Late one evening last week, I was asked by a well-meaning friend why did I hate the idea of “Food Security Bill” so much? Surely no one can reasonably object to making sure every Indian is well-fed and healthy? He was right. No one can reasonably argue with the aim of ensuring that our population is well-fed, literate, healthy etc etc. What I was railing against was the “means” – and the misplaced belief that subsidies are the way to solve these problems; the misplaced belief that all we need is more money for “pro-poor” schemes and the illusion that giving someone a “fish” is the same as making sure they will not be hungry again.

In an article published last week in the Indian Express titled, “Patronising the poor, in perpetuity” Dipali Rastogi  highlighted how the misguided “Food Security Bill” will  “…translate to subsidies worth almost Rs 1 lakh crore for close to 75 per cent of our population (after including the various categories such as children under 14, pregnant women, destitute, homeless etc)”. She also mentioned that although the

…direct burden for food grain subsidy on the state exchequer would be about Rs 1 lakh crore for the country as a whole, the indirect cost implications will be manifold (since this will involve creation of national and state food commissions, grievance redressal offices and grain banks in addition to large amounts needed for creating storage infrastructure and distribution systems

and..

What’s more, this whopping subsidy is going into an area rife with leakage and corruption…any government that imagines it (eradication of extreme poverty and hunger) can be achieved through direct food subsidies is fooling itself.

Subsidies are a “hot potato” in India – no one wants to touch them although I suspect almost everyone recognises they are quick fixes that have long ceased to have any enduring effect. In addition, they divert precious resources from other pressing needs (e.g. infrastructure, power) and create long-term fiscal imbalances that will one day come to haunt us. But subsidies win votes – and as Vikram Singh noted on the facebook page, “..who’s to argue against naked populism”?

On the same post, Geetali Tare mentioned in her comment that “The state has responsibility towards the poor and the dispossessed. They are not our burden, they are our responsibility. …If people think that the fiscal deficit is ”spiralling” because of these schemes, they need to read the budget documents carefully. The spending on defense is currently Rs. 1,64,415.49 crore. Spending on the social sectors? Rs. 1,37,674 crore. Two things directly impact govt. spending: corruption and inefficiency. But no one’s focussing on that”

While subsidies can help the poorest (and yes, the state has the responsibility to meet the basic needs of all of its citizens), surely there are better ways of doing this than doling them out – in kind – and via a system that leaks like a sieve? Why has the government not considered cash transfers? Why have education vouchers not been implemented to provide for better education? Geetali identified two things that impact government spending: corruption and inefficiency. Knowing this, why do we still continue to pin on our hopes on this apparatus to deliver relief to the poor? (as an aside, I believe the numbers mentioned by Geetali may not be entirely correct. In an article published in Jun ’11, Surjit Bhalla mentioned that spending on just food and NREGA in 2011/12 is Rs 130,000 crore).

Regardless of the numbers, is India unique in the matter of corruption and inefficiency in government and delivery of basic services? Far from it. 50 years of failed socialism provides numerous examples of entire economies that went bankrupt – thanks to overarching government control of economic activity, subsidies, leakages, corruption and fundamentally flawed policies. The extent of subsidies and what they *could* have achieved had the transfer been more direct is illustrated by this factoid from “Poverty and Hunger in India: What is Needed to Eliminate Them” by Arvind Virmani, Feb 2006 (emphasis added):

In 1993-94 the Central government expenditure in the budget category “subsidies” was Rs. 12,682crore of which Rs. 10,099 crore were for food and fertiliser subsidies…During the sameyear the Central and State governments together spent another Rs. 14,160 crore on the budget categories ‘Rural development,’ ‘Welfare of SC, ST & OBCs’ and ‘Social Security and Welfare.’ ..These two sets of expenditures (Rs. 25850) would have been more than sufficient to eliminate16poverty in 1993 if transferred directly to the poor and disadvantaged (SC, ST, handicapped, old, poorfarmers).

In 1999-2000 the total subsidies provided by the Central government were Rs. 25,690 crore ofwhich Rs. 22,680 crore were for food and fertiliser. During the same year the Central and Stategovernments together spent another Rs. 28,080 crore on ‘Rural development (RD),’ ‘Welfare of SC, ST & OBCs and ‘Social Security and Welfare.’

