The decision of the government to provide free food to the needy for another five years needs to be welcomed, notwithstanding the concerns that are there on the fiscal side. The scheme is targeting 800 million poor or needy people, which is commendable given that the levels of deprivation are still high in the country. The issue surfaced during the lockdown where the initiative was taken to ensure that the poor had access to food which was provided at zero cost, which has been finally merged with the PDS scheme that imposed nil cost for the beneficiaries. By extended the scheme for another five years, the stage has been set to ensure that people will be better positioned to lead a better life.
This has to be seen in the context of two important issues – one factual and the other theoretical. The recent data that has come out on hunger and nutrition needs to be brought in here. The Global Hunger Index placed India at 111 in a set of 125 countries which however has been contested in several quarters. The report has placed the level of under-nourishment at 16.1% for the period 2020-22. Now Niti Aayog has in its report on multidimensional poverty provided data on various aspects of this concept. For population deprived of nutrition, the ratio provided for 2019-21 was 11.9%. Therefore, the justification for such action is strong as there is a large section of population which requires support.
In terms of cost of the programme, it would broadly be in the present range of ₹2 lakh crore of food subsidy which is the payout for the fiscal. The fact that this will remain free for the next five years means that the food subsidy bill will continue to increase in proportion to the higher MSPs that are being paid to the farmers. But the pace of growth will not be very significant and can be absorbed well in the Budget.
The broader issue which is raised is more on the theoretical front. The primary role of the state is to ensure that the needs of the poor are met. This is why the subsidy on food is still important. Two years post the lockdown, it has been seen that the levels of employment have remained shaky which has necessitated a larger section of the rural folk seeking recourse to the NREGA programme. In fact, the funds do tend to get exhausted when the demand for labour goes up, which has been the case in the last couple of years. Therefore, until such time that the economy is able to generate sustained growth which keeps the employment rate ticking, help will be required from the government.
Hence, the high levels of deprivation in society has been the reason for governments to offer sops in the form of free food, subsidised cooking gas, free water, electricity and so on. This has helped to improve the standard of living of the people. Intuitively it can be said that in case there is any reversal of policies in these areas, the targeted beneficiaries would slip down the ladder considerably. With the state elections having commenced, the manifestoes of all parties have been focusing on social welfare. The free food scheme extension by the centre will enthuse more states to also keep their programmes ticking while looking to launch new ones. Given the limited resources that governments can raise, such programmes would necessarily absorb a larger part of the available funds in the budget. Add to this the fiscal constraints imposed under the FRBM laws and it becomes hard for states in particular to meet their fiscal targets.
So how does one analyse the manifestoes of parties in the ongoing elections? Manifestoes are always about giving sops to the public, and never speak of any additional cost imposed on society. Also often it has been seen that states are not able to fulfil most of the promises because there are fiscal constraints all the time. Low-hanging fruit – the existing schemes – can be extended as they are part of the budget. But major policies like farm loan waivers have had a mixed outcome. While there are promises made at the time of elections, very often the amount promised is never utilised going by the actual budgetary numbers. This is so because it gets challenging for farmers to claim the same as the criteria set are quite stringent. For example, the size of the farm is the criterion to begin with, and there has to be proof submitted to show that the crop failed due to weather conditions in the region. The normal disbursement is around 20% of what is promised.
Hence while such promises may tend to give the impression that the budgets would be under severe pressure, the fact is that governments often substitute programmes or make a limited allocation for the same so as to ensure that the fiscal numbers are in order. This has been the major benefit of enforcing the FRBM rules on states as it ensures that there is a cap to borrowing. The result often is that states do cut back on discretionary expenditure which is capex. But the variations have not been very significant and can be in the range of 5-10%.
While critics may like to pontificate on how governments should draw their budgets, the truth is that they work for the people and hence cannot be driven always by economic principles. It is the political economy which is important all the time. The idea of having the FRBM is to ensure that the boundaries are not crossed. This is a pragmatic way of handling government expenditure where a balance is drawn between political compulsions and fiscal prudence. Hence, announcement of sops by the governments should not be taken at face value as the overall fiscal contours fix act as inbuilt constraints.
The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal