Month: July 2013

Mr Chidambaram, you can't fool all the people all the time

P-CHIDAMBARAM 

Vivek Kaul
 P Chidambaram was at his rhetorical best in Jaipur yesterday defending the food security ordinance. “The Food Security Ordinance which I hope becomes a bill is intended to deal with both hunger and malnutrition. There are direct benefits, there are huge indirect benefits,” the finance minister said.
But does supplying more grain to nearly two thirds of the country’s population at a highly subsidised rate really help? There is more than enough evidence from the past three decades that it doesn’t.
The amount of grains distributed through the public distribution system has gone up dramatically over the years. As T N Ninan wrote in a recent column in the Business Standard “Back in the 1980s, the government distributed an average of nearly 16 million tonnes of foodgrain each year through the public distribution system (PDS). The 1990s saw an increase in the PDS throughput to just over 17 million tonnes. The striking change came in the decade of the “noughties”, which saw the annual figure climbing to around 20 million tonnes, then 30 million tonnes, and in the final years of the decade more than 40 million tonnes. Now the figure is closer to 50 million tonnes. On a per capita basis, the grain made available through the PDS has doubled, from 20 kg per year in the 1990s to 40 kg now.”
But even this hasn’t helped tackle the country’s malnutrition problem. As Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “In at least one field – that of nutrition and especially child nutrition – South Asia fares distinctly worse than sub-Saharan Africa. More than 40 per cent of South Asian children ( and a slightly higher proportion of Indian children) are underweight in terms of standard WHO norms, compared with 25 per cent in sub-Saharan Africa (the corresponding figure, incidentally, is less than 12 per cent in every other region in the world).”
This is something that other experts also agree with. A research paper titled National Food Security Bill: Challenges and Options authored by several authors at the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, points out “According to National Family Health Survey (NFHS-3) conducted in 2005-06, 20 per cent of Indian children under five years old were wasted (acutely malnourished) and 48 per cent were stunted (chronically malnourished). The HUNGaMA (Hunger and Malnutrition) Survey conducted by Nandi Foundation conducted across 112 rural districts of India in 2011 showed that 42 percent of children under five are underweight and 59 percent are stunted.”
One reason for this could be that a major portion of the subsidised grain distributed through the PDS never reaches the intended beneficiaries. It is estimated that in 2009-10, the PDS had a leakage of 40.4%. This is a significant improvement from 54.1% in 2004-05, but is a large number nonetheless. The food security scheme is being executed through the same ‘leaky’ PDS.
The other reason for the lack of nutrition is the fact that improving nutrition is not simply about selling grains to more people at a subsidised rate. “Access to sanitation facilities and women’s literacy in particular are found to be strong factors affecting malnutrition,” write the CACP authors.
Drèze and Sen compare sixteen extremely poor countries on various social indicators. When it comes to access to improved sanitation, India is 13th on the list. Only Cambodia, Haiti and Nepal come behind India on this indicator. In fact Pakistan and Bangladesh fair much better than India on this indicator, and so does war-torn Afghanistan. “In India, a full 50 per cent of households had to practise open defecation in 2011, according to the latest population census – a higher proportion than in almost any other country for which data are available…This hardship passes largely unnoticed, and indeed, the need for universal access to basic sanitation facilities has not been a major concern in Indian planning till very recently,” write Drèze and Sen. And it is well worth remembering here that the Congress Party has ruled the country for a major period of time since independence. So if lack of sanitation leading to malnutrition is a problem in the country, it is because the Congress party has chosen not to address it till date.
There is enough evidence to prove that food security scheme is unlikely to do much on the improvement of nutrition front. What about the scheme helping people to buy rice and wheat at very subsidised rates and hence ensuring they do not have to go hungry?
As a recent article in the Mint points out “A February report of the National Sample Survey Office (NSSO) shows the proportion of people not getting two square meals a day dropped to about 1% in rural India and 0.4% in urban India in 2009-10. Interestingly, the average cereal consumption of families who reported that they went hungry in some months of the year (in the month preceding the survey) was roughly equal to the average cereal consumption of those who reported receiving adequate meals throughout the year.”
So the government’s own data conclusively proves that people are able to buy as much rice and wheat that they need.
To improve nutrition more consumption of vitamins and minerals is required. Howarth Bouis, director of HarvestPlus, International Food Policy Research Institute (IFPRI), made a very interesting point in an interview to the Minta few months back. “Food prices have been going up over time but we have to make a careful distinction in the Indian case between cereal and milk prices on the one hand, and all other foods on the other hand. After the green revolution, yields of rice and wheat shot up, and prices actually came down. Maybe prices have risen in the past couple of years but over the past 40 years, prices have fallen. The story is similar for milk. But if you look at all the other food groups such as fruits, vegetables, lentils, and animal products other than milk, you will find a steady increase in prices over the past 40 years. So it has become more difficult for the poor to afford food that is dense in minerals and vitamins.”
Food prices have gone up dramatically over the last few years due to the easy money policy run by the Congress led UPA government. (You can read the complete argument here). During the period 2008-2009 to December 2012, the food inflation averaged at 10.13% per year. It has more or less continued at same levels since then. And this is one of the major reasons that has been impacting nutrition, at least over the last few years.
Lack of nutrition among children and needs to be tackled on a war footing. The trouble is that the medicine being prescribed for it just does not work. As Ashok Gulati and Surbhi Jain of CACP point out in a research paper titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) “There is a need to innovate in our food management and welfare policies so that same expenditure brings much higher returns in terms of tackling hunger and malnutrition of this country.” And that is really not happening.
Given this, P Chidambaram might well want to remember what Abraham Lincoln, the great American President, who brought slavery to an end, once remarked: “You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time.”
(Vivek Kaul is a writer. He tweets @kaul_vivek) 

