Economy Dec 19, 2011
Despite the objections of many in the UPA cabinet and the advice of economists, Sonia Gandhi is shoving the Food Security Bill down our throats.
It is tempting to conclude that all this is prompted by a desire to see the poor fed, but the truth is that the Food Security Bill (FSB) - like many of its predecessors - will end up achieving the exact opposite of what it wants to. It will achieve food insecurity and a devastated economy.
The FSB's bills will fall due only later, but Sonia Gandhi's old bills are already costing us plenty - not least inflation and a busted budget.
Let us add up the real cost to the country when Sonia Gandhi's party feeds itself off someone else's money: ours. This is the true cost of keeping the Dynasty in power.
The following are Sonia Gandhi's political bills that have been paid by all of us - taxpayers and consumers.
# 1 Farm loan write-off of Rs 72,000 crore in 2008. All that the UPA needed to do to help farmers in debt was to waive interest, freeze the outstandings, and allow them to pay it all in easy instalments. But what could have been a bill of less than Rs 10,000 crore of interest waivers, which would have helped maintain a proper climate for loan recovery while providing real relief, ended up with a cost of Rs 72,000 crore for the exchequer. The political part of the bill is thus Rs 72,000 crore minus interest waiver costs - say around Rs 60,000 crore. The cost of damaging the repayment culture is incalculable - and will be paid by subsequent generations and banks.
# 2: Subsidies paid for keeping diesel, cooking gas and kerosene prices low:Rs 2,23,203 crore in 2005-11. Add this year's under-recoveries of another Rs 1,32,000 crore, and the total bill is Rs 3,55,000-and-odd crore. Let's further assume that all politicians would have subsidised petro-goods to some extent. But the NDA did not subsidise half as much. If we take 50 percent of the amount as subsidies that every politician would have paid to consumers, the subsidies paid only to humour Sonia Gandhi would be around Rs 1,75,000 crore.
# 3: The National Rural Employment Guarantee Act (NREGA) has cost all of Rs 1,00,000 crore so far, and by March, 2012, it will have cost around Rs 1,40,000 crore. Assuming, once again, a more sensible kind of populism would have ended up with only half the expenditure on such schemes, Sonia's bill would work out to Rs 70,000 crore.
The Sonia-Rahul re-election bill so far thus amounts to Rs 3,05,000 crore.
Now, let's bring in the Food Security Bill. The official estimate of costs is around Rs 1,00,000 crore, but since these are likely to be underestimates intended to force a foolish bill through a reluctant cabinet, we should look at more realistic estimates.
Ashok Gulati and Jyoti Gujral - the former is chairman of the Commission of Agricultural Costs and Prices, and thus should know what he is talking about - wrote in The Economic Times that the real cost of the FSB, taking both the direct cost of subsidies and the accompanying investment in infrastructure (godowns, higher food procurement prices, et al), should be reckoned at Rs 2,00,000 crore per annum in the next three-year period.
Now let's assume that even this money is worth spending to feed the poor. But the existing public distribution system (PDS) leads to a leakage of nearly 60 percent.
Says a World Bank study prepared at the instance of the UPA government: "Leakages and diversion of grains are high. Only 41 per cent of the grains released by government reach households, according to the 2004-05 National Sample Survey (the latest data available), with some states doing much worse. In 2001, the Planning Commission has estimated this leakage of BPL (below poverty line) grains at 58 percent nationally."
If 58-60 percent of Rs 2,00,000 crore spent on the Food Security Bill is going to be lost due to leakage and pilferage, this is a humongous Rs 1,20,000 crore loss every year. Since it is Sonia Gandhi who insists on the FSB in its current form after rejecting every other alternative (including cash transfers to the poor), it means this bill ought to be sent to her and the National Advisory Council (NAC) she heads. Since we have two years of food security to finance before the next election, the real bill will be Rs 2,40,000 crore for 2012-13 and 2013-14.
Add Rs 2,40,000 crore to the Rs 3,05,000 crore bill the dynasty has already racked up to keep itself in the good books of the electorate and to get Rahul Gandhi the gaddi in 2014, and the true cost of Dynasty is Rs 5,45,000 crore.
NAC's annual budget in just around Rs 4 crore. But the bill it is sending taxpayers is as much as Rs 5,45,000 crore.
Can India really afford dynastic politics of this irresponsible sort?
Let's return to the economics of the Food Security Bill (FSB) again. It's worth beginning with the old saying, slightly modified for our purposes: Teach a man to fish, and he will feed himself for life. Give him a fish every day, and you will have him eating out of your hands. You would have created a permanent dependency and ultimately run out of fish.
This is what Sonia-nomics will achieve with the FSB: a population dependent on the dole, and an economy ultimately unable to feed itself.
To be sure, let's give Sonia the benefit of the doubt and assume she has a heart of gold and weeps buckets at the thought of anyone going hungry. But nothing in the policies she has backed so far suggests she has her head screwed right.
If there is a crisis, of course, you should provide food to the hungry. But this can only be a short-term measure. Since Sonia has been in power for more than seven years, the crisis phase should have ended long ago and long-term solutions found to the problem of hunger and food supplies.
Sonia Gandhi wakes up to hunger only when elections are in sight. But we shall let that pass.
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However, the damage caused by the FSB will be with us long after the UPA is gone. The Bill will result in the following dangers:
1) It will damage the exchequer and stoke inflation - causing the subsidy bill to go higher and higher every year, leading to a pile-up of debts. India will be Greece by 2014.
2) The huge procurement targets needed to feed 75 percent of rural households and 50 percent or urban ones will call for regular increases in food procurement prices. This will again feed inflation.
3) If the monsoon fails in any particular year, we will have to import grain. International food prices are already well above Indian levels. If we enter the market - which we have seldom done - prices will go through the roof. High imports will send the rupee crashing - raising prices again. This is a recipe for disaster.
4) High procurement means closing down three-fourths of the market system in grains since the government becomes a monopoly buyer everywhere.
5) Both poor and rich farmers will try to game the system. If the market gets you a price of Rs 20 a kg for rice, and you can get 35 kg of rice per family per month at Rs 3, who will not buy from the PDS and sell to the market? This is cash transfer by another name: graft will be the only result.
6) The massive bill of Rs 6,00,000 crore for the FSB over three years is essentially money down the drain. It works against the fundamental argument about teaching someone to fish as against feeding him indefinitely. It will create dependencies, when the amount could have been spent to create rural infrastructure to improve agricultural productivity, and incomes. What we have essentially done is consumed the seedcorn of the future by spending money to feed instead of investing in rural infrastructure.
Raghuram Rajan, who teaches at Chicago's Booth School of Business, said the other day at a lecture organised by Business Standard that the root cause of poverty in India was poor rural productivity. But instead of raising productivity, Indian governments were busy offering palliatives through money transfer schemes like NREGA, higher support prices for food, and, now, the Food Security Bill. This can merely raise rural demand without improving agricultural productivity - causing inflation.
But with UPA-2 listen? Unlikely, for the government has just got its ears tweaked by Sonia Gandhi for delaying her Food Security Bill.
UPA-2 is hastening our tryst with economic disaster.
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