Decoding the food security legislation

The United Progressive Alliance's (UPA) ambitious National Food Security Bill might soon become reality.

After getting approval from the Lok Sabha, the Bill is headed for the Upper House of Parliament for approval.

The big debate is on the financial implications as and when all states start implementing the scheme. Also, how the estimated 20-30 per cent leakage in public distribution system (PDS) will be a drag on the finances, with no tangible benefits.

The government had pegged food subsidy at Rs 90,000 crore (Rs 900 billion) in the 2013-14 Union Budget.

Within this, Rs 80,000 crore (Rs 800 billion) was the usual food subsidy, while Rs 10,000 crore (Rs 100 billion) was towards "expenses" for the Food Security Bill.

The actual subsidy, based on the 2001 census data, is being pegged at around Rs 1.09 lakh crore, almost Rs 20,000 crore more than the estimated subsidy in the 2013-14 Budget.

However, this is not unusual. According to officials, the Budget always estimates food subsidy less than the actual needs, which are later met either through supplementary or rolled over to the next year.

"Never is the entire food subsidy requirement for a year provided in the Budget. Usually, 80-85 per cent of the annual subsidy incurred in a year is released through Budgetary support, while the rest is carried forward," said the official.

The current targeted public distribution system (TPDS) is based on the 2001 census, while a new census on 2011 population is already ready, which will push up the requirement of food from states as the number of the poor would actually rise.

According to official estimates, the subsidy on providing cheap food will also increase to around Rs 1.13 lakh crore as the number of beneficiaries rise.

This does not include the subsidies incurred on providing mid-day meal for children and nutritional food for pregnant women under OWS (other welfare schemes). Expenditure on such programmes is around Rs 8,000 crore. So, the total expenditure of providing cheap food to all under the existing TPDS mechanism is around Rs 1.2 lakh crore.

According to officials, after the Food Bill comes into force, this expenditure will swell to around Rs 1.3 lakh crore, which also includes the expenditure incurred for OWS as these will now be part of the Bill. This expenditure (Rs 1.3 lakh crore) is for one-year and that too when all the states simultaneously implement the Bill.

In other words, the incremental increase in subsidy from the current required food subsidy (based on TPDS on 2001 census) due to the Food Bill is Rs 21,000 crore, but from the Budgeted subsidy, this number is almost Rs 40,000 crore more.

However, with just four to five states planning to implement the Bill in FY14 and the rest pushing it to FY15, there is every possibility that the entire expenditure might not come this year and the government could manage to keep the food subsidy within reasonable levels.

However, what happens in FY15 is a big question mark. A clause in the Bill fixes the sale price of wheat, rice and coarse cereals for three years at Rs 3 per kg for rice, Rs 2 per kg for wheat, and Rs 1 per kg for coarse cereals.

However, the procurement price of wheat, rice and coarse cereals will have to be increased by at least 5-10 per cent to compensate farmers. Even if grain procurement remains at the current levels of 60-62 million tonnes, the cost will increase as the proposed sale price is just half of the current sale price and to more number of people.

At present, foodgrains at Rs 3, Rs 2, and Re 1 a kg of rice, wheat and coarse cereals, respectively, are just limited to 130 million people. Later on, the coverage will be expanded to almost 800 million people.

This is where the real trouble will start. Also, from FY15, the Centre will bear a part of expenditure of all states on transportation, distribution and commission to ration shop owners for grains under the Food Bill, which will further add to its operational expenditure.

This as experts said could very well push up the estimated subsidy to over Rs 130,000 crore per annum as states like Chhattisgarh give a huge amount of funds as commission to ration show owners. Probably, this is what the market is fearing -- a bloated incremental cost from FY15 onwards.

Read the complete Food Bill

THEN AND NOW FOOD SUBSIDY ESTIMATES