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Monday, 19 December 2011 00:00
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Rs 2 lakh crore on food bill, expect farm growth to fall

 

The Prime Minister’s Economic Advisory Council’s estimate that the Food Security Bill will raise food subsidies by more than 50%, from R60,000 crore to R95,000 crore, will presumably be top of mind when the Cabinet meets to debate the Bill once again. What the Cabinet would do well to keep in mind, however, is a far more scary scenario painted by India’s leading agriculture economist Ashok Gulati—though the piece, jointly written with Jyoti Gujral of IDFC, is in their personal capacities, keep in mind that Gulati is the head of the Commission for Agricultural Costs and Prices. Gulati and Gujral put the cost of the Bill at R6 lakh crore in the first 3 years, or R2 lakh crore a year.

Where do they get their costs from? For one, since the government is making a commitment to provide a fixed amount of grain each year, Gulati quotes the estimate given by the agriculture ministry that will be required to raise output—the ministry estimates foodgrain output will have to be raised by 25 million tonnes, requiring additional outlays of R1.1 lakh crore. Since a higher procurement would require higher rates as well as higher infrastructure costs—while the Bill needs the creaky PDS to handle 74 million tonnes by 2013-14, just 29.7 million tonnes were lifted by states in 2009-10 as against 45.4 million tonnes allocated for the PDS!—these have also been taken into account, as have been the mandi taxes on the vastly higher procurement.

To put the amount in perspective, total subsidies budgeted this year on everything are R1.4 lakh crore. More important is what this does to agriculture production. If agriculture has to grow at 4%, based on a conservative incremental capital output ratio of 4, this means India needs investments of around 16% of agriculture GDP—the good news is we’re now getting this kind of investment but the bad news is, Gulati points out, just a fourth of this is from the government. Given that it is only government that spends on irrigation, this means the growth potential is compromised. It’s not as if government is not spending on agriculture, but it spends 5-6 times more on farm subsidies than it does on farm investment where the returns in terms of poverty reduction and higher farm growth are several times higher. There are then other distortions like the Essential Commodities Act that allows states to ban movement of agri-commodities and suspending futures markets to the APMC Act that allows commission agents to take away as much as 15% of the farmers revenue—surely this can be removed even if FDI in retail cannot be allowed? And it will help in the UP elections!

 

 

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