Either of these..if transferred directly to the poor and disadvantaged (SC, ST, handicapped, old, poor farmers) would have eliminated poverty. Together these subsidies and poverty alleviation expenditures (Rs. 53,770 crore) would have been sufficient to eliminate poverty in 1999-2000, even if administrative costs and leakages used up half the allocation (and the small fraction of RD expenditures on water supply were excluded).

But these subsidies do actually benefit someone – the man in the middle i.e. the bureaucracy involved in the system. Unsurprisingly, even when measures to reduce leakages and improve effectiveness are recommended, the government blithely ignores them.

This is what Sh Virmani found out:

In the formulation of the tenth Plan as Advisor (Development Policy) responsible for food policy/ PDS system the author proposed the gradual introduction of a credit /debit /smart card system to replace the existing PDS system characterised by enormous leakages and high administrative costs (see Virmani and Rajeev (2001)). In this system the entitled person could obtain the specified subsidy from any participating supplier of food/cereals. The person would pay the supplier the difference between the market price and the unit subsidy, and the supplier would collect the subsidy from the government.

The formal proposal was to carry out an experiment (as a first step) to determine its effectiveness and to learn about and iron out any problems that may arise. Consequently funds were allocated in the tenth plan for introducing it in a sample of urban areas along with the introduction of food stamp system in a sample of rural areas. Not a single State govt has agreed to undertake this experiment so far, as it has the potential of dramatically reducing leakages and administrative costs.

In the end, a leaky system that is piled high with subsidies will end up with only one outcome: A government that is left with no money to provide for basic services & infrastructure and a continuous decline in standards of living of the poorest (Indeed the NREGA scheme for example has actually ended up pushing people in poverty – thanks to rural inflation – and has neither created skilled manpower or any worthwhile, productive assets).

And what has been the impact of this mountain of subsidies? In a prescient article written almost 3 years ago (Mar ’08), the Economist noted how these subsidies had failed in their objectives.

But as he (Finance Minister Chidambaram) himself conceded, outlays and outcomes are not the same thing. Standing between the two is an administrative machine corroded by apathy and corruption. The government’s subsidies fail to reach the poor, its schools fail to teach them and its rural clinics fail to treat them.

It further noted (emphasis added):

The government’s debt burden leaves it short of money for infrastructure. It is reluctant to free banks, pension funds and insurers to serve the market better, because it needs them to buy its bonds. The miserable record of its social spending deprives firms of well-nourished, well-schooled workers, and saps the political will for reform. State governments are left scrabbling to appease rural disgruntlement rather than investing in efforts to lift the productivity of land and labour.

Even more damning evidence comes from the record of food subsidies of the past decades – in the figures for hungry people in India. Their number have actually increased in the last 2 decades.

According to Oxfam, the number of hungry people in India increased by 65 million between 1990 – 2005. With a total of 230 million undernourished people, India today has the dubious distinction of being the ‘world’s hunger capital’.

Which is not a surprise considering that Parliament was informed in March ’08 of a Planning Commission study which found only 42% of subsidized grains reaches the target group.

Wait, there is more. A single-minded focus on subsidies has a far more damaging side-effect. As Lalatendu mentioned in a comment on facebook: “In my village…(thanks to subsidies) A generation is being brought up as skill-less and work-shy!There is no reason to believe this trend is confined to my village only. This is a dangerous trend that will aggravate with meaningless populist schemes like FSB.”  That NREGA is contributing to a generation of unskilled people has been noted and remarked upon by experts and others too (e.g. see “NREGA is money down the drain” and “NREGA and the law of unintended consequences” . A Washington Post report quotes S. Baskar Reddy, head of agriculture at FICCI as saying:

It is de-skilling our people at a time when we should be training them for new skills.

