Tuesday, July 30, 2013


Part 3



(Neither a welfare measure nor a novel idea)

FSO (Food Security Ordinance) is devoid of elementary principles of economics. It is based upon virtually ‘free’ supplies of rice/wheat/coarse grain, while nothing is “free” in life and the world. Theoretically, if everything is provided free to all, work culture will disappear, production/supply of goods will vanish and the national economy will be defunct. There is no free lunch for ever!!
It offers “grains” and not “welfare” to poor man. Nine out of ten persons will want money/cash which they can spend at their discretion or as per their “choices” of necessities in life—be it education, healthcare, house, travel etc.
Neither is it a novel idea as drummed about. It is merely an extended version of TPDS ( Targeted Public Distribution System)  except that prices of grains which are Rs 5.65/kg ($0.1) for rice and Rs 4.10/kg ($0.07) now are reduced by about 50%.
PDS is managed by the Central Government through FCI and state procurement agencies, which is a dysfunctional mechanism riddled with 50% leakages, corruption at the procurement and distribution centres, poor storage, lack of warehousing and burdened by costly bureaucratic set up. FSB/FSO will further exacerbate this.
Diversion intensified.
Poverty also does not mean absence of common sense.  Hence, low priced grains will be resold to make money in open market at better prices. Most of the paddy/rice is stored with millers, which can easily be manipulated by the millers, while being shown as stocks on paper only as experienced by the Government in previous years. Wheat has to be milled for flour—which can also be traded by the beneficiaries when the market price will be 10 times the subsidised price. The system is made prone to unscrupulous leakages. Policy makers then blame people for corruption, but the reality is that the policy making is bankrupt of solid and workable ideas!

Leakages confirmed by CAG and NSSO data
As per CAG report, 14 million tons of wheat and 16 million tons of rice (Total 30mill tons) were released for distribution under TPDS during the year 2009-10. While NSSO data states that the households reported actual consumption of PDS grains (rice and wheat) at 13.50 MMT. The differential quantity of 16.50 MMT (55% of the quantity released) remains unexplained, confirming large scale leakages from the system.

 Not pro-investment but pro subsidy
        I.            Beneficial programs will be of productive investment rather than leaking subsidies. Assuming 6,00,000 crores or $100 billion is incurred in three years –—about $50 billion will be siphoned off by unscrupulous means without accountability. 
      II.            Subsidy is a “pricing” policy—while CCT is a “monetary” policy. Pricing policy is consumptive with massive leakages. Monetary policy ensures direct delivery to beneficiaries and benefit of “choices”.

    III.            Unfortunately, UPA-2 is proudly claiming to have increased food subsidy from Rs 25000 crores ($4.2 billion) –five times to 125000 crores ($21 billion) as a social welfare measure, which is adverse for the economy-- worsening the fiscal deficit from 2.5% in 2008 to 6% in 2012.

Finance Minister urges for de- monopolising

On 20th May 2013, Finance Minister had asked Competition Commission of India to suggest the manner in which the state monopoly in grains can be corrected; private participation can be enhanced and that discovery of market price is not affected by Government policy. Even FM is not the same page with FSO in the real sense.
Market distortion

        I.            Central Government prides itself for fixing “MSP” for benefit of farmers, undertakes massive procurement of wheat and paddy/rice, provides subsidies and fiddles with export-import regime. States shower bonuses, decide about local taxation/movement, undertake decentralised procurement and enforce discretionary levy obligations etc.  All these create market distortion.
      II.            These dual power centres with arbitrary interventionists’ powers substantially distort the market and crowd out private players. Market essentially is the continuous and collective intervention of millions of minds. All bureaucratic rules emanate from the tunnel view of officialdom and political compulsions/coterie, which miss the larger picture and become obsolete with every passing day.  Streamlining ambiguities in trade of perishable commodities over the last 50 years is the call of the day.
    III.            Wheat and rice producing states can milk the Centre by discretionary levy of local taxation on grains even higher from the existing level of maximum 14%-15%. What if Punjab and BJP ruled states of MP and Chhattisgarh raise the taxes on wheat and rice to 25%?? And why should they not when they know the centre cannot implement FSO without their procured grains. 

