Wednesday, August 28, 2013

Impact of the Food Security Bill on the Indian Budget

The past couple of weeks have been extremely painful for the Indian Investor and the Indian Economy as a whole. In a couple of weeks, the Sensex is close to 17000 from its 19000 levels and the Rupee is on the verge of breaching the 70 mark against the US Dollar. Things do not look good for the Indian Investor. Personally, I feel that the market will be volatile in the next 3-6 month time frame. To top this all off, our MP's have passed an ambitious food security bill this week in the Parliament and are trying to take credit for the same since elections are due next year.

At a high level you must know already that the food security bill is something to do with economic subsidy for the less privileged and the government will foot the bill. The idea behind this article is to go over the key impact this food security bill will have on the Indian Budget.

So, What is this Food Security Bill?

The Food Security Bill guarantees 5 kg of rice, wheat and coarse cereals per month per individual at a fixed price of Rs 3, 2, 1, respectively, to nearly 67% of the population.

Food is one of Man's most basic needs and the government is trying to make it more accessible to the people who are on or below the poverty line. This is an ambitious attempt and personally I feel that this scheme will be useful to the low-wage earners in our country if implemented properly. Anyways, how it is implemented or whether it will be implemented properly is not our concern from this articles perspective. Let’s worry only about the Economic impact.

So, how much will this Food Security Bill cost our Government?

67% population means around 85 crore individuals (Assuming our population as 130 crores)

The selling price of any average quality Rice is around 20 rupees per kg. So, if the Government is planning on selling it at Rs. 3 per kg, then the difference Rs. 17/- will be the subsidy the government is offering. So, for 5 kgs the subsidy is Rs. 85/- per person. For 85 crore people imagine how much subsidy the government has to give. You can take the average selling price of all these items that come under this bill, subtract the selling price from market price and voila, you will end up with the total subsidy per person.

The highlight is, this is on a monthly basis. Which means, the government will incur this subsidy bill every month and forever.

A guideline estimate by the Government suggests that the overall impact this Food Security Bill will have on its exchequer will be around 1.2 lakh crores. Economists and industry experts feel that this estimate is highly optimistic and may go up to 2.4 lakh crores.

A point to remember here is that, this estimate is just for the subsidy the government will be offering. The additional expenditure that is required to set up system through which this scheme will be brought to the common man, setting up operations, movement of the food grains, storage of the grains and so on is not part of this estimate. If we include all those factors the actual bill the government will foot will be much higher than this estimate.

Another important point to remember here is that, the food security scheme is an open ended scheme. This means that, there is no end date or expiry date for this scheme. It will be a never ending phenomenon that covers 67% of our population irrespective of whether they need that subsidy or not. This means, as our population goes up, the expenditure too would keep going up.

What is the Government Saying about this huge expenditure?

The government is using our GDP for comparison purposes and is saying that the expenditure for this Food Security Bill will be between 2-3% of the nation’s GDP. 2 to 3% doesn’t sound big, right???

Is this a fair % comparison?

After reading the last line you may have thought, 2-3% doesn’t sound so big. What impact would that have...

Did you think that?

GDP stands for Gross Domestic Product and is the total value of all goods and services that are produced within our country. It does not refer to the total amount of money the Indian Government earns through taxes and other revenue channels. Now, go back and read the claim in the previous paragraph and think if this 2-3% is a reasonable comparison.

I am sure you will agree that a more accurate comparison would be as a % of the country's total income.

So, what is our country's total income?

The projected Income for our country in the financial year 2013-2014 is around 11.2 lakh crores. This is the difference between our total revenue/earnings and the loan interest & repayments we do from the various entities we have borrowed money from.

So, 1.2 lakh crores as a % of 11.2 lakh crores works out to 10.7% and if we take the higher limit estimate of 2.4 lakh crores the % soars to 21.4%

The government is proposing to spend between 10-20% of its gross income to meet the cash needs of this Food Security Bill. This scheme will put immense pressure on the nation’s fiscal deficit.

Fiscal deficit is defined as the difference between what a government earns and what it spends.

How will this extra expenditure be financed?

If the government has to spend 10-20% of its income on this scheme, it means that the corresponding amount has to be reduced from other schemes like Infrastructure projects or educational projects and so on. The nation’s income is not going to go up by 20% to meet this additional cash requirement overnight. So, the finance ministry will have to either borrow to meet this additional cash demand or cut expenses on other projects to accommodate this.

Given that our economy is in a bad place right now, hiking taxes is not a good option. Add in the fact that we have elections next year; the option of hiking taxes is ruled out. Budgets for most projects for the next few years are also allocated and earmarked from our revenue and hence cutting expenditure too is ruled out. So, the only option available for the Government is to "Borrow"

Schemes like National Savings Certificate (NSC) or Infrastructure Bonds etc. are classic examples of Government Borrowing.

So, to summarize, the Government is planning to borrow many more lakhs of crores in order to fund this ambitious scheme. As you may have guessed by now, this will have a significant impact on the Indian Economy as well. We will be covering that in our next article...

Disclaimer: The idea behind this article is not to cover the political motives of either the ruling party or the opposition. This article is my personal opinion about this Food Security Bill purely from an investment and economic stand point. The author does not guarantee the accuracy of any of the claims in the article.

1 comment:

  1. Thanks for wonderful, easy-to-understand write up. I was wondering how the food security bill will affect our economy & thanks to your article, I have an idea now!!


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