Food subsidy spends could go upto 1.1% of GDP

A higher poverty count as outlined by the recently accepted Tendulkar committee report and providing for extra poor families under the proposed food security Act would entail an additional food subsidy spend of an estimated Rs 60 billion, pushing up the total food subsidy bill to about 1.1% of the GDP in FY2010-11 and posing a 0.3% of GDP upside to total spending and the fiscal deficit, a recent study of the country's food subsidies has said.

Significantly, the end April study has projected this on the premise that the Centre's food subsidy bill for FY 2009-10 could be actually be as high as Rs 722 billion, a good 30% higher than the Rs 560 billion (Rs 56002 crore) RE mentioned in the 2010-11 Budget and an even higher 65% increase over the subsidy cost of Rs 437 billion pegged as food spend for FY2008-09.

Interestingly enough, Budget 2010-11 pegged food subsidy at even lower than the official 2009-10 levels, at only Rs 55,578.18 crore (BE) compared to a higher Rs 56,002 crore (RE)for 2009-10. Given the sharp difference between the "actual" food subsidy of Rs 722 billion estimated by the researchers and the official level of Rs 560 billion (RE) for 2009-10, the study has chosen to add the additional food subsidy spends estimated on account of the food security bill provisions to the former to arrive at projects of impact on both food spends as a percentage of the GDP and fiscal deficit.

The findings come against recent assertions by other sectoral analysts that the share of food subsidy to poor families (Below Poverty Line or BPL and consumer families of the Antyodaya Anna Yojana or AAY) has been decreasing, plunging to only 80% of the total subsidy under the Targetted Public Distribution System (TPDS) in 2008-09 compared to 82% of total subsidy in 2007-08 and 84% of the total subsidy in 2006-07.

The study (Food Subsidies in India: a new fiscal risk) has pegged the incremental cost of food subsidy with the Food Security Bill provision and on the basis of the new poverty estimates for the Below Poverty Line (BPL) families at Rs 63 billion, including a subsidy for grain per month at Rs 17/kg (at a total of 35 kgs per family) , issue price at Rs 3/kg and a subsidy per month per family (of four) and annual subsidy per family at Rs 595 and Rs 7140 respectively. While the Planning Commission's poverty estimates only pegged the BPL consumer families at 65.2 million, the Tendulkar Committee has pegged these at 74 million. Accordingly, the difference between the annual subsidy estimated by the former and the latter (Rs 466 billion and Rs 528 billion respectively) is pegged at around Rs 62 billion.

"Our estiamte may be an upper bound as far as riks to the deficit is concerned as procuremetn cost and quantity could be lower this year due to a better monsoon or less need to build governmetn food stock reserves. Still, the discussion above clearly illustrates that t non-trivial upside risk to the spending envelope has risen due to the governemtn's intention to expand the scope of its food subsidy program," the study by Deutche Bank (Asia Economics Special) has emphasized. In recent years, it points out, food subsidies have averged 3/4 percent of the GDP, makin up about 5% of the total government spending. Recnet policy developments expanding the number of eligible households under the subsidy umbrella and a hike in the per capita subsidy portion (to 35kgs) would both push up both total food spends and the fiscal deficit "from the present official projections," the study contends . "The increase in the BPL family headcount as well as the wider scope for per caipta subsidy will clearly raise the food subsidy bill going forward," the study holds. It contends that the quantity and prices at which foodgrain is being made available to these target groups under the PDS "are more generous than what was initially proposed by the government last year. As a result, the overall cost of the initiative will rise on a per capita basis."

Food subisdy cost (the difference between the economic cost of holding grain and the issue price to consumers) has already trebled from 2002-03 levels as the former (including purchase price of grain, taxes, transport, handling and storage charges) has increased persistently ove rthe last few years while the latter has remained unchanged since 2002. Moreover, the Centre's procurement of grains has increased substantially and at a higher economic cost in the last three years, pushing up grain buys sharply since 2007-08. "

[Source: The Economic Times, New Dehli, 02May10]

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