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Column: Sad state of food security

posted Dec 20, 2011, 1:40 AM by Puneet Goyal
SUBHOMOY BHATTACHARJEE Posted: Tuesday, Dec 20, 2011 at 0309 hrs IST
The Food Security Bill is a Trojan Horse, beautiful for the government, which leaves it as a sign of immense goodwill, but deadly for those who host it. The Bill will create mounting problems for the banking system, jacking up their credit allocation for food, will create pressure on RBI to manage foreign exchange reserves in a drought year, will cripple state government finances as both cash support and the women and child component is hosted on their budget, and finally for the terms of trade between MSP-based crops and those like potatoes and onion that do not have it. The final line of destruction will, of course, be the windfall gain for all ration shop owners in towns.

What it does to the central government budget in 2012-13, we don’t include here, as it is a self-inflicted injury and as insurance companies will say there is no cover for such wounds.

For now, let’s just focus on the impact on banks, and that on state finances, as they are the ones where the impact will be the soonest.

Behind all the brave words in the Cabinet Note on the Bill, there are two omissions. The first is that the central government has, until the middle of this financial year, cleared only 74% of the food subsidy bill of the Food Corporation of India (FCI) for last year for carrying out government procurement. As the pressure on the fisc has mounted since 2007-08, the Centre is carrying fat arrears every year, much like revolving credit on credit cards. Second, to square up the difference, FCI was allowed an annual unsecured short-term loan limit of R6,500 crore. It rose to R10,000 crore in 2009-10 and has now been converted into a ways and means advance.

In summary, the government is finding it difficult to sustain even the current level of expenditures. To meet the gap, the banks will have to step in with larger borrowing limits for FCI. Last year, the outstanding bank credit for food was R64,283 crore, as on March 25. Of this, FCI accounted for R30,000 crore. The rest was procured by grain traders.

In India, food credit is directed credit. A consortium of 50 banks led by SBI lend the money to the sector. The idea is to ensure that no arbitrage takes place in the sector to drive up prices. The current rate of interest set by SBI for FCI is 11.70% with effect from September 1, which, in effect, becomes the rate for the sector. The rate had, in fact, peaked at 12% in August but has come down since. RBI, on behalf of the government of India, makes it clear that it does not want this cost to rise as that would push food inflation.

Since banks ask for no collateral in the business and get few rights to check stock against loans, the system is totally open ended.

All these interventions were meant to finance a procurement of 58 million tonnes of wheat and rice (last kharif and rabi cycle). More people will mean correspondingly more drawl from the banking system. The Food Security Bill has a heroic assumption that, despite pushing in another 200 million people into the public distribution system and raising the quota for the 400 million already in, the total procurement will rise by less than 10 million tonnes. This assumption is based on clearing up the loss in storage and transmission, which again is predicated on making the FCI operations capital intensive.

So, at the very minimum, using a pro rata method of calculation will yield about R16,000 crore of bank credit for each additional 10 million tonnes of procurement. To the extent the government has to stock more, and it will have to, as more farmers switch to assured off-take of rice and wheat, the impact on the banking system will become very expensive, indeed. Remember the one-time R70,000 crore waiver of farm loans took SBI over two years to erase from its liabilities. These are potentially larger numbers.

The other segment that will be hurt is the state governments. For them, the impact will follow next year just after the banks see their food credit balloon.

And what does the Bill push on the plate of the state governments?

Clause 25(4) says if grain is in short supply, the state governments will pay a cash allowance towards food security of the affected population. It does not link the payment to the price of R3/2/1 but will obviously be inflation-linked and set from open market prices. The Centre’s additional subsidy envisaged of R23,000 crore does not include this amount.

Yet as the Centre-state financial relations set by the 13th Finance Commission till 2014-15 make no room for compensatory transfers for the Food Security Bill, the states will have to borrow more to pay for this liability.

As states like Bihar and West Bengal have pointed out, they are poor with no cash surplus yet will have to foot this expenditure from their own budget. So the plan is essentially regressive as it will punish the poorer states more.

States will also have to finance the support for pregnant women and lactating mothers. While this cost will be shared with the Centre, the ratio will be set by New Delhi.

How much can be the conceivable impact on state budgets. For example, West Bengal’s share of funding for the Sarva Shiksha Abhiyan in 2010-11 is R784 crore against the Centre’s R886 crore, even though this is supposed to be a 30:70 (state:Centre) scheme. Typically, over time, as more elements of schemes drop out of plan schemes, the financial responsibility of the states rise. The Food Security Bill springs the same trap.

An internal paper circulated by the agriculture ministry puts the number at about R35,000 crore in a drought year.

Both the first round impact, on the banks and the states, means the math behind the Bill has obviously never been worked out. Since the states will have to, in turn, borrow from the banks to meet their liability, the follow-through will be even larger.