Implications of India's proposed food security law

Text Size + -

July 21, 2010 11:08 AM EDT

India's ruling Congress party is pushing for a law to subsidise grains for the poor, a move that will impact government finances as well as political support for the party ahead of key state elections that begin in October.

The bill, proposed by Congress in its election manifesto last year, will be debated in parliament when it sits next week. But it is uncertain whether it will be passed into law this session.

The proposal appears to run counter to recent reforms by the government, which lifted subsidies on fuel prices, but aims to partly shield a substantial voter base from surging inflation in a country where about 40 percent of the 1.2 billion population lives below the U.N. estimated poverty line.

Here are a few questions and answers about the bill.

WHAT IS THE FOOD SECURITY BILL?

Food inflation is a nagging problem in India, eating into disposable incomes. India has 410 million people living below the U.N. estimated poverty line of $1.25 a day. The left-of-centre Congress, which heads India's ruling coalition, says it wants to insulate the poor against inflation by guaranteeing cheap grains such as rice and wheat.

Must Read

Sponsorship Link

Like us on Facebook

The food security draft bill envisages making available 25 kg (55 lb) of grains a month for 3 rupees (6 U.S. cents) a kg to the poor across the country. But an advisory council headed by powerful Congress chief Sonia Gandhi has suggested the amount of subsidised grains per month be increased to 35 kg. The council has also recommended that, initially, everybody in about 150 districts, which are the poorest of the country, be covered by the scheme. The subsidy will then be extended to the poor in the rest of the country. These proposal are likely to be accepted by the government.

WHAT IS THE FINANCIAL IMPLICATION?

India already provides cheap grains and pulses to nearly 180 million poor or low-income families through a public distribution system that will cost nearly $12 billion in the year to end-March 2011, accounting for about 1 percent of GDP and 5 percent of total government spending.

Although there are no official estimates yet, the new scheme will definitely add to the subsidy burden. A Deutchse Bank report said the incremental cost could be about $1.27 billion, raising total food subsidy costs to around 1.1 percent of GDP in the current 2010/11 financial year and widening the fiscal deficit.

But Montek Singh Ahluwalia, the deputy chairman of India's Planning Commission, has said the proposed food security bill will not lead to any breach of the 2010/11 fiscal deficit target.

The government wants to bring down the fiscal deficit to 5.5 percent of GDP in FY2010/11 from 6.9 percent in the previous financial year.

WHAT IS THE POLITICAL SIGNIFICANCE OF THE BILL?

The proposed bill, a brainchild of Gandhi, is a flagship programme of the Congress party around which it hopes to bolster its support among the rural poor. In its first five-year term in office in 2004, the Congress-led alliance pushed through a rural jobs guarantee scheme benefiting millions of people in the countryside, which largely contributed to the party's strong election victory last year.

The Congress is hoping the food security bill will have the same result at a time when India's headline inflation is hovering above 10 percent, triggering public discontent. With a series of state elections coming up over the next year and starting in October, the government is fearful of voter backlash over high prices.

The bill contrasts with Congress' push to liberalise the economy, but the government hopes it will build a food safety net for the poor to help cushion the blow of other reforms such as lifting pricing controls on fuels, which will likely raise inflation.

The bill is expected to generate debate in parliament when it sits on July 26, but no party is likely to oppose it the overall idea. It is not clear, however, when parliament will ratify the bill into law.

WHAT ARE THE CHALLENGES TO IMPLEMENTING THE PROPOSAL?

The existing Public Distribution System is widely seen as inefficient with corruption leading to food meant for the poor being diverted to retailers. Many fear a new food security scheme may also bypass the intended beneficiaries. Tonnes of grains are also wasted due to inadequate supply chains and lack of storage facilities.

But the real challenge to widening a subsidised food scheme is an uncertain output from the country's rain-dependent agricultural sector. India's anxiety over erratic monsoon rains will become more acute as rising incomes and a growing population push up demand for produce faster than supply, turning the nation into a major importer within five years. Growth in India's grain output has fallen back in recent years, slowing steadily from a spectacular jump of 50 percent in the 1970s after the Green Revolution that boosted India's grain yields.