There are no free lunches…

…or are there?

Note: I had discovered Roshan to be a fellow-thinker on matters related to economics. While we have little or no differences on open economy concepts, we have a great deal of difference when it comes to how domestic economy should be managed. In this post, you get to read both POVs and judge the topic for yourself.

Prologue

In an economy that already suffers a 5% deficit, the FSB will add another 1.2% of burden for free food. According to Sonia, the biggest “pusher” for FSB, this bill would cost the exchequer (read: taxpayers) around $23b, will provide near-free food to 2/3rds of India.

The ideologist POV

If you are ideologically inclined, the simple way to interpret this is that this the lowest form of socialism. This means we are heading straight back to the Nehruvian era, in an already weak economic climate. This is the conceptual opposite of free-market and capitalism; and an epitome of redistribution and societal decay.

But wait…

Even if you are NOT ideologically inclined, this plan doesn’t make sense. Here’s why?

The economist POV

This program costs ₹1.3 trillion for 48 billion kgs of rice (800 million people X 5 kg per month X 12 months in a year). The per-kg cost comes to about ₹27. Even assuming the distribution overheads are negligible (which they are not), after the co-pay of about ₹3, the government cost comes to around ₹24 — assuming the same farmers can sell it in free-market for ₹34, the GDP is effectively hit to the tune of ₹10/kg or ₹480 billion or 0.5% of GDP.

If you add this to the fact that we will have ₹1.3 trillion in added deficit, and the fact the subsidy may be much higher than ₹10/kg, the balance sheet impact on India is much higher.

There’s more

This is not merit-based — If India has lifted 138 million out of poverty, and there are only 269 million now in poverty, who is this program actually helping? And why they are getting it, again? Any reason besides the fact that they have the voting power? There’s an article written by Swaminathan Aiyar where Sonia has fudged the system to deem more people as living in poverty, so FSB can address a broader mass.
Distribution Leakage — India’s distribution network is world renowned for leakage and corruption. The people who need it won’t get it, the people who don’t need it will see their bags of rice stolen and profited from.
This will not bring food security — 5kgs of rice is not enough for a family. The fact that they don’t have food security will remain.

Quoting Sonia

Sonia says “You mustn’t question this legislation or inquire how it will be funded”. Because the legislation is nothing but an irrational act of populism to attract votes during the 2014 elections. Because the funding comes from the money we give the government to do its job of governance. Not redistribution.

Return to ideological view

Lets face it — no country in the history of the world has ever prospered due to socialism. China, if you are thinking about it, is a capitalistic state, just that the only capitalist happens to be the State.

Who is funding this?

If you think the entire India is funding this, think again. Thanks to the archaic labor laws and the might of unorganized labor force, fewer than 35 million people pay income taxes. So effectively, each tax-paying citizen is spending ₹45,000 to essentially ensure Sonia gets elected again.

$23b for FSB means that much money not spent on electricity, roads, water, education, research, defense etc…But Sonia knows it too well that none of these will be as popular as FSB — so we face the wrath of democracy.

Contraview

With the status as one of the 10th largest economies in the world, 3rd if you consider purchasing power and with a growth rate between 5–7 %, India has a lot to cheer about. It is also a part of the celebrated BRICS group of new global emerging powers.

But it also belongs to a more sinister club; it is 15th in the list of countries in the global hunger list (GHI) where Sudan is ranked higher at 19th and Pakistan at 20th. An estimated 40% of Indian kids under 5 suffer from malnutrition. Among Indian states, the land of desi ghee, Punjab, lies below 33 other developing countries ranked by GHI.

So I feel glad that India is implementing the National Food Security Act after it passed parliament with strong support (the opposition wanted to increase coverage to 90% to gain the vote bank effect). Notwithstanding the political greed shown by the UPA government, this is a genuine game changer. With coverage for 50% of urban poor and 75% of rural poor, and with support for new mothers, it goes a long way towards the reduction of hunger.

India has also one of the most comprehensive agricultural purchase vehicles, called Minimum Purchase Price Scheme (MPPS), where in the government sets minimum prices for the purchase of commodities. Since the farmers constitute a huge vote bank, MPPS schemes are the most generous, normally above wholesale prices in most areas for same quality of goods. So FCI (Food Corp of India) ends up buying most of the crop in nearly all categories, through middlemen of course and storing it in open structures where it lies and rots. The argument here is that, since Indian government already buys enough food grains and lets it go rot (urban Indians do not buy from FCI sourced food, nor do foreign buyers), why don’t we use our mammoth stocks to feed our poorest people without adding much to the deficit.

Finally, these low price food schemes are already implemented in some states as a vote bank policy but have improved hunger index, reduced malnutrition and made masses aware and vigilant about their right to food, which has reduced pilferage. So extension of these successful schemes to all states would definitely help India in reducing its hungry, and that in itself is a priceless goal. After all, what can 40,000 crores buy you (maybe 25 Aircraft carriers, or 400 Rafale fighters which may or may not be used). The actual increase in food subsidy being 40,000 crore.

Some positives of the National Food Security bill passed on August 26th are

For the first time, the head of a house hold is the oldest female resident
Maternity benefit and food from pregnancy till 6 months after child birth
Integration with Aadhar to reduce fraud
Equal responsibility sharing with state governments

Biggest of the positives is the spread of awareness of the right to food, which will make the poor more vigilant about their right and reduce the existing pilferage.