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According to news reports, the Prime Minister recently chaired a meeting with ministers to discuss an alternative plan (“Plan B”) for the National Food Security Bill, 2011 (hereinafter “Bill”). The Bill is currently pending with the Standing Committee of Food, Consumer Affairs and Public Distribution. It seeks to deliver food and nutritional security by providing specific entitlements to certain groups. The alternative proposal aims to give greater flexibility to states and may bind the centre to a higher food subsidy burden than estimates provided in the Bill. It suggests changes to the classification of beneficiaries and the percentage of the national population to be covered by the Bill, among others. Classification of beneficiaries The Bill classifies the population into three groups: priority, general and excluded. Individuals in the priority and general groups would receive 7 kg and 3 kg of foodgrain per person per month respectively at subsidized prices. Plan B suggests doing away with the priority-general distinction. It classifies the population on the basis of 2 categories: included and excluded. Those entitled to benefits under the included category will receive a uniform entitlement of 5 kg per person per month. Coverage of population Experts have suggested that the Bill will extend entitlements to roughly 64% of the total population. Under the Bill, the central government is responsible for determining the percentage of people in each state who will be entitled to benefits under priority and general groups. Plan B suggests extending benefits to 67% of the total population (33% excluded), up from 64% in the Bill. The Ministry has outlined two options to figure out the number of people in each state that should be included within this 67%. The first option envisages a uniform exclusion of 33% in each state irrespective of their poverty level. The second option envisages exclusion of 33% of the national population, which would imply a different proportion excluded in each state depending on their level of prosperity. The Ministry has worked out a criterion to determine the proportion of the population to be included in each state. The criterion is pegged to a monthly per capita expenditure of Rs 1,215 in rural areas and Rs 1,502 in urban areas based on the 2009-10 NSSO survey. Thus, persons spending less than Rs 40 in rural areas and Rs 50 in urban areas per day will be entitled to foodgrains under the alternative being considered now. Financial estimates Newspaper reports have indicated that the revised proposal will add Rs 7,000 to Rs 10,000 crore per year to the current food subsidy estimate of Rs 1.1 lakh crore. According to some experts, the total cost of the Bill could range anywhere between Rs 2 lakh crore to Rs 3.5 lakh crore (see here and here).
Recently, the Kelkar Committee published a roadmap for fiscal consolidation. The report stresses the need and urgency to address India’s fiscal deficit. A high fiscal deficit – the excess of government expenditure over receipts – can be problematic for many reasons. The fiscal deficit is financed by government borrowing; increased borrowing can crowd out funds available for private investment. High government spending can also lead to a rise in price levels. A full PRS summary of the report can be found here. Recent fiscal trends Last year (2011-12), the central government posted a fiscal deficit of 5.8% (of GDP), significantly higher than the targeted 4.6%. This is in stark contrast to five years ago in 2007-08, when after embarking on a path of fiscal consolidation the government’s fiscal deficit had shrunk to a 30 year low of 2.5%. In 2008-09, a combination of the Sixth Pay Commission, farmers’ debt waiver and a crisis-driven stimulus led to the deficit rising to 6% and it has not returned to those levels since. As of August this year, government accounts reveal a fiscal deficit of Rs 3,37,538 crore which is 65.7% of the targeted deficit with seven months to go in the fiscal year. With growth slowing this year, the committee expects tax receipts to fall short of expectations significantly and expenditure to overshoot budget estimates, leaving the economy on the edge of a “fiscal precipice”.
Figure 1 (source: RBI)
Committee recommendations - expenditure To tackle the deficit on the expenditure side, the committee wants to ease the subsidy burden. Subsidy expenditure, as a percentage of GDP, has crept up in the last two years (see Figure 2) and the committee expects it to reach 2.6% of GDP in 2012-13. In response, the committee calls for an immediate increase in the price of diesel, kerosene and LPG. The committee also recommends phasing out the subsidy on diesel and LPG by 2014-15. Initial reports suggest that the government may not support this phasing out of subsidies.
Figure 2 (source: RBI, Union Budget documents, PRS)
For the fertiliser subsidy, the committee recommends implementing the Department of Fertilisers proposal of a 10% price increase on urea. Last week , the government raised the price of urea by Rs 50 per tonne (a 0.9% increase). Finally, the committee explains the rising food subsidy expenditure as a mismatch between the issue price and the minimum support price and wants this to be addressed. Committee recommendations - receipts Rising subsidies have not been matched by a significant increase in receipts through taxation: gross tax revenue as a percentage of GDP has remained around 10% of GDP (see Figure 3). The committee seeks to improve collections in both direct and indirect taxes via better tax administration. Over the last decade, income from direct taxes – the tax on income – has emerged as the biggest contributor to the Indian exchequer. The committee feels that the pending Direct Tax Code Bill would result in significant losses and should be reviewed. To boost income from indirect taxes – the tax on goods and services – the committee wants the proposed Goods and Service Tax regime to be implemented as soon as possible.
Figure 3 (source: RBI)
Increasing disinvestment, the process of selling government stake in public enterprises, is another proposal to boost receipts. India has failed to meet the disinvestment estimate set out in the Budget in the last two years (Figure 4). The committee believes introducing new channels [1. The committee suggests introducing a ‘call option model’. This is a mechanism allowing the government to offer for sale multiple securities over a period of time till disinvestment targets are achieved. Investors would have the option to purchase securities at the cost of a premium. They also propose introducing ‘exchange traded funds’ which would comprise all listed securities of Central Public Sector Enterprises and would provide investors with the benefits of diversification, low cost access and flexibility.] for disinvestment would ensure that disinvestment receipts would meet this year’s target of Rs 30,000 crore.
Figure 4 (source: Union Budget documents, PRS)
Taken together, these policy changes, the committee believe would significantly improve India’s fiscal health and boost growth. Their final projections for 2012-13, in both a reform and no reform scenario, and the medium term (2013-14 and 2014-15) are presented in the table below: [table id=2 /]
