Food Security Bill can set off a consumption boom ...and then some - Daily News & Analysis

Proper implementation of the Food Security Bill (FSB) will lower spending on foodgrains by below poverty line (BPL) households, and free up resources for spending on other goods and services, in particular health, education, and nutritious food. According to Crisil Research estimates, FSB could generate additional savings of around Rs 4,400 this year for each BPL household that begins to purchase subsidised food. This savings equals around 8% and 5% of the annual expenditure of a rural and urban household, respectively. For rural households the savings amount exceeds their current annual medical and educational spends. Higher disposable income would also allow BPL households to spend more on protein rich food, thereby improving their nutritional intake. While the benefits of the Bill could go well beyond just the provision of food, the success of the scheme and its welfare impact lies in identifying the poor and making sure that they are able to avail the food subsidy. Benefits beyond the provision of food Take the example of Raghuvir, who works at a construction site in rural Bihar. Despite being a BPL person, he does not have a ration card and therefore, cannot purchase subsidised foodgrains from the public distribution system (PDS). Perforce, he buys foodgrains from the village grocery at market rates, which are far higher than the PDS prices. That leaves him with little money to purchase nutritious food such as milk and eggs or pay for his children's education. He often has to compromise on purchase of clothing and basic household consumables as well. Raghuvir's case is not an isolated one. At present, while all BPL households are entitled to purchase subsidised foodgrains from PDS, a significant proportion of them are being denied their entitlement. Only around 16% of rural BPL households in Bihar purchased rice under PDS in 2009-10 (Table 1). In Jharkhand and Uttar Pradesh less than 35% of rural BPL households have access to rice from PDS. Similarly, in Rajasthan only 27% of rural BPL households have access to wheat from PDS. At an all-India level, less than half (around 43.5%) of all BPL households purchase rice under PDS and only around one-third of them purchase subsidised wheat (Figure 1 and Table 1). But things may soon be different for Raghuvir if FSB is implemented in a systematic and efficient manner. Last week, Raghuvir was told by his village panchayat that under the provisions of the FSB he would be entitled to purchase 25 kg of subsidised foodgrains per month for his family of five (5 kg per person per month). He would be able to purchase this quantity from the PDS at the subsidised price of Rs 3 per kg for rice, Rs 2 per kg for wheat and Rs 1 per kg for millet. Whether or not Raghuvir is actually able to avail of the benefits intended in FSB will depend on the government's ability to identify poor households and ensure that they are able to receive the food subsidy. If the identification exercise is carried out correctly, several BPL households, similar to Raghuvir's, which currently do not have access to the PDS, will be given some form of identity proof that will, for the first time, make them eligible for purchasing foodgrains at the subsidised rate from the PDS. Purchasing subsidised foodgrains from PDS will free up a part of their earnings that is currently being spent on buying foodgrains at higher prices from the market. Rural households that consume their homegrown produce could alternatively sell it at market price to earn additional income and consume foodgrains purchased at subsidised prices from the PDS. In effect, food subsidy will leave households with more money to spend on other goods and services. As the foodgrain requirement of a household is higher than what it would be entitled to under the FSB, the household may spend part of this resultant saving on buying its remaining foodgrain requirement from the market. However, a part this money would also be spent on buying more nutritious food such as proteins as well as other necessary goods and services. The key questions from a broader perspective that may have implications for the corporate sector and rural consumption are: How much would be the income benefit per household due to the FSB? And which goods and services would households spend this additional income on? Potential beneficiaries and extent of income benefit The FSB entitles 75% of the rural and 50% of the urban population to subsidised foodgrains. Will all eligible households shift to PDS under the new food security bill? Unlikely. We believe that due to the preference for better quality and greater variety of foodgrains available in the open market, households above the poverty line that are currently not purchasing foodgrains under the PDS are unlikely to shift to PDS. BPL households, in contrast, will be less sensitive to quality as the resultant savings forms a significant proportion of their annual expenditure. Therefore BPL households are likely to shift to PDS once the FSB is implemented. As per the Tendulkar Committee estimates, around 41% of rural and 25% of urban population are below the poverty line. Once BPL households that currently do not have access to subsidised food receive an appropriate identity proof, they