New Delhi: Indian Prime Minister Manmohan Singh’s $21 billion-a-year programme to provide cheap food for the poor threatens to impede the nation’s efforts to pare the widest budget deficit in major emerging countries.
The food security Bill enacted last week entitles about two-thirds of India’s 1.2 billion people to low-cost grains, boosting food subsidies to as much as 1.2% of gross domestic product (GDP) yearly from 0.8%, Nomura Holdings Inc. said. The policy could pose a risk to Singh’s goal of cutting the fiscal gap to 4.8% in 2013-2014, Morgan Stanley said.
“The food Bill will be unequivocal bad news for fiscal dynamics,” said Rajeev Malik, a Singapore-based economist at CLSA Asia-Pacific Markets. “While it could be politically beneficial for the beleaguered Congress-led government, the medium-term fiscal challenges created by the legislation continue to be ignored.”
Finance minister P. Chidambaram has pledged to pare the deficit to 3% of GDP by 2017, part of wider policy changes since September to avert a credit-rating downgrade and revive India’s economy. The full fiscal strain of the food programme will be felt next year and may weigh on bond prices, according to ICICI Securities Primary Dealership Ltd.
The food initiative is a key plank of the government’s re-election strategy ahead of polls due by May 2014. Singh aims to build on vows to help the poor in a nation where World Bank data shows more than 800 million people live on less than $2 per day.
Budget and trade shortfalls in Asia’s third-largest economy have hurt the nation’s currency, which touched a record-low on Monday. The rupee has depreciated 9.3% against the dollar in 2013, the most after the yen in a basket of 11 Asian currencies tracked by Bloomberg.
The rupee weakened 0.6% on Monday, while the S&P BSE Sensex index fell 0.9%. The yield on the 8.15% note due June 2022 rose to 7.71% from 7.64%.
The food policy provides rice at Rs.3 a kg, wheat at Rs.2 and coarse grains at Rs.1, under a monthly entitlement of five kilogrammes per person.
The administration will retain the $15 billion food-subsidy estimate for the financial year ending March 2014 given in February’s budget even as it rolls out the measure, two finance ministry officials said.
“That’s because the Bill will apply for only about half the fiscal year, with all the supplies available unlikely to be taken up,” they said. The legislation involves spending of Rs.1.25 trillion in a full year, the government estimates.
The exact impact this financial year depends on the pace of implementation as states need to identify eligible recipients and set up a distribution mechanism, Morgan Stanley said.
“The measure in the longer term could push up food-subsidy expenditure and stoke price pressures,” said Sonal Varma, an economist at Nomura in Mumbai.
“Budget objectives may be strained as early as 2013-2014 on higher spending on grains and as the drop in the rupee increases the cost of oil subsidies,” according to Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd.
“The fiscal gap is at risk of swelling to 5.5% of GDP from 4.9% in 2012-2013,” Patnaik said.
India’s excess of expenditure over revenues is the widest in the BRIC group, which also includes Brazil, Russia and China.
Targets for narrower deficits are part of a 10-month effort by Singh’s coalition to damp inflation and to revive economic growth from a decade-low 5% last fiscal year.
Chidambaram is in the US this week, extending efforts to woo investment and help fund India’s record current-account shortfall. The nation is rated at the lowest investment grade by Fitch Ratings, Standard and Poor’s and Moody’s Investors Service.
“While the food Bill comes with a cost, it will bolster the poor if properly implemented, which is an important step for economic development,” said N. R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.
Consumer inflation was 9.31% in May, the second- fastest in the Group of 20 major economies. Wholesale prices climbed 4.7%, a 43-month low.
The Reserve Bank of India left interest rates unchanged in June after the rupee’s drop threatened to make imports costlier.
“We are in a spot of trouble due to this additional spending given that economic growth is likely to remain low,” said Religare’s Patnaik.
Stephanie Phang in Singapore and Sam Nagarajan in New Delhi contributed to this story.