out "Since 2006-07, the procurement levels for rice and wheat have increased manifold... Currently, piling stocks of wheat with FCI has led to an artificial shortage of wheat in the market in the face of a bumper crop. Wheat prices have gone up in domestic markets by almost 20 percent in the last three months alone (in the three months upto December 2012, when the CACP report was released), because of these huge stocks with the government that has left very little surplus in markets." CACP expects this phenomenon to get more pronounced if Right to Food Security Bill becomes an act.
4. Increasing nutrition is a major goal of the Right to Food Security Bill. But the way it is currently structured it will work against this goal. As an editorial in the Indian Express points out "In fact, the food security bill will do little to genuinely address the real nutritional needs of the nation, but will distort the grain market, and saddle the system with yet another legal entitlement that cannot be undone. NSSO (National Sample Survey Office) data shows that per-calorie food consumption is falling not because large parts of India cannot feed themselves basic grain, but because they are turning to better food like protein, vegetables, tea etc."
But with the farmers getting a fixed price for rice and wheat they are less likely to produce other food products. As the CACP report points out ""Assured procurement gives an incentive for farmers to produce cereals rather than diversify the production-basket...Vegetable production too may be affected - pushing food inflation further."
5. In fact state governments are already trying to procure more and more grain than they had in the past. As the Business Standard editorial referred to earlier points out "Bihar, only a marginally wheat surplus state, has this year set up more grain procurement centres than the major wheat-growing states of Punjab, Haryana and Uttar Pradesh put together. These, obviously, are trends that need to be restrained. One of their untenable fallouts is the mopping up of the wheat surplus in the peak season by the government, which is tantamount to virtual nationalisation of the foodgrain business."
This is something that even Indira Gandhi, the biggest political socialist that India has ever seen and the biggest jholawala of them all, tried to do in 1972-73 and failed miserably. She nationalised the wholesale trade in food grains, a decision which had to be reversed in a few weeks as it lead to escalating prices and total chaos. Indira Gandhi made big blunders as Prime Minister of India, ramifications of which are still being borne, but this was one prospective blunder she corrected quickly. This can be a source of inspiration for Manmohan Singh and the jholawalas who advise Sonia Gandhi, because the virtual nationalisation of foodgrain business will be disastrous.
As the CACP report points out "The government already procures one-third of the cereals production and any increase in procurement will have enormous ramifications on the cereal economy/markets and would crowd out private sector operations with a consequent effect on open market prices."
6. The jholawalas in favour of right to food security keep pointing out towards the success of public distribution systems in states like Tamil Nadu and Chattisgarh. What they do not realise is that if Right to Food Security Bill becomes an Act, the central government will prevail over the state governments. "Once the Act comes into effect the existing schemes pursued by the states will suffer considerably...The National Food Security Bill(NFSB) however creates a new statutory framework governing the public distribution system (PDS). PDS systems in states will have to first comply with the NFSB and in the event of a conflict...the provisions, rules, regulations and orders issued under the NFSB will override." Hence, systems which have been successful in states may not be in operation anymore.
To conclude, the right to food security will usher in an era of very high food inflation ( as if its not high already). It will also push up government expenditure and in turn its fiscal deficit. This will add to inflation. As Ashok Gulati, the Chairman of the Commission for Agricultural Costs and Prices and Shweta Saini an independent researcher, write in a research paper titled Taming Food Inflation in India "Based on the empirical results of the econometric analysis, it is suggested that the policies to rein-in food inflation will foremost require winding-down fiscal deficit, which has gone (above 8 percent of GDP for Centre and States combined)."
The right to food security will work exactly in the opposite way and push up food and overall inflation, which in turn will hurt those it is expected to benefit.
Vivek Kaul is a writer. He tweets @kaul_vivek
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