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Food subsidy can fill poverty gap, twice

Union Finance Minister P Chidambaram’s estimate for India’s 2014-15 food subsidy bill of Rs 1,15,000 crore in the interim budget is more than twice of India’s Poverty Gap, or the cost of pushing all households above the poverty line if cash transfers were used instead. The Poverty Gap for India, as per the latest NSSO Consumption Expenditure Survey data available (for the year 2011-12) is Rs. 55,744 crore.

A highly-placed government official explained the reason behind the food subsidy substantially exceeding the poverty gap: “The Food Corporation of India (FCI) does incur huge costs on holding procured food grains and it can be argued that there is tremendous potential for its operations to be more efficient”. “The point is not that the food subsidy should be discontinued but to see if limited resources are being used efficiently for targeting poverty effectively.”

The Finance Ministry has in fact capped reimbursements to the FCI from the fiscal for the costs it incurs on the Government’s food subsidy programme, Mr. Chidambaram said in a television interview on Thursday: “I think a strong and firm hand on the wheel can keep the food subsidy at Rs 1,15,000 crore,”. “What FCI procures and how it finances it is a matter of the FCI, the Ministry of Consumer Affairs and banks... I am only concerned with what the Budget, the treasury gives...”

Even for the 2013-14 food subsidy, the interim budget provides Rs 92,000 crore which the FCI has said falls short of the procurement costs during the year by almost Rs 40,000 crore.

The Fiscal Responsibility and Management (FRBM) Act statement laid in Parliament by Mr. Chidambaram as part of his budget documents last Monday says that the food subsidy regime in the coming years will have to undergo a massive overhaul. “Government will have to align the pricing policy for subsidised goods to ensure that the subsidies remain affordable and it is extremely essential to put in place proper systems for better targeting,” the statement says.

Beside the food subsidy, the UPA Government has on an average spent close to Rs 1 lakh crore per year since 2004 on a variety of anti-poverty schemes such as the Mahatma Gandhi National Employment Guarantee Scheme. This is set to increase going forward as the annual cost of implementing the Food Security Law.

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