How the government makes you pay more for food

 food

Vivek Kaul


“God,” they say, “is in the details”. And so is the devil.
The wholesale price inflation(WPI), one of the ways to measure the rise in prices, touched 4.86% for June 2013. In May 2013, WPI had stood at 4.7%.
The worrying factor was that food inflation increased to 9.74%, due to an increase in price of onions, cereals and rice. During May 2013, food inflation was at 8.25%.
While an overall inflation of less than 5% sounds like a good situation to be in, it clearly is not, because of the high food inflation that prevails (I bought tomatoes at Rs 60 per kg yesterday evening and that hurts).
The point to remember here is that overall inflation is a theoretical construct where various goods and services have a certain weight attached to them. Food articles comprise of around 14.34% of the WPI basket. What this means in simple English is that if an individual were to spend Rs 100 on goods that comprise the WPI basket, he would spend Rs 14.34 on buying food.
But for most people the proportion of money they spend on food is higher than 14.34%. A discussion paper titled Taming Food Inflation in India released by the Commission for Agricultural Costs and Prices(CACP), Ministry of Agriculture, on April 1, 2013, makes the point. “An average household in India still spends almost half of its expenditure on food, and poor around 60 percent (NSSO, 2011), and that poor cannot easily hedge against inflation, high food inflation inflicts a strong ‘hidden tax’ on the poor…In the last five years, post 2008, food inflation contributed to over 41% to the overall inflation in the country,” write the authors Ashok Gulati and Shweta Saini. Gulati is the Chairman of the Commission and Saini is an independent researcher.
This means that rising food prices are a huge problem for most Indians. Vegetable prices went up by 16.47% in June vis a vis 4.85% in May. Onion prices went up by a whopping 114% against 97.4% in May. Price rise in cereals and rice was 17.2% and 19.1% respectively.
While each food product has its own reasons for the price rise, there are some broad generalisations that can be made. Take the case of rice and wheat. Their price rise can be directly attributed to hoarding by the government.
In a research paper titled Buffer Stocking Policy in Wake of NFSB (National Food Securities Bill) Ashok Gulati and Surbhi Jain of CACP point out “The country is currently loaded with large stocks. On July 1, 2012, e.g., it had 80.2 million tonnes, and is likely to have similar or even higher amount this year, despite emerging as the largest exporter of rice (around 10 million tonnes in calendar year 2012) and exporting about 5.6 million tonnes of wheat in FY 2012‐13.”
The situation seems to have continued this year as well. The food grain stock as on April 1, 2013, stood at 59.8 million tonnes against the norm of 21.2 million tonnes, that the government needs to maintain as on April 1, of every year.
One explanation for the hoarding is that the government was building up stocks to implement the food security scheme. But even after taking that into account, the government is hoarding onto more rice and wheat it requires to sell at subsidised rates. The CACP report estimates that anywhere between 41-47 million tonnes, would be a comfortable level of buffer stocks. This would be enough to take care of the subsidised grain that needs to be distributed to implement the food security scheme. At the same time it would also take care of the strategic reserves that the government needs to maintain, to be ready for a drought or any other exigency.
As on July 1, 2013, the government is expected to have around 82 million tonnes of rice and wheat. What this means that the government has an excess stock of nearly 30-40 million tonnes. As Gulati and Jain point out “The value locked in these “excess stocks”, evaluated at their economic cost, ranges from Rs 70,000 crore to Rs 92,000 crore. This infusion of “excess” money into the economy without corresponding flow of goods is evident in the paradox of rising prices of rice & wheat amidst overflowing stocks in government godowns.”