will be able to purchase foodgrains at the subsidised prices instead of at the higher market price. Therefore, they will save the difference between the market price and the subsidised rates on their monthly foodgrain entitlement (25 kg of foodgrains for a family of five). Our estimates suggest that at current prices rural BPL households that do shift to PDS and purchase their entire entitlement will save around Rs 4,400 per year if the FSB is implemented in 2013-14. This amount is estimated to be slightly higher for urban households taking into account the smaller household size as well as the higher market price in urban areas. Moreover, the annual household savings is estimated to increase in 2014-15 and 2015-16 since the price of foodgrains under PDS is not expected to increase for three years (as stated in the FSB) and market prices of foodgrains would increase every year. For an average rural BPL household an annual savings due to the FSB would be nearly twice the estimated annual spending on medical and education in 2013-14 and almost comparable to their spending on proteins, clothing and household consumables (Figures 2 and 3). For an urban BPL household the savings from the FSB equals half a year's worth expenditure on proteins or household consumables & clothing (Figure 3). Our estimate of an income benefit due to the implementation of FSB is the potential benefit to any household that shifts to PDS, assuming that the household is able to avail its entire entitlement at the subsidised rates proposed under the FSB. The quantum of income benefit to individual households will also differ slightly depending on their decisions about how they spilt their foodgrain entitlement into rice and wheat (for the purpose of our calculations, millet has not been taken into account). For example, in Jharkhand the quantity of rice consumed by a rural BPL household is 3.6 times the consumption of wheat. By contrast, in Rajasthan the foodgrain consumption under PDS almost entirely comprises rice as wheat is not covered under PDS. At an all-India level, the ratio of rice to wheat consumed is 1.5 times for a rural BPL household and 1.1 times for an urban BPL household. In our estimations we have assumed that households will split their foodgrain entitlement under FSB in the same proportion as seen at an average all-India level. What items are likely to see a boost in consumption? As the FSB will provide households with additional disposable income, households will in effect move up the income bracket. An analysis of the household consumption pattern across different income brackets throws some light on what items this additional money is likely to be spent. In the case of rural households, spending on education and medical expenditure is seen to increase as income increases (Figure 4). If this happens, the FSB will indirectly help increase investments by households in their future. The demand for nutritious food items, especially milk and milk products, egg, fish & meat also increases sharply with household income. Spending on clothing and household consumables such as toiletries (which can improve health outcomes) is also expected to rise once the FSB is implemented. In the case of urban households, poor households increase their expenditure on protein-rich food and fresh fruits as their income increases (Figure 5). Their spending on medical expenses and education tends to rise even more sharply than that of rural consumers. Among the urban poor, spending on conveyance and rent also rises with the increase in income. Among discretionary items, the urban household spends more on clothing and household consumables as its income increases. In sum, in addition to guaranteeing food security to poor households, the FSB could serve as a means to improve their discretionary spending and thereby improve their quality of life. Implementation challenges Although the FSB entitles 67% of India's households to subsidised foodgrains, it does not throw much light on how these households will be identified. The welfare benefits intended in the FSB can only be realised if all poor households are correctly identified and receive access to subsidised food. For this, the government can leverage the Aadhar platform and link the income status along with biometric and demographic information in the Aadhar database. In states where Aadhar is lagging significantly behind, the identification of income status can be done in conjunction with the Aadhar enrollment. Moreover, transferring subsidies through the Aadhar-enabled bank account of beneficiaries will also ensure that cash benefits/subsidies reach the intended recipients. Using Aadhar as an identity proof at the point of sale of foodgrains will also reduce leakages through duplicates and ghost accounts. The ability of the FSB to reach majority of the BPL households will further improve if subsidised foodgrains can also be purchased from authorised retail stores outside the existing PDS network. Mahambre is principal economist and Saraf junior economist with Crisil. via Business - Google News http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNGo9Qddr28i9uxRPSFYl4BzYGNIhA&url=http://www.dnaindia.com/money/1856754/report-food-security-bill-can-set-off-a-consumption-boom-and-then-some

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