Views | Making lemonade from lemons - The FSB edition

The Food Security Bill (FSB) championed by the National Advisory Council chaired by Sonia Gandhi was cleared by the Cabinet in December 2011. Since then, critics on the Left have mostly devoted themselves to pointing out how inadequate the FSB is in tackling the problem of food availability and malnutrition in India, specifically for children and the poor.

The statistics are mortifying. According to the World Bank, 47% of India’s children are malnourished, and India has twice as many malnourished children as sub-Saharan Africa (though these numbers implicitly assume that a healthy Indian child should be as tall as healthy children from other parts of the world). Relentless food price inflation over the last few years has hit the poor very hard - prices of staple foods and grains have doubled. Deservedly, the government has received a barrage of criticism because of food price increases, which are linked inextricably to its own flawed economic and welfare policies.

Last month, the Union Government roped in external consultants to put finishing touches to the new entitlement, in line with the comprehensive taxpayer-sponsored, centralized welfare super-structure built by the UPA since 2004. We had Right to Employment, Right to Education and now a Right to Food - with a Right to Pension already in the works.

Leftist groups are dissatisfied with the FSB because in their view it doesn’t do enough - they are demanding even greater public distribution of food, despite the well-documented wastage that existing government-controlled distribution causes every year, and a wider entitlement net covering more people. Leftist eminences led by Nobel laureate Amartya Sen have said India must push through the FSB. The position FSB votaries have taken is that the costs don’t matter and accepting the immorality of desperate hunger for voiceless millions is far worse. No data or argument from the fiscal or economic front that shows how unsustainable and ineffective the FSB will be can convince them otherwise.

The fundamental and false assumption underlying the position that votaries of the FSB are taking is that there is no other alternative to FSB that can help eradicate the scourge of hunger and malnutrition plaguing India. In fact, decades of experience have shown the weaknesses of a government-controlled food production and distribution system. Given the near-inevitability of the FSB owing to the political backing the Bill enjoys from the highest echelons of the Congress party, what can be done to control the damage it is bound cause in its present form?

In November 2011, the government announced a plan to allow foreign direct investment in multi-brand retail, with more caveats than holes in Swiss cheese. Compulsory local sourcing of retail goods and inane restrictions on geographic market participation were just some of the arbitrary provisions. Big-ticket reforms should not be executed with umpteen qualifiers, in isolation of policy action in other sectors. Flawed as the policy was, it was immediately shot down by a united political Opposition, which was correctly concerned about the short-term dislocation and job losses but prescribed the wrong remedy by asking for a permanent burial to the retail FDI policy. Since the uproar, the government seems to have put FDI in retail on hold again.

There is a strategic opportunity for the UPA to combine full-blown FDI in multi-brand retail with a comprehensive food security program. A political consensus is emerging on direct cash transfers - the Finance Minister announced in this year’s Budget speech that Nandan Nilekani-led UIDAI’s blueprint to facilitate direct cash transfers of subsidies for kerosene, fertilizers and food had been accepted. At its National Executive meeting held in Mumbai recently, the principal Opposition party BJP has also endorsed cash transfers, going so far as to urge the Centre to assist farmers in opening bank accounts and transferring all subsidies directly.

Building on this broad political consensus, the Union government could design a comprehensives program that provides food security to India’s masses in the form of food stamps that can be encashed not just at government ration shops but also at modern retail chains and supermarkets built by global and Indian retailers. Such food stamps could be used to buy groceries, grains and packaged food at any shop, private or public. Any fraud or misuse of food stamps can be prevented by leveraging the UID program to target subsidies effectively - the benefit could even be delivered electronically via smart cards.

The program should include supply-side reforms as well - as economist Bibek Debroy has noted, government-imposed restrictions on production and marketing of agricultural and food products via Essential Commodities Act, 1955, the APMC Acts at the state-level and the system of minimum support prices all need to be assessed in unison when looking at the issue of food security. India is a long way from the creation of unified markets in agricultural and food produce, and this has profound implications for farmers and agri-producers, who typically need the type of food security being spoken of.

Through such a composite program that eases the supply side, drives long-term investment and creates demand through food stamps in a new consumer constituency that is at the bottom of the pyramid (whose inclusion through such a mechanism expands the market size and makes the India consumer retail proposition even more attractive to investors), those eligible to avail food security could walk into a local Carrefour or Big Bazaar store and buy food. Retailers would make swift and substantial investments in building their presence in India, with the knowledge that a captive market exists for their food products in particular. Given the competition this attractive and large market would create among retailers, prices will be driven low and quality would remain high as firms compete for a chunk of the food spend across the entire consumer spectrum, which already has a substantial share in overall consumer spending. According to National Sample Survey Organisation data, food spend constituted 40.7% and 53.6% of the total household consumption expenditure in urban and rural areas respectively for 2009-2010.

Such a program would convert the government’s subsidy spending associated with the Right to Food into infrastructure investment, that, through private firms, goes into building logistics, cold storage warehousing and modern retail facilities which India desperately needs. The job creation associated with a massive investment push in retail would be a further upside.

This strategy also solves the government’s political problem of driving through Parliament an important but hotly-contested reform like FDI in retail. In its present form, the proposal is a middling compromise that doesn’t elate any constituency. Corporations and investors don’t like the caveats, and the political backlash that short-term job losses that FDI is sure to cause makes it difficult for political parties to unreservedly back the reform. Designed as a reform that helps poor people get access to quality food, opposing full-fledged FDI in multi-brand retail would make politicians anti-poor.

And which politician wants to be seen as denying the poor and malnourished the right to shop for food at a Walmart?