The excess storage by the government causes inflation in two ways. There is lesser rice and wheat available in the open market, and this pushes up prices. In the last few years, the government has been buying and hoarding more and more of rice and wheat produced. In 2006-2007, the government bought 32% of the total rice paddy produced. In 2011-2012, this had shot up to a massive 54%. During the same period the procurement of wheat more or less doubled, from 18% to 35%. As a a report brought out by the Comptroller and the Auditor (CAG) General of India points out “The total food grains stock in the Central Pool recorded an increase of 45.8 million tonnes between 2006-07 and 2011-12.”
In some states the procurement of grains has more or less been quasi nationalised. In states like Punjab, Haryana and now Madhya Pradesh and Chhattisgarh, around 80‐90% of the rice and wheat produced is bought by the government. This means the amount of rice and wheat available in the open market has come down dramatically and which in turn has pushed up prices.
The second reason for inflation is the fact that the farmers have already been paid anywhere from Rs 70,000-92,000 crore for the excess stocks that the government chooses to maintain. When this money is spent it leads to more money chasing the same number of goods and products, and thus adds to inflation.
In fact, high food inflation isn’t a recent phenomenon. It has been a regular part of our lives since 2008, when the Congress led UPA government decided to get ready for the 2009 Lok Sabha elections and go on a spending spree. During the period 2008-2009 to December 2012, the food inflation averaged at 10.13% per year. It has more or less continued at same levels since then.
The rise in expenditure of the government hasn’t been met by a rise in revenues and has thus led to an increase in fiscal deficit. Fiscal deficit is the difference between what the government earns and what it spends. The fiscal deficit of the Indian government in 2007-2008 (the period between April 1, 2007 and March 31, 2008) stood at Rs 1,26,912 crore. This jumped by 230% to Rs 4,18,482 crore, in 2009-2010 (the period between April 1, 2009 and March 31, 2010). It has since jumped to even higher levels and for the 2013-2014(i.e. The period between April 1, 2013 and March 31, 2014) it is projected to be at Rs 5,42,499 crore.
And it is this increased expenditure(reflected in the burgeoning fiscal deficit) of the government that has led to inflation. As Gulati and Saini point out “Indian fiscal package largely comprised of boosting consumption through outright doles (like farm loan waivers) or liberal increases in pay to organised workers under Sixth Pay Commission and expanded MGNREGA(Mahatma Gandhi National Rural Employment Guarantee Act expenditures for rural workers. All this resulted in quickly boosting demand.”
The sudden increase in government expenditure meant more money landing up in the pockets of citizens. And this money was spent leading to an increase in demand for goods and services. But this increase in demand could not be met with an increase in supply because of several infrastructure bottlenecks. As Gulati and Saini write “But with several supply bottlenecks in place, particularly power, water, roads and railways, etc, very soon, ‘too much money was chasing too few goods’. And no wonder, higher inflation in general and food inflation in particular, was a natural outcome…This study finds that the pressure on prices is more on protein foods (pulses, milk and milk products, eggs, fish and meat) as well as fruits and vegetables, than on cereals and edible oils, especially during 2004-05 to December 2012. This normally happens with rising incomes, when people switch from cereal based diets to more protein based diets. ”
Food inflation has now become a way of life for Indians, and is unlikely to go away any time soon. Even with that the government can look to at least control the rise in price of rice and wheat by trying to sell the excess stocks that it is hoarding onto. In fact, the irony is that the government doesn’t have enough space to store all the rice and wheat it is hoarding. The total storage capacity available is around 71.9 million tonnes. Now compare this to the total expected food grain stock of around 82 million tonnes as on July 1, 2013. What this means is that nearly 10 million tonnes of food grain is rotting in the open.
It is not rocket science to suggest that at least this stock can be sold off. It is always better if people eat rice and wheat, rather than the government letting it rot.
The article originally appeared on www.firstpost.com on July 16, 2013

