Why food security bill makes economic sense
If it is assumed that an additional 30 crore people would get the cheaper food, the demand for other items of consumption would rise significantly, giving the sluggish economy a boost. Arun Kumar writes.india Updated: Aug 27, 2013 16:34 IST
The National Food Security Bill (NFSB) has raised a political storm in India. Many are worried about what its impact would be on farm prices, the growth rate and questions are being asked whether there would be a sharp rise in the subsidy bill and inflation rate once the NFSB is implemented. Such confusion persists because analysts ignore the impact the Bill will have on the economy.
Hunger is not an individual problem but has its roots in the country’s macroeconomics: the nature of employment generation and the terms of trade between agriculture and the other sectors.
The government, through its policies, determines these macroeconomic variables. For instance, in spite of high growth after 2003, hunger persists. Only the government can provide the correctives and end hunger. So the NFSB is only a corrective measure to the other policies being pursued by the government; it does not solve the basic problem of income generation.
The NFSB will also raise demand for other goods and give the sluggish economy a much-needed boost. This is because the availability of cheap food grain will lower the food bill of families and they would spend the extra amount thus saved on other items. This amount could be substantial since the poor spend 50–60% of their budget on food.
If it is assumed that an additional 30 crore people would get the cheaper food, the demand for other items of consumption would rise significantly, giving the sluggish economy a boost.
The rate of inflation for the poor would also fall. But because the total consumption of food would rise, the free market price would also rise. That would hurt those not covered by the NFSB, like the lower middle classes.
The immediate rise in inflation, however, would be small because as of March 1, India’s 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 was only 27 million tonnes. The higher free market price would lead to a higher price for the farmers and this could lead to an increase in supply in coming years.
Some argue that the poor do not need more food grain but require other items of food. This is partially correct. Food grain availability (proxy for consumption) in India peaked in 1991 at 510 gms per person per day and declined after that (in 2001 by 18%).
This has been attributed to a shift in the consumption pattern. Whenever the monsoons have been bountiful and food prices have dropped, consumption has gone back to around 500 gms. This suggests that the consumption pattern has changed little and the need for more food grains remains substantial. The NFSB would help the poor stabilise their consumption.
It is estimated that the subsidy bill on food would be around Rs 1,25,000 crore (around 1% of GDP). The additional amount over and above the current expenditure may be around Rs 30,000 crore. But, the requirement of storage would decline since food grains would be distributed rather than kept in the open where they rot, and that would reduce the subsidy. The real problem would be corruption and the identification of additional families to be covered and delivery to them. In macroeconomic terms, the NFSB is desirable (with some amendments) and would reflect the nation’s commitment to its citizens.
Arun Kumar is Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University. The views expressed by the author are personal.