    IV.            Prices can be right if markets are right. If markets are misleading, then prices too will be distorted. FSB/FSO makes Government as the monopoly of grain trade. Market prices will be therefore distorted with round tripping and mismanagement. Markets “need “to be set right. But FSB/FSO  puts parliamentary stamp in perpetuating flawed production, procurement and distribution policies.

Withdrawal of subsidies creates social unrest

      V.            It demeans human dignity and shambles the economy. It is easier to introduce subsidies or interventionist policies. But their subsequent withdrawal can create social unrest and be politically highly unpalatable as can be seen from the mess in which Thailand has made for itself under price pledging scheme.
All grains potentially marketable surplus
FSB/FSO makes all grains produced “potentially” marketable surplus.  Farmers, under the open ended procurement scheme shall bring Wheat, Rice, and Corn to the state agencies which are obliged to purchase them at minimum support price.   This price may vary between Rs.13.00 to 15.00 per Kg.  The farmer is not under any compulsion to stock grains at his premises.  Instead they can buy the same grain at ration shop under Rs.1-2-3 formula whose economic cost may be Rs.20 per Kg. 
Super subsidy by states
State Government like Karnataka, Tamil Nadu, Andhra Pradesh, and Chhattisgarh are distributing Rice at Rs.1.00 per Kg.  Under FSB/FSO, any extra quantities “currently” supplied by them over and above their present entitlement (say 90%-100%) will be made available by the Central Government subject to the difference of Rs.1.00 or 2.00 per Kg to be incurred by the State Government.   State Governments are further encouraged to buy extra grains from the open market and supply to the targeted beneficiaries under Rs.1-2-3 formula.  Subsidy of Rs. 17-18 per Kg will be borne by the state in such an operation.  State Government will exploit the poverty program incentivized by the Centre further promoting recycling of grains, rent seeking and sleaze.

Friday, July 19, 2013


Part 2

Tejinder Narang


(Net effect of FSO is to increase consumption by 1 kg per person per month to 3.1kg per person per month from the present 2.1kg per person per month—for which beneficiaries are expecting bonanza and UPA is claiming credit. Fiscal health of the Nation is threatened while it will make little difference in the real sense)

Electoral compulsions of 2014 demand political populism for Congress led UPA. A think tank—National Advisory Council (NAC)--headed by Sonia Gandhi made recommendation for National Food Security Bill (FSB) in 2009.

The mandate of policy planning, feasibility, statistical determination, subsidy/investments/ returns thereof and final estimation in any economic environment is the forte of Indian Planning Commission. In the absence of reliable data/ conclusions of the Commission, numerous numbers are floating in the media articulated by respected economists and research agencies based upon diverse indicators of Government agencies. It appears that country’s planning commission is not privy to the detailing of this FSO.

1) Poverty, not necessarily means hunger.

NAC, which is neither accountable to the Government nor Parliament, is guided by Nobel Laureate Amritya Sen , Professor of Economics at Harvard university —born in Santiniketan, West Bengal (India) and a socialist economist, based in USA who visits India now and then to remember and lecture on poverty, hunger and malnutrition, and what the Government should do through NAC. Sen and his followers’ see massive starvation related deaths in India. Seething opposition has come from all market friendly economists including Indian born US economist Jagdish Bhagwati, a Mumbai born Professor of Economics at Columbia University USA who believe that there could be poverty but that is relative standard of richness and not necessarily hunger.

As per National Sample Survey Office (NSSO) of India—people suffering from hunger --or inadequacy of food are only 1.9% in 2008-09. The hunger may have been further mitigated in last three years below 1.9%. Malnutrition due to poor calorie intake, impure water, lack of toilets, healthcare, sanitation etc. and poverty is measured by different parameters. Thus reality is quite different from what is perceived by Sen and therefore the sense of the bill is deemed senseless.

NSSO for 2011 reveals about 95% of urban and rural households are in good/livable conditions and 63% have cell phones with rural penetration of 54%. With every second person in the country in possession of a mobile phone, where electricity has to be is provided for charging the phone--- assumption of wide spread poverty and hunger, applied for FSB/FSO, is clearly misplaced.