(Vivek Kaul is a writer. He tweets @kaul_vivek)

 

 

The Almighty Dollar and the Fallen Rupee

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“I am not an economist. I am an old bond trader,” said Drew Brick, who leads the Market Strategy desk for RBS in the Asia-Pacific region, when Forbes India caught up with him for breakfast on a recent visit to India. “We trade the noise,” he added emphatically.
Right now, the noise is about what US Fed Chairman Ben Bernanke said or didn’t say about his bond-buying. And this is why one needed to know what the “old bond trader” had to say about why the rupee was falling against the dollar. “What is happening now is really not a function of anything really specific to India, although India has an inclination to have problems,” explained Brick. Finance Minister P Chidambaram should welcome at least the first part of his statement, since he has been defending the “fundamentals” of the economy to anybody who would listen.
The foreign exchange market hasn’t been one of them, for it has been cocking a more attentive ear to what Bernanke had to say. And on June 19, he said that the Fed would go slow on its money printing operations in the days to come as the US economy started reviving. “If the incoming data are broadly consistent with this forecast…it would be appropriate to moderate the monthly pace of purchases later this year…And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said at a press conference that followed the meeting of the Federal Open Market Committee (FOMC).
That statement impacted the bond markets most—and the carry trade. The carry trade is about investors who borrow in low-yield currencies to invest in assets in other markets, presumably with higher yields. Bernanke’s statement signalled that bond yields may go up, and that meant carry-trades would have to be unwound. Brick confirmed this: “We are seeing the unwinding of a lot of carry trades that have been taking place across the globe in the chase for yield.”
Brick, who bears a striking resemblance to Hollywood actor Richard Gere, had worked with BNP Paribas, Morgan Stanley and legendary bond kings Pimco before he joined RBS last year. He explained why the dollar is holding up even though US growth isn’t exactly something to write home about. “Some people think that the United States is the least dirty shirt in the drawer. And it has got growth, though not a very high trajectory of growth,” said Brick.
It is this minor revival that is creating problems for carry trade investors who have borrowed and invested money across the world on the assumption that US interest rates will rule close to zero in the foreseeable future.
The return of economic growth in the US has pushed up 10-year treasury bond yields. The yield, which stood at 1.63 percent in the beginning of May, has since risen to 2.5-2.6 percent.
Said Brick: “A bond works by a simple method. It measures three fundamental variables. What are they? Everybody who trades bonds thinks about where is growth going? Where is inflation going? And what is the risk premium?”
And what do we get if we apply this formula to calculate the yield on 10-year US treasuries? Explained Brick: “If the 10-year yield today is around 2.2 percent [it was so, on the day the interview was conducted], what would you say the US nominal growth is? Around 2 percent. What do you think inflation is? Around 1 percent. What do you think the risk premium is in the market place? Clearly it’s risen a little, so maybe it is 30 basis points.” (100 basis points make 1 percent).
This gives us a 3.3 percent yield on 10-year US treasuries. “And when the 10-year treasury is trading at a yield of 2.2 percent, what do you do as a trader? You sell that freakin’ thing. And that’s the risk,” said Brick.
When lots of bonds are sold at the same time, the price of the bond falls and thus the yield, or the return, goes up. And that is precisely what has been happening with 10-year US treasuries, with the yield shooting up by nearly 60 basis points from 1.63 percent in early May to nearly 2.2 percent on June 18, 2013. After Bernanke’s press conference on June 19, the yield shot up dramatically. On June 24, it stood at nearly 2.6 percent.
“The 10-year US treasury is extremely important,” said Brick. This is because it sets the benchmark for interest rates on all other kinds of loans in the United States, from interest rates charged by banks on home loans and home equity loans to interest at which carry trade investors can borrow money. More important for the rupee’s health, when the 10-year US treasury yield goes up, carry trades become less attractive. “The days of quantitative easing-sponsored carry trading are about to be pared, perhaps significantly. Remember, as volume rises, the cost of carry rises and so, too, does market illiquidity,” said Brick.
