Some Thoughts on the FSB - Food Security Bill

Some Thoughts on the FSB




Manmonia's FSB: 3% of GDP
Surjit S Bhalla

The food security bill, sorry emergency ordinance, if implemented honestly, will cost 3 per cent of the GDP in its very first year.

We have an emergency of the rarest order. The BJP stops Parliament and therefore the government passes an emergency privilege provided by the Constitution to pass the food security ordinance.

The bill, sorry ordinance, wants to provide food to the poor in order to eliminate poverty. This, according to the Congress, was Sonia Gandhi's dream, and indeed was part of the Congress manifesto in 2009. Again, if Congress spokespersons are to be believed, this is a pathbreaking attempt to eliminate poverty. It will give the poor a legal right to claim their 5 kg of rice, wheat or coarse cereals a month at the subsidised rates of Rs 3, 2, and 1 per kg, respectively.

This act-to-be follows the same pattern and motivation as the employment guarantee act passed in 2005. At that time, the Congress had claimed this would provide much-needed employment to the poor, that it was something "new" being offered. They never once mentioned that government-guaranteed employment was first provided by the state of Maharashtra, and since the early 1980s, it has been part of Central government schemes. The food security bill (FSB) is merely an extension of the public distribution system of foodgrains that has been in operation by all Central governments since the late 1970s.

The import of this is to partly nail the blatant spin (lie!) that the Congress government is adding to its list of scams. But they can be forgiven, because this is an election year and by all accounts, the Congress is desperate. From a policy point of view, the relevance is that Indian governments and polity have considerable experience with employment guarantee schemes, as well as food distribution schemes. What does this experience tell us?

Another claim by the Congress is that the FSB will provide a legal right to the poor for the food, just as MGNREGA has provided a legal right to the poor for employment. And the poor can sue the government for lack of food or jobs — surely, the most advanced welfare system in the world, and something India, and especially the Congress, should be justly proud of.

The NREGA has been in the works since 2005-06, and for all of India since 2008-09. So there is five years of concentrated experience with employment provision to the poor. Fortunately, to date, no rich and, especially, no poor person has sued the government for lack of employment, so it must be the case that the poor are fully satisfied and employed for at least the 100 days provided by the act. Then why is it that over two-thirds of the beneficiaries of the scheme were not only not poor in 2009-10, but their average consumption was 50 per cent higher than the average expenditure of the poor beneficiaries? And these non-poor doing back-breaking NREGA work were in the top third of the distribution! Only two conclusions are possible — the middle-class rich are not doing back-breaking work, or there is a lot of corruption in the NREGA scheme (the dictionary defines a scheme as "to make plans, especially in a devious way or with intent to do something illegal or wrong".) So that is why there have been no legal suits, even though there is lack of jobs for the poor (even the government admits to that fact) and the NREGA has not been able to spend the money allocated to it in any of the last five years.

There is little doubt that NREGA is plagued with corruption — what may be news to the "governance by ordinance" wallahs is that the PDS of food grains, whose operations the government will only multiply, is, on proven evidence, many times more corrupt than even NREGA.

Before proceeding further, I want to set up some ground rules for discussion of the FSB and the poor. In a recent panel discussion on CNN-IBN, noted food security expert and principal advisor to the commissioners of the Supreme Court, Biraj Patnaik, alleged that I "molested" poverty data. For long, I have held the belief that policy discussion should be centred on evidence, not ideology, and especially not, "you have to believe me because I am arguing for the benefit of the poor". Hence the title of my column, "No Proof Required". So when you look at the evidence presented in this article (above, below and in the table) please inform me which piece of data, or estimate, or conclusion, is incorrect, and whose evidence is proof of molestation.

The estimates contained in the table are from the recently released NSS consumer expenditure data for 2011-12. It presents calculations for the subsidy involved if governance by ordinance becomes law. Two columns are presented, one, a fact-based assessment of what happened in 2011-12, and the other, if the FSB was implemented faithfully, as I am sure the Congress, and Manmohan Singh and Sonia Gandhi (hereafter Manmonia) would want to do. After all, they are honourable persons.