The latest report of Tenudlkar Committee report of Planning Commission issued in December 2012 reveals that poverty ratio in 2009-10 is 29.8% --a steep decline from 45% in 1993-94. By 2013-14 it may even be below 25%. Coverage of 67% population under FSB/FSO even for poverty is 225% than what is revealed by the statistics. Such an over estimation is a profoundly flawed. This colossal variation speaks much of the electoral intent than merely of a socio-economic perspective.

2) Carrying huge stocks

Since 2009, the process of building humungous inventories of grain commenced which touched 82 mmt in June 2012 and 77mmt in June 2013 (about$ 27 billion). Ideas of Food security are translating into scarcity in open market reflected by higher grain prices at retail level.

3) Quantity estimates
Indian current ‘per capita monthly consumption’ of wheat and rice in 2009-10 as per National Sample Survey Office (NSSO) report no 545 ( January 2013) is 10.15 kg (5.9kg rice and 4.25 kg wheat)—of which Targeted Public Distribution System (TPDS) or subsidized share is 2.12 kg(rice 1.408kg and wheat0.619kg). 43% of the Rural and Urban population is under TPDS.

Net effect of the FSO is to enhance the current consumption of 2.12to merely an entitlement to 5kg/per month per person for 67% population at average subsidized rates of Rs 2.5 Kg whose economic cost is about Rs. 22/kg and rising every year by about 10%. (If coarse cereal is accounted, the consumption for cereals is a little higher)

For compliance with proposed bill, 61 mmt of grains per annum (55mmt now) and buffer norm of 47mmt (32 mmt now) are needed. (CACP report).

Since there are 50% leakages, only 30 million tons of grains will be “consumed” by 800 million populations, which is 37.5kg per person per year or 3.1kg per person per month. Net effect of FSO is to increase consumption by 1 kg per person per month--- more than now (2.1kg/month/per person)—for which beneficiaries are expecting bonanza and UPA is claiming credit. Fiscal health of the Nation is threatened while it will make little difference in the real sense.

4) Costs Estimates
In value terms the current subsidy is Rs 90000 crores ($15 billion). Central Government claims the enhancement in subsidy will be Rs.35000 crores ($6billion) –total 1,25,000crores or $21 billion-- by accounting only the enhanced purchasing cost of higher tonnage and eq to 1.5% GDP from the existing 1% of GDP.

Nomura Fixed Income Research group report of 10.7.2013 says “We do not expect a substantial fiscal impact in FY14 as implementation will take time. Our current estimate of the food subsidy bill is Rs 1 trillion in FY14, slightly above the government’s budget estimate of Rs900 billion (0.8% of GDP)”.

Other analyst who calculate extra investments for launching the scheme, additional funding in agriculture to bring some stability in production, storage, movement of grain (railways), progressive increase in procurement cost also called MSP (minimum support price) by 10% every year, re-identification of beneficiaries, strengthening of Food & Civil Supplies of each state, storage and delivery costs, grievance redressing mechanism, audit/vigilance etc will be minimum additional Rs.80,000 crores ($13 billion). That would inflate the cost of the bill to Rs. 200000 crores or $33 billion, about 2.2% GDP and in three years 600000 crores or $100 billion- as estimated by CACP (commission for Agricultural Cost and Prices).

Nomura Research Group comments once fully implemented, the “total cost of FSO is likely to rise from 0.8% of GDP to 1.3-1.8% of GDP over the next three years due to a higher food subsidy bill and other ancillary expense. Many investors and savers should be concerned over this dire forecast”.

Much of India’s economic growth has been dogged by persistent inflation, which the Reserve Bank of India (RBI) has been targeting for a while. Inflation could worsen if the government (as well as the next government post-elections) is not able to manage food supply properly. India will be surely humbled by its fiscal deficit .

