Expensive food-for-poor scheme could starve India's economy

India Dispatch: India's scheme to provide subsidised food to two-thirds of the population appears to be the answer to malnutrition and poverty. But there are widespread concerns the move will actually hurt the economy.

A mother and her child seeking alms walk past a wholesale shop in Bangalore. Manjunath Kiran / AFP

Two young bedraggled children peer through the window of a cafe in Mumbai. They tap at the glass, trying to get the attention of the customers who are sipping on lattes and eating sandwiches. The children, painfully thin and small for their age because of malnourishment, are ignored and eventually they scurry away.

Such scenes are commonplace in India, where, despite plentiful resources of food, millions of citizens struggle to get enough nutrition, while soaring inflation has only made the situation more difficult for the poor.

On the surface, it would seem that the Food Security Bill, passed by the lower house of parliament on Monday, would be exactly what India needs to alleviate malnutrition and poverty. It aims to provide subsidised food to almost 800 million people, or two-thirds of the population, at an expected cost to the state of 250 billion rupees (Dh13.97bn) a year.

But there are widespread concerns that the move will actually hurt India's economy.

Some economists argue that the scheme will weaken India's investment climate over the coming months, as investors interpret the move as a signal that the government is more focused on winning votes for the next general elections rather than improving the economic situation to achieve longer term benefits for the poor. It is also considered a burden to India's already wide budget deficit. All this is at a time when foreign money is flowing out of emerging markets because of expectations that the US Federal Reserve will wind down its stimulus programme.

Meanwhile, others doubt how effective the food security scheme will actually be, given India's widespread corruption and inefficient distribution systems.

"From basic economic principles, the Food Security Bill is a bad idea," says Kamal Sen, the president and chief executive of Cogitaas, a consultancy that specialises in strategy and planning. "Dual pricing of basic goods on such a large scale is going to lead to market and price distortions with great negative impact," he explains. "Shortages, black markets and nutritional imbalance between food grains and other nutrients, are all going to have major negative consequences.

"The distribution systems in India - whether subsidised food grain, or cooked midday meals in schools, or primary healthcare centres - is very flawed and consequently do not benefit the target groups as expected."

He believes that deeper, long term solutions are needed.

"Job creation and rising real wages, along with rising real incomes, is the only sure way to remove poverty or malnutrition, which does not depend on political patronage or bureaucratic connivance," Mr Sen says.

It is widely believed that India needs to achieve growth levels of about 8 per cent to create enough jobs for its population. Last year, economic growth slowed to a decade low of 5 per cent. Foreign investment is desperately needed by India to help stimulate its economy. With elections due in the next eight months, however, the fear is that investors will stay away until they are over. The food security scheme has only fuelled these concerns.

"It's the sign that you are sending out - it's not the money really," says Sonam Udasi, the senior vice president and head of research at IDBI Capital. "The sign is that despite the pressure you are facing on the economy, you are still forced to do this. In a way, the message is politics is winning over economics at this point in time. Investors will say: 'Why should I bother investing in your country right now? I can wait and watch and then come back when you're saner or there's a new government'."

Although the finance minister, P Chidambaram, has insisted that the scheme is within the country's budget, many feel that India cannot bear the burden of the cost of more food subsidies at the moment. It already has an annual food subsidy bill of 900bn rupees (Dh50.3bn).

"With next year's general election looming ever nearer, the government's willingness to instigate a politically unpopular fiscal tightening is close to nil," says Richard Iley, the chief Asia economist at BNP Paribas. "Consistent with that, the one dubious recent legislative success is the passage of the Food Security Bill, which, by some estimates, could triple food subsidy spending - an increase of 1-1 per cent of GDP - in the next few years."

Naveen Mathur, the associate director of commodities and currencies at Angel Broking in Mumbai, explains that the move has also been bad for the Indian rupee, which has crashed to a series of record lows recently.

"On top of the current account deficit, the fiscal deficit, the financial situation of the country, you are proposing another subsidy bill which grows in billions of dollars," he says. "One side of the story is that you want to cut your subsidies because this would take the burden out of the budget deficit figures. At the same time, what the government is doing - apart from all the reasons for the food security of the country - there is a cost and the cost of this particular Food Security Bill is really high. So, the situation today is leading us nowhere and people are getting sceptical on the overall picture of the Indian economy."

One of the major problems with India's food system is the convoluted distribution chain, which results in enormous wastage. "The success of the bill to achieve food and nutritional security depends critically on overhauling the archaic and inefficient food distribution system," says Rana Kapoor, the president of the Associated Chambers of Commerce and Industry of India and the managing director and chief executive of Yes Bank.

"A bad year of monsoons could emerge challenging and compel India to import food grains to meet the obligations of the bill," he explains. "Upside risks to food subsidy, at a time when India is struggling to reduce its fiscal deficit, could be challenging. Perhaps the government could begin now to switch subsidy expenditure away from fuel - especially on diesel - to food."