This is why investors have been selling a lot of the assets they have invested in and repatriating the money back to the United States. The Indian debt market has been hit by this selling and foreign institutional investors (FIIs) have pulled out nearly $5 billion since late May. In fact, stock markets all over the world also fell in the aftermath of Bernanke announcing that he will go slow with his money printing operations in the days to come.
The Federal Reserve has been printing $85 billion every month. It uses $40 billion to buy mortgage-backed securities, and $45 billion to buy long-term American government bonds. By doing so, it has been pumping money into the financial system and keeping interest rates low in order to spur growth.
But the growth did not come. Said Brick: “The truth is that central banks are running up their monetary bases but they are not necessarily getting any bang for the buck in terms of the turnover of the cash that they are creating into the system.”
Bernanke did not say he was going to withdraw all kinds of quantitative easing, or even that he would start withdrawing the easy money. That would require him to sell all the bonds he bought. The market though is getting ready for that to happen. “The market is already trading this. Forward pricing in the markets is already adjusting for this,” said Brick.
Low interest rates in the US after the 2008 Lehman crisis led Asians to borrow a lot in cheap dollars. “All across Asia, non-financial corporations, and even households to a small extent, have been taking out huge amounts of dollar funding,” said Brick. And this may cause some major problems in the days to come. “Right now we are seeing an unwinding of the dollar carry trade but at some point the dollar is going to turn and then the servicing cost of that debt is going to be all the more tricky. Every crisis that I have ever read through, and I am an old man, has always been born on the back of rising rate cycles that move higher with the dollar in tow. This makes the financing cost of debt in emerging markets more expensive. That’s across the board. That’s probably true here in India as well,” he added.
Brick suspects that there are problems lurking in the woodwork. “Corporates are relatively sanguine with a weaker rupee. But where are the cockroaches in the system? Where has the dollar funding been taken on offshore? Have Indians thought about what it means to have a rupee possibly at 65 to a dollar? And what would that possibly mean for the financing cost of banks that have almost certainly been taking on relatively cheap quantitative easing-sponsored cash in their offshore operations to be able to finance lending?”
If the rupee gets to 65 to a dollar, our oil bill will go for a toss. And will gold have a rally in rupee terms, assuming that its price stays stable in dollar terms? “Gold is a zero interest, infinite maturity, inflation-linked bond. That’s all gold is,” Brick responded. The supposed end of quantitative easing in the United States has taken some sheen off the yellow metal. “But it’s possible that we may have another move higher. The selloff has been rather pronounced. But it’s not the core issue here. Gold is a symptom of the larger issue,” said Brick.
Brick also feels that the bond market in the United States might be getting a little ahead of itself.
He reminded us about March 2012, when the 10-year US treasury yield had moved up to 2.4 percent. “Then, Ben Bernanke showed up on the tapes 10 straight trading days, running it back down [i.e. the yield]. My guess is that something like that will occur this time. The market is way ahead of itself.”
The broader point is that if yields rise at a fast pace, they will push up interest rates on loans. This will slow down some of the economic growth that seems to be returning to the United States. And that situation may not be allowed to play out.
So where does that leave Asia? “If quantitative easing gets tapered off as a consequence of relatively strong growth, then quite frankly Asian equities probably will hold in pretty well,” explained Brick.
And then came the but. “But if treasuries sell off massively as a consequence of technical reasons and a marketplace getting well ahead of itself, and dollar funding and interest rates get higher, then equities will get wasted out.”
“What is another scenario? I can give you millions of scenarios. But the truth is we don’t know in the opening stages, the first minutes of a three-hour movie, how it is going to play out. It’s going to be like a Bergman movie. I don’t know how it is going to play out but it is going to be weird at times,” Brick said.
Weird it will be, for “even the end-point of tapering [of Fed bond purchases] leaves the Federal Reserve with a still-gargantuan 25 percent-of-US-GDP balance-sheet. Pressures will sustain, even with reprieves,” Brick concluded.