Wednesday, July 17, 2013


 PART  1

Tejinder Narang
Sensing lack of parliamentary consensus on the Food Security Bill (FSB), UPA –II decided to promulgate an ordinance on 5th July 2013 and converted the FSB into Food Security Ordinance of 2013 (FSO) , subject to post-facto endorsement of the parliament as per constitutional provisions to make it an Act. Food ministers/ Chief Ministers of Congress ruled states/ and other official spokesmen have declared that there is “no problem” in rolling out the scheme politically and financially. The rule of thumb is that when Governments say “no problem”, apprehend that there is a “serious problem”. Sure there is “no problem” in promise being made at the time of elections. But there could be “serious problems” for the successive Governments to perform at huge national cost to all.
FSO is a doctrine of “paper entitlements” without committed obligation in the real sense, except for the Government to perform on best efforts basis. It does not empower people for food—it simply raises their expectation from the Government to deliver food. The conceptualization of FSB was done by National Advisory Council— a parallel agency under the Chairperson of Sonia Gandhi, President of the Congress party of India (humorously descripted as Non-Accountable Cabinet).   FSO is riddled with archaic ideas to acquire absolute state control of grains; misconceived basis of identification of prospective beneficiaries by ignorance of difference between hunger and poverty; immediate electoral considerations; non-transparency in cost and investments; disregarding statistical data and advice of Government agencies including Planning Commission of India; economically flawed and frustrating; prone to rent seeking, provoking round tripping of grains and nebulous in effectiveness. Since Governments are not rational but political, this FSO is in the danger of being a historical manuscript of highest political gimmickry and socio-economic sham.
 All aspects of this FSB/FSO, including systematic deficiencies are discussed here from A-Z .
Up to 75% of the rural population and up to 50% of the urban population will have “uniform entitlement” of 5 kg food grains per person per month at highly subsidized prices of  Rs 3/kg for rice($0.05), Rs 2/kg($0.03) for wheat and Rs 1/kg ($0.017) for coarse grains(mostly corn) respectively. It will entitle about “two thirds of 1.2 billion populations” to subsidised food grains under the Targeted Public Distribution System (TPDS). 

Determination of eligibility of such households will be the “responsibility of the States” as per the guidelines they may specify but shall not exceed 50% and 75% of urban and rural population respectively of the latest census.

In addition
a.       The poorest households would continue to receive 35 kilograms of grains per month under the “poorest of the poor (“Antyodaya Anna Yojana) at subsidized prices.
b.      States Governments to strengthen their Food and Civil Supplies Departments, set up Grievance redressal machinery at each district, authorise State Food Commissions for hearing the cases and forwarding to Magistrates, undertake audit and establish vigilance departments for ensuring compliance with FSO.

2)      Implications Summarised

a)      Quantitative and financial  
        I.            FSB/FSO enhances maximum per capita monthly consumption of 2.1kg under existing PDS (public Distribution system) to “entitlement” of 5kg (by 235%) per person from 43% to 67% of population with legal remedies. It also reduces the average “subsidized cost” from Rs 5.5/kg to Rs. 2.5/kg (by 55%). System of Central procurement of grains (average economic cost about Rs 22/kg) remains unchanged. 
      II.             Beneficiaries as per the FSO are yet to be identified by the respective States. Planning commission in its draft 12th plan report mentions “One of the important challenges for implementation of NFSB would be proper identification of beneficiaries which may be based on the on-going Socio-economic and Caste Census”.  Caste based identification is another negative novelty-that is hidden under the terminology of “latest Census”.
    III.            NSSO survey of Jan 2013 mentions per capita per month “consumption” of 10.15kg of wheat and rice. FSB/FSO provides “entitlement” of only 5kg. Balance 5.15kg/month still remains to be sourced at open market price from the bazar. FSO neither offers nor provides choices of other food items like fruit, vegetables, pulses, milk etc relating to wholesome nutrition.

    IV.            Total cost to the exchequer remains vague. Government of India (GOI) is projecting only additional estimation of procurement and subsidization. These estimates vary 0.8% ($12 billion) to 3% ($36 billion) of the GDP. It does not take into account collateral investments in agriculture, infrastructure of storage and distribution, establishing and payment to administrative machinery and effect of increased annual acquisition cost (Minimum Support Price). Neither these collaterals are planned or budgeted but mentioned only.

      V.            It burdens the state for setting up additional/doubling the bureaucratic machinery with financial implications that are not considered at this stage


    VI.            With 50% leakages in the Public Distribution System (PDS), it will take 10kg of “delivery” of grains per person per month by FCI to “receive” 5kg at the user‘s end. Leakages are bound to swell due to greed of arbitrage between open market prices vs. Rs1-2-3/Kg under FSB/FSO. Such “pilferages” or sunk costs in the ascending scale every year will be funded by middle/upper class tax payers, who may be excluded under the FSO.