The simplest possible summary of the subsidy is as follows (tell me where I am wrong or mad or molesting). Assume the subsidy in year BFSB (before the bill) is 100. According to NSS data, only 45 per cent of the population was accessing the PDS in 2011-12. With the bill, it will be 67 per cent. So, based on greater coverage alone (the better for elections, my dear), the subsidy will increase to (100*67/44.5), or 150.

The NSS data states that in 2011-12, average PDS consumption was 2.1 kg per person per month. So, with greater consumption, the subsidy bill increases to (150*5/2.1), or 357.

But because India is growing so fast and can afford largesse, and it is Sonia Gandhi's explicit dream to introduce the FSB (and the Congress's manifesto promise), the subsidy per kg will increase from Rs 13.5 per kg to Rs 16.5 (with weighted market price staying constant at Rs 19, the subsidised price declines from Rs 5.5 to Rs 2.5 per kg.) This increases the subsidy to (357*16.5/13.5) 436.

In 2011-12, the total food subsidy (government figures) was Rs 72,000 crore. So, after the FSB, food subsidy expenditures will be Rs 72,000*4.36, or Rs 3,14,000 crore, or 3 per cent of the GDP.

This is an open challenge to Sonia Gandhi, Manmohan Singh and P. Chidambaram. Your minions are stating that the ordinance-induced food subsidy bill will only increase by about 25 per cent and will amount to 1 per cent of the GDP. I get a conservative increase of 336 per cent, or a total subsidy level of 3 per cent of GDP with an honest implementation of the bill, sorry ordinance. One of us is massively wrong. I believe it is not me. But prove it otherwise.
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The math proves that Sonia's Food Security Bill is a big hoax
R Jagannathan

Sonia Gandhi's Food Security Bill (FSB), everyone acknowledges, is a political signal from the Congress to the electorate on the eve of elections. That it will damage the fiscal situation and also give inflation another push is something most economists accept. We are, of course, talking of economists who go beyond the moral argument which holds that when it's a question of feeding the poor, the budget can go take a walk.
 
However, it's now time to look even at the moral arguments closely. And expose the Congress party's claims that this bill is the answer to the problems of eliminating malnutrition and hunger. It was never intended to be that. What the math points to is not a budgetary fiddle, but a gigantic political hoax.
 
A good place to begin the argument is Surjit Bhalla's brilliant article in The Indian Express (shared above) which points out that if the Bill is proposed to be implemented as professed, the real cost is 3 percent of GDP. His calculation is that after the FSB is implemented this year, it will cost us Rs 3,14,000 crore in a full fiscal year.
 
Just in case the number doesn't impress you, that's more than the entire cost of all NREGA spends since 2005-06, the Rs 72,000 crore farm loan waiver, and many other government giveaways put together.
 
In short, the Food Security Bill is the mother of all giveaways and hugely damaging to the economy. It is guaranteed to cripple us for years, whether or not it helps reduce malnutrition.
 
Of course, the first thing to do is question Bhalla's math. But his critics have no chance here. This is how he arrived at the FSB cost figure of Rs 3,14,000 crore.
 
Start with the pre-FSB year of 2011-12, when the food subsidy bill was Rs 72,000 crore. In that year, 44.5 percent of the population accessed the public distribution system (PDS), taking an average of Rs 2.1 kg per head in subsidised food per month, according to National Sample Survey (NSS) data.
 
Under the Sonia-backed FSB, the per head entitlement will be 5 kg of rice or wheat or coarse cereals at Rs 3, Rs 2 or Re 1 a kg,
 
Bhalla takes the weighted market price of rice and wheat (assuming the PDS user takes his 2.1 kg monthly average) at Rs 19 a kg, from which he minuses the average price paid at the ration shop (Rs 5.5 per kg), leaving a subsidy of Rs 13.5 percent to be paid by the UPA.
 
