Friday, August 23, 2013

Food Security Bill Will Create More Fiscal Problems

Food security plan to increase govt's fiscal stress: Bimal Jalan--ET 23.08.13

MUMBAI: Former Reserve Bank of India(RBI) governor Bimal Jalan has raised red flags on implementing the government's food security plan at a time the economy is battling fiscal stress, joining a chorus of influential voices sounding caution on the legislation, widely expected to be a money guzzler. 

Jalan, who spent time in Parliament as a nominated member after stepping down as RBI governor in 2003, said that while the food security idea was noble and had his support, it was important to launch it when the government can manage the large costs associated with it. 

"If he (finance minister P Chidambaram) is trying to contain the fiscal deficit and control expenditure, it is important to look at the costs of financing such a programme, especially when the economy is not in a good shape," Jalan told ET in a telephone interview. His comments come a day after the RBI also sounded a warning to the government on the viability of the proposed Food Security Bill, a legislation that will ensure cheap food to nearly two-thirds of the population and which the Congress-led UPA is determined to push through Parliament in the ongoing session. 

The proposed programme -- the largest of its kind in the world -- will guarantee 5 kg of rice, wheat and coarse cereals each month at highly subsided rates. The annual cost of providing this has been estimated at 1,25,000 crore when fully implemented. 

The government, which has already birthed the food security legislation by way of an ordinance and has launched it in Congress-ruled states, has budgeted just 10,000 crore this year for it, raising fears about the fiscal impact of this measure when rolled out fully. 

A raft of experts has weighed against the plan in recent weeks. Economic forecasters in entities such as Morgan Stanley, Nomura and Crisil have warned that this spending programme, when fully implemented, will add to the country's fiscal deficit. Former finance minister Yashwant Sinha and his Cabinet colleague in the NDA government Arun Shourie have torn into the government on this issue, saying that it would severely damage government finances. 

Finance minister P Chidambaram promised on Thursday too that the government will meet its current and fiscal deficit targets for this fiscal year to end-March 2014. The government has projected the fiscal deficit at 4.8% of GDP while the estimate for the current account deficit is $70 billion. Some analysts and opposition leaders say the food security plan, a pet legislation of Congress president Sonia Gandhi, is being pushed through keeping in mind the next general elections, due in the first half of 2014. They liken it to the farm loan waiver scheme announced by the UPA-I government ahead of the 2009 elections, which had a knock-on impact on the country's balance sheet and is said by many as having helped the Congress to come back to power. 

Jalan, a chief economic advisor to the government during the Rajiv Gandhi years, said that it would be unfortunate if the food security plan was being determined by electoral considerations. "If that is indeed the case, it won't be the right thing to do," he said
The former RBI chief, who held office during the time of the Asian crisis of 1997-98, said that it was important at this juncture to ensure that spending on investment is not cut. Cuts in spending should be aimed at revenue expenditure, essentially spending on interest payments, subsidies and salaries, all items that do not lead to asset creation in the economy, he said. 

The RBI, in its annual report on Thursday, said that while the impact of the food security ordinance on food subsidies is manageable for 2013-14, in the years to come it will add to the fiscal deficit. "Over the next few years, the growing subsidies could restrict investment opportunities, including those in the agriculture sector." 

In a recent research note, Nomura had said that the medium-term consequences of the Food Bill will be far-reaching and estimated that the programme could raise the government's food subsidy burden to 1.0-1.2% of GDP annually from 0.8 % now.


Food Security Bill will eat into finances, growing subsidies to hurt investments: RBI--ET 23.08.2013

MUMBAI: RBI has weighed in on the ongoing debate on the viability of the proposed Food Security Bill, warning the government would find it difficult to contain spending on the proposal within the budgeted amount even in 2013-14. Further, the central bank, which released its annual report on Thursday, also asserted that the rise in the quantum of subsidies would hamper investments

The Centre plans to spend 90,000 crore on food subsidy in 2013-14, of which 10,000 crore is earmarked for the National Food Security Bill, which aims to provide foodgrain to poor families at subsidised rates. The government issued an Ordinance before the monsoon session, but it is yet to be ratified by Parliament. 

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