The interview originally appeared in the Forbes India magazine edition dated July 26, 2013

Five questions govt needs to answer on food security

 sonia-maino-la-fidanzata-italiana-di-rajiv-gandhi-29-gennaio-1968-ap2Vivek Kaul 
Sonia Gandhi wants the chief ministers of fourteen states in which the Congress party is in power to role out the food security scheme in letter and spirit, and in quick time. Some media reports suggest that the scheme will be rolled out on August 20, which also happens to be the birth anniversary of Sonia’s late husband Rajiv.
While there seems to be a great hurry to launch the scheme there are some basic questions that the government needs to answer.
a) It has been pointed out time and again that the right to food security is likely to benefit 82 crore Indians. It seeks to cover 50% of the urban population and 75% of the rural population. The trouble is that no clear eligibility criteria for identifying the intended beneficiaries has been specified. It has been left to the state governments. As Jean Drèze wrote in a recent column in the Business Standard “For instance, the identification of eligible households is left to the discretion of the government. In the absence of clear eligibility criteria, no one is really entitled to anything as a matter of right; this defeats the law’s purpose.”
So the question is how will be the intended beneficiaries be identified.? The lack of a mechanism already seems to be causing problems. A report in the Daily News and Analysis points out that a presentation being made Sheila Dikshit, the chief minister of Delhi, was cut short by food minister KV Thomas. As the report points out “Dikshit’s presentation was cut short by food minister, when she mentioned that 32  lakh beneficiaries of existing schemes would be covered by the food security ordinance. She was reminded that in Delhi 72 lakh people are estimated to gain from the food security scheme. She had mentioned that Delhi had 2.62 lakh BPL card holders and 2.21 lakh are in the rehabilitation colonies and other 40,500 are in slums. Even these figures made just 26 lakh persons. Delhi CM then added another 10 lakh beneficiaries covered under the Antyodaya Ann Yojana and Anna Shri Yojana. She was told to undertake a fresh survey and draw the list of beneficiaries.”
Haryana Chief Minister Bhupinder Singh Hooda was in a similar situation. “Similarly, Hooda also come out with a figure of just 39 lakh beneficiaries.  He was also told that as per the population of his state, he needs to draw a list of not less than 1.69 crore,” the DNA reports.
So the calculations of the Delhi chief minister tell her that there should be 36 lakh beneficiaries(26 lakh + 10 lakh beneficiaries under the Antyodaya Ann Yojana and Anna Shri Yojana) of the food security scheme in Delhi. The food minister feels that there are 72 lakh estimated beneficiaries. Dixit has been asked to do a fresh survey and draw up a list of beneficiaries. The gap of 36 lakh (72 lakh minus 36 lakh) need to be filled.
Hooda needs to fill in an even bigger gap of 1.3 crore (1.69 crore minus 39 lakh). Both Hooda and Dixit want to launch the scheme on August 20, which is a little over a month away. How are so many people going to be identified in such a short period of time? And the bigger question is why has no method for identification of intended beneficiaries be prescribed? Sheila Dikshit plans to distribute food security cards to those eligible for the scheme. 
b)What is the food security scheme going to cost every year? The finance minister P Chidambaram in the budget speech he made earlier this year said “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.” The total food subsidy in the government budget for 2013-2014(i.e. The period between April 1, 2013 and March 31, 2014) is set at Rs90,000 crore. Chidambaram’s estimate will be lower for this year simply because the scheme will be launched in large parts of the country only during the second half of the year.
Economist Surjit S Bhalla writing in a column in The Indian Express puts the cost of the food security scheme at Rs 3,14, 000 crore. Bhalla’s calculations are fairly simple and straightforward to understand and put across the likely cost of the scheme more than clearly.
The Commission for Agricultural Costs and Prices of the Ministry of Agriculture in a research paper titled National Food Security Bill – Challenges and Options puts the cost of the food security scheme over a three year period to Rs 6,82,163 crore. During the first year the cost to the government has been estimated at Rs 2,41,263 crore. Andy Mukherjee, a columnist for the Reuters, puts the total cost of food security at $25 billion or Rs 1,50,000 crore (assuming $1 equals Rs 60).
And if all these numbers aren’t enough there is the original estimate of Rs 27,000 crore when the idea of the Right to Food Security was first mooted in the National Food Security Bill tabled in the Parliament in December 2011. As Jean Drèze and Amartya Sen write in An Uncertain Glory – India and Its Contradictions “The additional resources required to implement the Bill were officially estimated, at that time, at Rs 27,000 crores per year.”
So how much is the food security scheme eventually going to cost the government and in turn the taxpayers? The estimates as one can see vary anywhere from Rs 27,000 crore to Rs3,14,000 crore. Can the government at least provide us a clear estimate of that? Or would that even be possible for the government to do, given that it has specified no method to identify the intended beneficiaries. Hence, it has no idea of how many people it will eventually end up covering under the scheme. So how does it calculate the cost? 