Now, adjust 2.1 kg per head (actual drawal from the PDS per head per month) to 5 per kg under FSB, and adjust again for the fact that the per head subsidy under FSB will be Rs 16.5 per kg (against Rs 13.5 per kg earlier), and adjust once more for the fact that subsidies will now cover 67 percent of the population (against current PDS's the 44.5 percent).
 
Do the math and Rs 72,000 crore of 2011-12 food subsidy before the FSB bloats to Rs 3,14,000 crore after Sonia Gandhi's electoral munificence.
 
There is clearly nothing wrong with Bhalla's calculator, bur then how do you account for P Chidambaram's claim that food subsidy will be only Rs 10,000 crore more than the normal subsidy?

In his budget speech last February, Chidambaram piously wished quick passage for the FSB and said: "Hon'ble members will be happy to know that I have set apart Rs 10,000 crore, over and above the normal provision for food subsidy, towards the incremental cost that is likely under the Act." Overall, he provided just Rs 90,000 crore for food subsidy, including the Rs 10,000 crore.
 
How does Chidambaram pitch in with just Rs 10,000 crore more, when Bhalla's calculation makes the total cost Rs 3,14,000 crore – a Rs 2,24,000 crore difference?
 
Even accepting that Chidambaram may have planned to implement the bill for only half this year (from 1 October 2013 to 31 March 2014), it would still give us a total additional provision of only Rs 20,000 crore for a full year.
 
So, clearly, Chidambaram's babus in North Block are mathematically challenged or they hoped the bill would never pass.
 
But we all know that Sonia Gandhi always intended to get it passed. Hence the recent ordinance in case parliament does not pass it.
 
There is only one other explanation possible: that neither Sonia nor Manmohan nor Chidambaram ever planned to cover 67 percent of the population.
 
If only half the population, or even one-third, will be actually covered by the FSB, the math would be significantly different – but even in this case the subsidy figure would not be the Rs 90,000 crore mentioned in the budget. Some others put the bill at Rs 1,25,000 crore – an amount still not budgeted for.
 
Little wonder Bhalla is calling the UPA's bluff: "This is an open challenge to Sonia Gandhi, Manmohan Singh and P Chidambaram. Your minions are stating that the ordinance-induced food subsidy bill will only increase by about 25 percent and will amount to 1 percent of the GDP. I get a conservative increase of 336 percent, or a total subsidy level of 3 per cent of GDP with an honest implementation of the bill, sorry ordinance. One of us is massively wrong. I believe it is not me. But prove it otherwise."
 
Bhalla need not waste his time challenging the Congress and Sonia Gandhi. The only conclusion one can draw is this: the Food Security Bill is either a huge political hoax, or a gigantic fiddle with the budgetary arithmetic. Or both. The betting should be on both.
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Food Bill: Amartya Sen's charlatan economics debunked
R Jagannathan

Amartya Sen, the intellectual patron of many of the UPA's economic follies, of which the latest – the Food Security Bill – is on the cusp of ruining things further, deserves to be debunked.
 
Once lauded for his work on famine and hunger, Sen today is a practitioner of charlatan economics that has very little to do with helping the poor.
 
Commonsense should tell us that acute hunger is more or less gone (case in point- http://www.firstpost.com/economy/bad-news-for-poverty-wallahs-india-is-less-hungry-now-654882.html ) – except in some pockets of India. Malnutrition, of course, is another matter, since it involves a whole lot of other inputs from maternal care and giving children enough nutrition once they are born. Neither of these problems is going to be solved by giving two-thirds of India (more than 800 million people) rice, wheat and coarse cereals at Rs 3, Rs 2 and Re 1 a kg.
 
Ruining the economy, of course, is entirely possible with this mindless scheme.
 
Dealing with malnutrition calls for an entirely different approach to food security – and the UPA's next flagship folly comes nowhere near addressing it. And yet, Amartya Sen is backing a bad idea.

Sen's charlatan economics have been repeatedly exposed by more sensible economists.
 
