Has the Food Security Bill sent shockwaves through our stock markets? Why is there so much panic?
Obviously there is panic in the market and this has led to a crash. But there are several reasons for that. One is the announcement by the US Federal Reserve Bank Chairman that they will slow down their 85 billion dollar per month stimulus programme which has affected economies across Asia and in fact, all around the world. To add to this worldwide panic is the fact that our own economy is not doing too well. Crucially, we have large borrowings that are more than what we spend. This leads to a big current account deficit. In this scenario, some of the investors that have pumped money into India are thinking of holding back since the US economy is doing better. Some foreign institutional investors (FIIs) are pulling out of the Indian market because they feel that the price of the rupee tomorrow could be less than it is today. Some of these fears are not valid. And the fear that the bill is somehow going to make a massive dent in our deficit is entirely misplaced. Our current account deficit is a little over 4% of our country’s income (GDP). Compared to that, all of our subsidies – oil, food et al taken together are half of that – 2% of the GDP. The food subsidies as they stand right now are only 0.8% of the GDP. With the new food bill, this will go up by, at most, another 0.15% to 1% of the GDP.
But if the markets have reacted this badly, surely it’s based on some sort of perception that the food bill will negatively impact the economy? Aren’t markets driven more by perception than anything else?
Yes, there are perceptions that may have influenced the market irresponsibly into believing that the food bill will add much more to the deficit than it will actually do. These include articles written by people like Surjit Bhalla and Ashok Gulati who have either inflated the cost of the food subsidy greatly or added to it other suggested investments in agriculture. When a market investor reads this, she or he will account for the worst case scenario in their mind and this may have shaped some perceptions in the market.
If food subsidies aren’t taking the economy down, what is?
Firstly, it is not true that our economy is sinking. Our GDP growth stands at 4.8 to 4.9%. Yes, there was a glorious period for about 5 or 6 years from 2004 to 2010 when our growth rates hovered between 7 and 9%. But it has never been that high in the history of independent India. However it is true that at 4.8%, our growth rate is now at the lower end of the average since 1991 when our economy first opened up to world markets. But even at this growth rate, we are better off than most economies of the world, except China. We are still in the top 10 and have not been downgraded yet. Where we are weak is our current account deficit or borrowings versus current spending. Most countries, even in Asia, have a positive current account and ours has historically been a deficit one. This makes us vulnerable to what happens in the world market. Our deficit is largely because we import vast quantities of gold and oil.
Isn’t it true though that people invest in gold because it is more stable and gives better returns than either the banks or the stock market?
That is not entirely true. But alongside that, yes, there is one area where the government is weak, which drives people more and more to invest in gold. And that is rising inflation. One way to bring inflation down is for the Reserve Bank of India to push up interest rates. But when the RBI governor tried that, he was shouted down by many of the same people who also critique the government for spending on subsidies and crib about paying taxes. So if the government must not hike interest rates or increase its tax base, how is it to curb inflation? This critique of a section of the affluent class is irresponsible.
How much more will be spent if the new Food Security Bill becomes a law?
There will only be an additional 15,000 crores spent. Let me put it this way. This food bill will feed an additional 22% of India or an additional 250 million people. It will distribute grains to 67% of the country as against the 45% that access the PDS (Public Distribution System) right now. The cost of feeding these extra 250 million people is equivalent to the cost of building 5,000 flats in a rich suburban building complex like the DLF flats in Gurgaon, for instance.
Will India need to import food if the bill becomes a reality?
Even if it’s a relatively small amount, the food bill can potentially add to the existing deficit can it not? How can this be pared to the absolute minimum?
The food bill is not likely to make a dent in India’s current account deficit. Still, the spending on the bill can be reduced further if we don’t keep such large stocks of grain in our godowns. We should reduce the stock to a point where it helps the price of foodgrain stabilise and remain static. If too much foodgrain is released into the market, it will reduce prices and that will hurt farmers. So that’s not a good idea. But if just sufficient quantities of food stock is released into the market to keep prices static, that will be a good way forward. It will curb inflation and reduce the spending on storage of grain, thereby reducing the overall food bill.
What can be done to make our food distribution more efficient?
Our food distribution system as it stands, the PDS, has been improving over time. The National Sample Survey data for 2011-12 shows that in the one state that was considered the worst performer in food distribution, Bihar, things have changed dramatically. Where the leakage of food grain used to be 90%, 2011 data shows this has now come down to just 20%. This is because the state government of Bihar has started spending on the PDS. In 2004, only 14% of the people of Bihar bought grain through the PDS or from ration shops. Now that’s gone up to 45%. And if we look at the same figures for India as a whole, in 2004, just 25% of our people bought from ration shops and now that has shot up to 45%.