In a recent article, Surjit Bhalla has asserted that the Food Security Bill will increase costs of food grain subsidy by 336%. Correcting errors in his calculation brings this figure down to 18%. In this article, the authors explain the errors and present the correct cost figures of the Bill.
In a recent article, Surjit Bhalla (‘Manmonia’s FSB: 3% of GDP’, 6th July, Indian
has asserted that the Food Security Bill will cost 3% of GDP. This figure is almost
three times the estimate offered by the government. Bhalla ends the article by throwing
a challenge to prove him wrong. We believe that Bhalla’s calculations have a serious
error. Since he was explicit about his calculations, the errors are easily corrected.
When we do that we find the estimate of costs increases by only 18% and not
by 336%, as alleged by Bhalla for the part of the Bill he focuses on. This
may be surprising at first glance but this is due to the fact that though the National
Food Security Ordinance (NFSO) expands the coverage, it reduces the amount of grain
per person for the Below Poverty Line (BPL) population excepting the poorest of
The food subsidy is the product of three factors:
Cost increase factor = p x g x s
where p = proportional increase in coverage, g = proportional increase in grain
receipts per covered person and s = proportional increase in subsidies in Rupees
per kg. Bhalla first considers the expansion of coverage from 44.5% to 67 %. Quantity
and subsidy rate unchanged, this would increase the food subsidy by a factor amounting
to 67/44.5 or by 50%. His second step is to consider the change in quantity supplied.
He points to the National Sample Survey (NSS) consumption data of 2011-2012 that
shows that per capita consumption of Public Distribution System (PDS) grain in the
country is 2.1 kg per month. The NFSO, he claims, would obligate the government
to supply 5 kg per month per capita. Hence, this by itself, would increase the subsidy
by a factor of (5/2.1) or by 138%. Finally, the subsidy rate is projected to increase
from Rs. 13.5 to Rs. 16.5 for a kg of grain. On account of this, the subsidy increases
by (16.5/13.5) or by a factor of 1.2 or 20%. Multiplying all of these together,
he concludes the subsidy would increase 4.36 times or by 336 % which would then
account for 3% of GDP.
Bhalla has made two distinct errors in his second step (i.e., calculating ‘g’):
Error (a): an arithmetic error by not properly adjusting for the base population,
Error (b): comparing the per capita amount of food grains currently received by
beneficiaries with the per capita amount of food grains the government promises
to release under NFSO.
Error (a): NFSO promises 5 kg to 67% of the population and not to everybody. The
NSS consumption figure of 2.1 Kg, on the other hand, is the average consumption
of PDS grain for the entire country (total consumption of PDS grain divided by the
entire population of India). If 45% of the population is receiving food grains,
and it is 2.1 kg per member of the general population, then each beneficiary
is receiving 2.1/0.45 = 4.67 kg on average. NFSO will increase this to 5 kg. Then
Bhalla’s formula would yield:
1.5 x (5/4.67) x (16.5/13.5) = 1.96
That is, the food subsidy bill should roughly double and come to around 1.35% of
GDP, which is still way less than the numbers he put out.
Error (b): But even this would be an overestimate due to the fact that he is mistaking
the per capita NSS consumption figure with what the Central government supplied
to the state governments before the ordinance went into effect. The average
consumption refers to what households received and not what government supplied.
The difference between the two is the famous ‘leakage´ of the PDS.
In 2011-2012, the PDS off-take was 51.3 million metric tonnes of grain which means
the per capita supply of grain by the government to the 44.5 % of the population
(of 1.21 billion) works out to be 7.9 kg per month. The second ratio therefore should
be (= 5/7.9) instead of (5/2.1). Correcting this error, the product of the three
ratios ((67/44), (5/7.9), (16.5/13.5)) turns out to be 1.181. That is, the subsidy
amount increases by approximately 18%. In rupee terms, the subsidy increases from
Rs. 72,000 crores ($11.8 billion approx.) to Rs. 85,000 crores ($13.9 billion approx.)
firmly within 1% of GDP.
What is interesting is that the supply of grain per eligible person under the NFSO
has actually gone down from 7.9 kg to 5 kg but the coverage has gone up from 44.5%
to 67%. This fact has gone mostly unrecognised.
The absurdity of Bhalla´s claim can be directly seen from the fact that the Food
Ordinance requires about 52 million tonnes while the current government supply is
itself 51.3 million tonnes. Therefore, the incremental subsidy increase would
surely be modest. Bhalla´s use of NSS consumption figures implies that he expects
consumption figures to scale up to 5 kg. With existing leakages (amounting to 40%
of supply), this would happen if the Central government supplies well in excess
of 5 kg per beneficiary. This is not going to happen. The Central government obligation
ends with their supply of 5 kg per beneficiary (with some additional supply to Antyodaya
Anna Yojana (AAY) households) to the states. If some of this quantity "leaks" out
to blackmarketeers and others, beneficiary households lose but the budgetary cost
does not rise.
It is possible that Bhalla wants to take the figure of 5 kg at ‘face value’ and
hence he holds the Central government responsible for ensuring that 5 kgs of food
grain per person per month reach the PDS beneficiary. We believe that is not a fair
expectation as running the PDS is the responsibility of the state governments. But
even if we assume that this expectation of his is justified, the food subsidy bill
will be 1.35% GDP and not 3%.
The ‘minions´ at the Finance Ministry whom Bhalla scorns estimated the total cost
of Rs. 125,000 crores ($20.4 billion approx.) because they rightly included the
cost of associated welfare programmes as well as the cost of implementing the programme.
Interestingly, most of the cost increase over the existing food subsidy programme
is due to the expansion of direct nutritional interventions such as mid-day meals
etc. and not due to greater allocation of food grains through PDS, as Bhalla believes.
Bhalla is barking up the wrong tree. The major concern about the NFSO is not its
immediate cost. The major concern ought to be how to ensure that the full
benefits are received by households. How can leakages be stopped? The costs to think
about are those borne by households and not by the government. A PDS-driven model
drives out local and often more nutritious cereals from household budgets. On the
producer side, excessive increases in Minimum Support Price (MSP) lead to more grain
production at the cost of other foods such as pulses, vegetables and fruits. These
latter costs are certainly not budgetary costs. But still, the debate about the
NFSO should be about these costs and how they can be minimised by the judicious
use of cash transfers and other policies. We hope that the debate will not be led
astray by reckless calculations that remain unexamined.
"Correct costs of the Food Security Bill" by Bharat Ramaswami, Milind Murugkar &
Ashok Kotwal. Reprinted from THE FINANCIAL EXPRESS online with the permission of
The Indian Express Limited © 2013. All rights reserved throughout the