Today's Business Standard, for example, has an article by Arvind Subramanian, Senior Fellow at the Peterson Institute for International Economics and Center for Global Development, which rubbishes Sen's stand on food security. (Read here - http://www.business-standard.com/article/opinion/the-economic-consequences-of-professor-amartya-sen-113070901024_1.html).
 
Critiquing Sen's backing for the UPA's entitlements-based policy framework, of which the Food Bill is only the latest exhibit, Subramanian gives five solid reason why this approach is seriously flawed.
 
One, it causes economic instability and vulnerability. The domestic slowdown and the antics of the rupee are clear evidence of this. No further proof is required of the damage caused by UPA-nomics.
 
Two, the rights-based approach "legitimises atrocious policies". Leave alone food, Subramanian shows how energy subsidies have ballooned over the last 10 years of UPA rule, distorting the choices people make in multiple spheres – from bad crop patterns to wrong fertiliser use to under-investment in power.
 
Three, the rights-based approach also "undervalues opportunity costs". Subramanian gives the example of the right to education (RTE) – an enormously expensive exercise with doubtful payoffs. It would have been far cheaper and more effective to focus on ensuring teachers turned up for work – thus improving student learning. The RTE is an extravagance the country could have done without, when cheaper and more focused solutions were possible. The UPA never weighed the costs of what could have been done with the money spent – hence incurring a huge opportunity cost.
 
Four, Subramanian correctly suggests that the rights-based approach overburdens the state's capabilities. The state's first duty is to protect its people, deliver law and order, and ensure basic rights, and public facilities. When the focus shifts to private welfare benefits such as providing food and homesteads, the state fails to deliver on public goods, as Ajay Shah points out in this article ( http://www.firstpost.com/blogs/how-indias-focus-on-welfare-is-damaging-law-and-order-568545.html ).
 
Five, ultimately, overburdening the state leads to its weakness. Subramanian says that when the state does not provide the basics of protection, health and education services, and focuses instead on redistribution, it loses the allegiance of the middle class. They will evade taxes, educate their children abroad, live in gated colonies, and generally turn away from the state.
 
Concludes Subramanian, who started out as an admirer of Sen: "For this admirer of Professor Sen's exceptional academic work, two ironies stand out. His Nobel-winning insight was about the importance of broad purchasing power rather than the narrow (physical) availability of food in avoiding famines and mass starvation. It is curious, even mystifying, therefore, to see him forcefully advocate, through morbidity-laden polemic, the physical provision of one type of food – cereals, which are rapidly declining in people's consumption basket – to help reduce malnutrition."
 
But it is not only Subramanian who is disillusioned with UPA's voodoo economics and Sen's efforts to give it intellectual heft. Earlier, Arvind Panagariya of Columbia University spoke out when Sen made a fool of himself by claiming that every week's delay in the Food Bill caused 1,000 deaths.
 
Panagariya told The Economic Times: "I  was taken aback when I heard Sen forcefully attribute a specific number of child deaths of "1,000 per week" to the lack of passage of the Food Security Bill on a TV debate… I am mystified by how one can attribute a precise number of child deaths to the absence of a policy that has not been in place for a single day, a policy that is subject to so many lapses and leakages along the implementation chain, whose impact critically depends on how the beneficiaries adjust their consumption in response to it, and which can after all potentially impact only calorie intake and no other causes of death."
 
Swaminathan Aiyar also scuttled Sen's pretentions (here - http://articles.economictimes.indiatimes.com/2013-05-22/news/39445320_1_nobel-laureate-food-security-bill-child-deaths ) by taking up Sen on his own calculations. Using figures for losses in the public distribution system caused by leakages and graft, he calculates that the Food Security Bill – which Sen claimed cost 1,000 lives per week due to non-implementation, or around 50,000 lives per annum – would cost at least Rs 50,000 crore more even according to official estimates.
 
Asks Aiyar: "Even if the Bill saves 50,000 lives, it will cost an additional Rs 50,000 crore. Aren't there cheaper ways of saving lives than Rs 1 crore per head?"

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