And yet, the government continues with its populist schemes – deaf to the opinion of experts and blind to overwhelming data, figures and statistics that betray its own incompetence and failure.  Instead of using “growth..as the principal strategy for inclusive development” (in the words of Prof Jagdish Bhagwati), it relies on “redistribution” which in the words of economist Arvind Panagariya, “..keeps the poor and marginalised out of the mainstream of the economy” locking them “into unproductive agriculture” and preventing them “from moving into gainful employment in the urban manufacturing sector” [link]

Obviously such vast amounts of money diverted to populist schemes (with the introduction of Food Security Bill, the total outlay on subsidies will exceed the outlay on defence), leaves little left to invest in crucial infrastructure – or health or education – which are the only solid foundations for  sustained progress, development and prosperity.  If you think these amounts are trifling, think again. The numbers involved in such “welfare schemes” announced by UPA in the last few years is staggering:

1. Farm loan write-off of Rs 72,000 crore in 2008.
2. Subsidies paid for keeping diesel, cooking gas and kerosene prices low:Rs 2,23,203 crore in 2005-11. Add under-recoveries for FY11-12 of Rs 1,32,000 crore.
3. Add the National Rural Employment Guarantee Act (NREGA) that has cost Rs 1,00,000 crore so far, and by March, 2012, is expected to cross the figure of Rs 1,40,000 crore.
4. And finally the Food Security Bill. “The official estimate of costs is around Rs 1,00,000 crore, but since these are likely to be underestimates intended to force a foolish bill through a reluctant cabinet, we should look at more realistic estimates. .. Ashok Gulati and Jyoti Gujral – the former is chairman of the Commission of Agricultural Costs and Prices, and thus should know what he is talking about – wrote in The Economic Times that the real cost of the FSB, taking both the direct cost of subsidies and the accompanying investment in infrastructure (godowns, higher food procurement prices, et al), should be reckoned at Rs 2,00,000 crore per annum in the next three-year period [link].

Even assuming that all politicians will indulge in some form of subsidies or the others (although the NDA government introduced subsidies totaling less than half this amount), FirstPost estimates that

..the bill the dynasty has already racked up to keep itself in the good books of the electorate and to get Rahul Gandhi the gaddi in 2014…is Rs 5,45,000 crore.

Read that again: Rs 5,45,000 crore or $102,830 million or $102 billion or approximately Rs 5000+ for every Indian. This is the true cost of keeping the “dynasty” in power – or to be more precise, the amounts that have been spent to get them to power in 2014. This money is coming out of your pocket – and mine. And it is hastening us on the road to fiscal ruin.

It is creating an entire generation that only knows how to survive on handouts. It is creating a class of under-employed, unskilled and malnourished who will be unable to contribute anything to the economy – thus condemning themselves and the society to a semi-permanent state of under-development. Worse, these vast amounts of money will do nothing to eradicate hunger – or to provide meaningful employment – or education to the unfortunate millions. On the other hand, they are very likely to cause further distortions in the economy and are almost certain to lead to a crisis that might set India back at least by a decade in terms of economic growth and development.

Is it not time we wake up? Is this the legacy we want to leave for our future generations? Think, debate and discuss these issues…And share them with your friends and family – and the next time a politician comes to you to solicit your support, ask them what have they done to stop this loot of our money and our taxes.

As for the “Food Security Bill”, Tavleen Singh says it best:

…The reason why Indian children continue to starve is because the schemes that our ‘socialist’ rulers have devised to prevent this happening have never worked. They have been too centralised, too tangled in red tape and run mostly by corrupt and wicked officials who could not care less if children, other than their own, starved to death. The food security law will fail for exactly the reasons listed above.

…If Sonia Gandhi is genuinely concerned about food security, what she needs to do is start by accepting that centralised schemes of the kind envisaged in her new bill can never work…My objection to this food security bill is that not only is it not the solution but it will lull our political leaders into believing that they have solved the problem. And, if 45 per cent of our children continue to be declared malnourished by international standards, they will simply say at election time that they have done the best they can but corrupt state governments have not done their bit. It is a movie we have all seen so often before that it should never, never be made again. So please Soniaji, respected and honourable Soniaji, withdraw your wretched bill and give us some real change instead.

Comment, thoughts welcome as always. Pl also read: 2 simple reasons why socialist economies always fail.. and how subsidies can actually kill innovation.

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