  VII.            Planning Commission is highly sceptical about the present Targeted Public Distribution System (TPDS). In its draft report it reminds that, “Another important initiative required during the Twelfth Plan is the end-to-end computerisation of the TPDS operations with the help of a comprehensive Plan scheme. This should not  only address current challenges (of leakages; emphasis added) but also facilitate proper tracking food grains and lifting by consumers using Aadhaar numbers or adopting innovative methods like smart cards.” Planning commission recommends innovative methods like cash transfers as an alternative to the existing system.

More litigation

VIII.            “Entitlement” does not mean commitment of “delivery or availability” to the beneficiary. It merely ensures a legal right to a “hungry” person for enforcement of his claim in a Magisterial Court, after following an elaborate procedure of lodging the complaint/ enquiry against Food and Civil supplies unit through State Food Commission.  It may then be followed up at High court and Supreme Court for final adjudication. Who incurs the cost of litigation is ambiguous. Are we promoting intent to litigate on 5kg of grains –theory of absurdity.

    IX.            Litigation in India gets extended till decades in overburdened Indian Judicial system where 32million cases till 30.9.2010 are pending as per details revealed by the Supreme courts in June 2011.  Justice delayed is justice denied and promotes criminality / corruption both in police and judiciary.

b) Monopoly

      X.            Contrary to the market reforms initiated in 1990-91, FSO restores the system of socialistic economy of 1960-70’s in the grain chain. Government monopoly of grain trade extends from 30%-35% as of now to potentially 95% under open procurement system (keeping 5% for seed). Private sector is crowded out all the more.   

    XI.            All monopolies are inherently inefficient due to lack of competition, plethora of rules/ regulations and absence of commitment on delivery of goods/services. Monopoly collapses if the employees of organisation decide to go on strike or avail mass leave or go slow or services of their union leaders are terminated for fraud /indiscipline.

  XII.            GOI has set up Competition Commission of India for “eyeing and ensuring” greater competition and demolition of monopolies but demits itself of that very concept in letter and spirit. Private sector is penalized for cartelization while Government/State continues to misappropriate and manipulate the monopoly under the umbrella of FSO.  

c) Discouraging diversification   

XIII.            FSO sends negative signals for  diversification of production of other food items like oilseeds, pulses where there is very high import dependency (approx. $15billion and rising), nor incentivizes higher growth of horticulture. FSO fortifies its overwhelming leaning for wheat and rice production and procurement by the Government at a remunerative price from farmers and then given back to them at 90% of the subsidised cost.

XIV.            Farmers of crops ‘other’ than wheat and rice stand excluded from the assured procurement by the Centre/ State and also of assured income, which may promote rural divide. This defies principle of inclusive growth.

d) Force Majeure

  XV.            Under force Majeure, when there may be draught or other natural calamities, no safeguards are proposed or defined in FSB/FSO. Extensive imports under such emergencies may have to be undertaken at exorbitant cost and then subsidised. Indian ports/roads/railways are not geared to handle massive import of grains. Even if grain import is prioritized, other essential imports like fertilizer, coal will suffer and exports slowed down

e) Political overreach

XVI.            All states are encouraged to extend further subsidy for wheat and rice and fix the price to Rs 1/kg—virtually free (instead of Rs 2/kg or Rs 3/kg) for electoral gains. Funding gap may either have to be borne by the Centre or the states—leading to higher fiscal deficit and inflation.

XVII.            Such a heavy subsidised price (90%), once introduced through FSO of parliament can be modified or enhanced only through another parliamentary amendment. That may be a political hot potato. SC/ST reservations though initially introduced for a limited period now cannot be reversed even they these classes have graduated to much higher income groups.

XVIII.            Due to coalition politics at the Centre and the States, polarization of political parties, multiplicity of socio-economic agenda, absence of any legislated funding for elections—cereals will be used for creation of currency for electoral agenda.
f) Exports      

 In principle exports of grains should crumble. But in practice they may remain stable or slightly be higher owing to leakages in the market—another route for promotion of fraudulent activity through the FSO. However the cheaper, almost free grains could be illegally diverted at slightly better prices to Bangladesh, Nepal, and Myanmar which might discourage regular exports.
contd AS PART 2