The Food Security Bill, 2013, (FSB) has been passed in the Lok Sabha and is under consideration in the Rajya Sabha. The Act will facilitate 62 million tonnes of foodgrains to be distributed to about 81 crore individuals, about 63 crore in rural and 18 crore in urban areas. The priority households, about 46 per cent in rural and 28 per cent in urban areas, are to have monthly entitlement of 7 kg per person per month at a subsidised price of Re.1 per kg for millets, Rs2 per kg for wheat and Rs 3 per kg for rice. And at least 3 kg of foodgrains per person per month to be given to a general category of households at subsidised prices.

Assuming that the cost of FSB is Rs1,20,000 crore, per capita cost amounts to Rs1,482 annually or Rs 4 a day.

The objectives of the FSB are laudable but the assumptions on which it is based are weak.

Identify the hungry

First, how many are hungry and where are they located in India? In a survey undertaken from July 2009 to June 2010, NSSO reported that percentage of households not perceiving themselves as getting adequate food throughout the year was 2.1 per cent or less in all major states except West Bengal (4.6 per cent) and Odisha (4.0 percent). In urban India, it was less than 1.3 per cent except in Madhya Pradesh (1.4 per cent). Food inadequacy appears to reach a peak during some months in Arunachal Pradesh (November to February), Odisha (February) and West Bengal (February).

Thus, about 2.6 crore people in Assam, Bihar, Madhya Pradesh, Odisha and West Bengal, suffer food deprivation. They are unlikely to have the resources to even afford the FSB subsidised food. It would be justified, therefore, to identify the hungry and give them food free of cost. According to Suresh Tendulkar’s estimation of poverty in India, there are about 27 crore poor people in the country.

Since 1991, India has undertaken reforms in the financial markets. The objective was to bring in competition in the markets which helps to determine the right price of financial instruments. For instance, in the government securities market, primary dealers and satellite dealers were set up to create competitive markets. The Reserve Bank of India initiated the auction system to determine market-related yield curve. In the banking sector, efforts are being made even now to increase competition, first amongst domestic banks and then between domestic and foreign banks. To achieve this, consolidation, merger and acquisitions are also being considered.

Distorting the market

If the Food Corporation of India (FCI) is to siphon away 62 million tonnes of foodgrains to serve 67 per cent of the population, this will distort the market mechanism to determine fair price. FSB will harm the grain trading market; if the FCI were to purchase a significant chunk of the foodgrains at a pre-determined minimum support price, chances of the open market suffering from manipulation, hoarding and price distortions would increase. Such distortions will impact the sowing pattern and production of foodgrains in the country as well as lead to shifting patterns of agricultural production. This would be detrimental to the market mechanism, especially for an economy opening up to global markets.

Now that the FSB has been passed, it may be prudent to implement it in phases. There is a need to undertake a survey to find out how many people would really like to avail food under the FSB, given the varied food habits and economic status across India. Real wages have been increasing both in rural and urban areas. With higher purchasing power and changing food preferences, it would only be a waste to incur high costs to provide food that people do not want or require. If a significant number of people do not avail of the subsidised food, the stocks will then enter the market illegally, causing distortions and substantial loss to the Government.

Economists generally get the rap for faulty advice and divided opinion on national issues. But in the case of FSB, their advice has been ignored. So, economists should not be blamed for its consequences.

(The author is RBI Chair Professor of Economics, IIM Bangalore.)

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