c) The food security scheme aims to provide subsidised wheat and rice to nearly 82 crore people. In order to procure the required rice and wheat the government already has an elaborate procurement system in place. It uses the Food Corporation of India and various other state agencies to buy rice and wheat directly from the farmers. The rice and wheat thus bought will be later sold at a subsidised price by the government.
What does the government plan to do in bad years when the production and/or procurement of rice and wheat are hit? In the current year the procurement of wheat by the government has declined by 33 per cent to 25.08 million tonnes. This has been attributed to aggressive buying by private traders. As of now this is not a reason for worry for the government primarily because of the excess wheat that it had bought during the previous years.
But what happens in a year during which production of rice or wheat is hit. As the CACP research paper cited earlier points out “With 60 percent of India’s farmland dependent on monsoon rains, drought years can slash production and force the country to import large quantities. The government already procures one-third of the cereals production and any increase in procurement will have enormous ramifications on the cereal economy/markets and would crowd out private sector operations with a consequent effect on open market prices.”
The government has the option of importing grains. But that is easier said than done, specially in case of rice. “Rice is a very thinly traded commodity, with only about 7 per cent of world production being traded and five countries cornering three-fourths of the rice exports. The thinness and concentration of world rice markets imply that changes in production or consumption in major rice-trading countries have an amplified effect on world prices,” the CACP paper points out.
Andy Mukherjee of the Reuters explained the consequences of what would happen during a year of bad harvest, a lot more clearly, in a recent column. “When the domestic Indian crop is insufficient, the programme may destabilize a thin global rice market…Once the bulk of Indian consumption bypasses the local open market – where prices can and do rise in years of bad harvest – the full brunt of the country’s demand will have to be met by supply from Thailand, Vietnam, Pakistan and the United States. That will in turn cause prices to surge for countries dependent on imports, such as Nigeria, Senegal, Bangladesh, Indonesia and the Philippines,” he writes. Not only is the price of rice going to go up in India, the world prices will go up as well. We will start exporting food inflation in the years to come.
d) Are the states really ready to launch the food security scheme? Of the fourteen Congress governments in the country only two have committed to launch the scheme on August 20, 2013, the birth anniversary of Rajiv Gandhi.
The government plans to use the public distribution system (PDS) to distribute rice and wheat. Estimates made by CACP suggest that the currently the system has a leakage of 40.4%. “In 2009-10, 25.3 million tonnes was received by the people under PDS while the offtake by states was 42.4 million tonnes- indicating a leakage of 40.4 percent,” the research paper points out. This is a marked improvement from 2004-05 when the leakage was around 54.1%.
Drèze and Sen in their book An Uncertain Glory – India and Its Contradictions divide the PDS into ‘old-style’ PDS and ‘new-style’ PDS. “Basic features of the old-style PDS include narrow coverage, large exclusion errors, erratic supply of food and massive corruption. The new-style PDS is based on a focused effort to tackle these interrelated problems, and to achieve broad coverage, low exclusion errors, regular supply, and relatively small leakages,” write the authors.
States like Tamil Nadu, Chattisgarh, Andhra Pradesh, Himachal Pradesh, Odisha and Rajasthan, are a part of the new style PDS, Drèze and Sen point out. But large states like Uttar Pradesh and Bihar are still on the old style PDS. This will ensure a tremendous leakage of rice and wheat that is distributed at a subsidised price in these and other states which still have old style PDS. 
e) The government ultimately plans to move food security onto the cash transfer system from the current PDS. So beneficiaries will be paid in cash which they can use to buy rice and wheat from the open market. But what will happen to the elaborate grain procurement system that the government has built through the Food Corporation of India in that case? As Drèze and Sen write “If the PDS were to be replaced with cash transfers, the government would have to devise good ways of using all the rice and wheat it procures every year. The procurement system has a momentum of its own, and is unlikely to be dismantled any time soon. Upbeat estimates of massive ‘food subsidy’ savings in the event of a transition to cash transfers effectively assume a discontinuation (or at least a sharp reduction) of foodgrain procurement, but this assumption is rarely discussed. Nor is the political feasibility of discontinuing food procurement given any room in these calculations.”
These are important questions for which the government needs to answer or they will comeback to haunt us in the time to come.
The article appeared on www.firstpost.com on July 15, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
 
