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Strategy
GameChanger
Food security bill: there is no free lunch. Our analysis of the draft of the National
Food Security Bill as cleared by the EGoM suggests a total food-subsidy burden of `827
bn, significantly higher than the `606 bn provided for in the FY2012 budget. There are
substantial challenges in procurement, logistics and identification of beneficiaries. Given
the experience of MGNREGS, where government as a large procurer increased wages
dramatically, we worry about the prices of grains in the open market.
Two-thirds of Indians to be covered: as proportions remain same, numbers will rise
The recently cleared National Food Security Bill, expected to be introduced in the Parliament during
the monsoon session starting August 1, proposes to cover 67% of India’s population, down from
78% as proposed by the National Advisory Committee, or NAC. The bill legally entitles individuals
from ‘priority households’ to 7 kgs of subsidized grains a month and individuals from a proportion
of ‘general households’ to 3 kgs of subsidized grains (see Exhibit 1). As proportions remain the
same, the numbers of Indians eligible under the scheme will rise over time (see Exhibit 2).
Government to procure more than 62 mn tons of grain, subsidy bill at `827 bn
Without accounting for wastage across the logistics chain but taking into account other
government schemes (mid-day meals, ICDS, etc.) and some minor buffer (‘for consecutive drought
years’), we estimate government procurement to be more than 62 mn tons of grains annually (see
Exhibit 3). The direct subsidy bill for the same (given current prices) is estimated at between `540
bn and `590 bn (see Exhibit 4) and the overall subsidy bill (including logistics cost and interest) is
expected to be `827 bn: we see significant upside risk to this as government procurement itself
raises prices. This compares with the `606 bn provided as food subsidy for FY2012E (see Exhibit 5).
Significant crowding out of private operations in grain market: possible price impact
With the government now expected to mop up 59% of marketable surplus (see Exhibit 6) in
wheat and rice (to say nothing of coarse cereals), we expect the government action may distort
prices. We have seen this earlier when the government increased procurement by increasing
minimum support prices (MSPs) over FY2007-09 (see Exhibit 7). This is also visible via another
government scheme, the MGNREGS which has caused significant rise in wages (see Exhibit 8).
Challenges across the value chain: procurement, logistics and identification
Procurement challenges like (1) lack of APMC mandis, (see Exhibit 9), (2) inadequate storage
capacity compared to current and required stocks (see Exhibit 10) and (3) significant wastage in
the value chain (see Exhibit 11) can raise the cost of honoring the legal entitlements under this bill.
It is widely expected that the unique identification (UID) number can help better targeting;
however, it will take a few years before they are completely rolled out in the country. We are also
concerned that the proportion of people to be covered remains constant over time—thereby still
continuing to entitle people who may grow affluent as India’s economic growth continues.
Freed-up wallets in rural India may stoke demand across other categories
Anecdotally, there have been many unintended effects of another far-reaching scheme of the
government, MGNREGA including shortage of labor and significant boost in rural demand. We
expect that such unintended effects may ensue from the implementation of this scheme: we
estimate that even at the 75th percentile of rural Indian incomes, there will be 10% savings on
their consumption expenditures and hence more so for poorer people: this can
further create a more buoyant rural demand. The increased rural demand and government
intervention may create sustained inflationary pressures.
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