 
 
 

Chidambaram and Sharma’s US visit is a waste of time

P-CHIDAMBARAMVivek Kaul 

The finance minister P Chidambaram is currently in the United States trying to solicit foreign direct investment(FDI) into India. This is one of the things that the government is trying to do in order to control the depreciation of the Indian rupee against the dollar.
Foreign investors wanting to start new industries and businesses in India bring in dollars through the FDI route. To do business in India the foreign investors need to exchange their dollars for Indian rupees. Hence they need to sell dollars and buy rupees. When this happens, there is a surfeit of dollars in the foreign exchange market, and this ensures that rupee gains value against the dollar.
At least, this is how it is supposed to work in theory. A big reason behind soliciting investment through the FDI route is that money brought in through this route cannot disappear overnight.
The question is will this work? Just inviting foreign investors to set up shop in India is not enough. The sales pitch needs to be followed up with a lot of serious background work. As Deepak Parekh, Chairman of HDFC, India’s biggest home finance company recently said “Look at our Foreign Direct Investment (FDI) policy. Ministers go all out to woo investors, but when investment proposals come, we cannot take decisions…Our policy on FDI is akin to inviting guests over to our house, but when they arrive, we refuse to open the door.”
The commerce minister Anand Sharma is also doing the rounds of foreign investors in the United States, along with Chidambaram. He cited some of the things that the Indian government had been doing to address complaints of foreign investors. One of the things that he talked about was the setting up of the Cabinet Committee on Investments (CCI) headed by the Prime Minister Manmohan Singh. The CCI was notified at the beginning of this year, on January 2, 2013, to ensure faster clearances for the implementation of major infrastructure projects.
But nothing of that sort seems to have happened. As The Economist points out in a recent article “a new committee headed by the prime minister, Manmohan Singh, has tried to push forward projects tangled in red tape…But the committee has not made a meaningful difference. On The Economist’s count, the fresh capital investment it has sanctioned (rather than discussed or delegated to other bodies) amounts to 0.4% of GDP, spread over several years.” The bottomline is that the ministers at least need to get their sales pitch right.
Foreign investors will not jump to set up shop in India just because a few ministers from India come calling. Any foreign investor will look at the ease of doing business along with the prospective returns that he can make, once he has got the business up and running.
Every year the World Bank puts out a ranking which measures the Ease of Doing Business across countries. In the 2013 ranking, India came in 132nd on the list. India’s ranking was the same in 2012 as well. When it comes to starting a business India is 173rd on the list. What this means is that foreign investors have an option of starting their business in a much easier way in 172 countries other than India.
When it comes to enforcement of contracts India is 184th on the list. The broader point is that why will the investors come to India when they have better options available elsewhere? Also it is worth remembering that the Western world in general and the United States in particular is currently dealing with the aftermath of the financial crisis. There is great pressure on companies to set up new businesses or expand current ones in their home countries. In this scenario if they do decide to go abroad and set up new businesses, it needs to be a very good proposition for them.
Foreign investors can get money to set up businesses and industries in India, but some basic infrastructure like power, roads etc, needs to be provided to them. And that is missing in India. As Jean Drèze and Amartya Sen, who are seen as the intellectual gurus of the current Congress led UPA government, write in their new book An Uncertain Glory – India and Its Contradictions “There has been a sluggish response to the urgency of remedying India’s astonishingly underdeveloped social infrastructure and of building a functioning of accountability and collaboration for public services. To this can be added the neglect of physical infrastructure (power, water, roads, rails), which required both governmental and private initiatives. Large areas of what economists call ‘public goods’ have continued to be neglected.”
This is something that needs to be set right if the government wants foreign investors to set shop in India.
What also does not help Chidambram and Sharma’s sales pitch is the fact that Indian businessmen do not seem too keen to expand their businesses or set up new businesses in India. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
As Ruchir Sharma points out in Breakout Nations “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad.”
How will Messrs Chidambaram and Sharma ever be able to explain this dichotomy to the foreign investors?
Foreign investors are no fools and they have realised over the years that it is not easy to do business in India. The spate of scams from 2G to coalgate has also contributed to them staying away. FDI into India has fallen in the last three out of the four years. For 2012-2013(i.e. The period between April 1, 2012 and March 31,2013), FDI fell by 21% to $36.9 billion, as per government data. The United Nations Conference on Trade and Development (UNCTAD) in a recent release said that FDI inflows to India declined by 29 per cent to $26 billion in 2012.
In order to attract foreign investors to invest in India and set up new businesses, a lot needs to be set right. And that needs to be done in India. Ministers visiting the United States on junkets is no way to solve the issue.
The article originally appeared on www.firstpost.com on July 12, 2013.
(Vivek Kaul is a writer. He tweets @kaul_vivek)