Indian Prime Minister Manmohan Singh’s $21 billion-a-year program to provide cheap food for the poor threatens to impede the nation’s efforts to pare the widest budget deficit in major emerging countries.
The Food Security Bill enacted last week entitles about two-thirds of India’s 1.2 billion people to low-cost grains, boosting food subsidies to as much as 1.2 percent of gross domestic product yearly from 0.8 percent, Nomura Holdings Inc. said. The policy could pose a risk to Singh’s goal of cutting the fiscal gap to 4.8 percent in 2013-2014, Morgan Stanley said.
“The food bill will be unequivocal bad news for fiscal dynamics,” said Rajeev Malik, a Singapore-based economist at CLSA Asia-Pacific Markets. “While it could be politically beneficial for the beleaguered Congress-led government, the medium-term fiscal challenges created by the legislation continue to be ignored.”
Finance Minister Palaniappan Chidambaram has pledged to pare the deficit to 3 percent of GDP by 2017, part of wider policy changes since September to avert a credit-rating downgrade and revive India’s economy. The full fiscal strain of the food program will be felt next year and may weigh on bond prices, according to ICICI Securities Primary Dealership Ltd.
The food initiative is a key plank of the government’s re-election strategy ahead of polls due by May 2014. Singh aims to build on vows to help the poor in a nation where World Bank data shows over 800 million people live on less than $2 per day.
Budget and trade shortfalls in Asia’s third-largest economy have hurt the nation’s currency, which touched a record-low of 61.2125 per dollar yesterday. The rupee has depreciated 8.6 percent in 2013, the most after the yen in a basket of 11 Asian currencies tracked by Bloomberg.
The rupee strengthened 0.8 percent to 60.1450 at the close in Mumbai, after regulators took measures to curb speculation in currency derivatives. The S&P BSE Sensex index rose 0.6 percent. The yield on the 8.15 percent note due June 2022 fell to 7.68 percent from 7.71 percent yesterday.
The food policy provides rice at 3 rupees (5 U.S. cents) a kilogram, wheat at 2 rupees and coarse grains at 1 rupee, under a monthly entitlement of five kilograms per person.
The administration will retain the 900 billion-rupee ($15 billion) food-subsidy estimate for the financial year ending March 2014 given in February’s budget even as it rolls out the measure, two Finance Ministry officials said.
That’s because the bill will apply for only about half the fiscal year, with all the supplies available unlikely to be taken up, they said. The legislation involves spending of 1.25 trillion rupees in a full year, the government estimates.
The exact impact this financial year depends on the pace of implementation as states need to identify eligible recipients and set up a distribution mechanism, Morgan Stanley said.
The measure in the longer term could push up food-subsidy expenditure and stoke price pressures, said Sonal Varma, an economist at Nomura in Mumbai.
Budget objectives may be strained as early as 2013-2014 on higher spending on grains and as the drop in the rupee increases the cost of oil subsidies, according to Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd.
The fiscal gap is at risk of swelling to 5.5 percent of GDP from 4.9 percent in 2012-2013, Patnaik said.
India’s excess of expenditure over revenues is the widest in the BRIC group, which also includes Brazil, Russia and China.
Targets for narrower deficits are part of a 10-month effort by Singh’s coalition to damp inflation and to revive economic growth from a decade-low 5 percent last fiscal year.
Chidambaram is in the U.S. this week, extending efforts to woo investment and help fund India’s record current-account shortfall. The nation is rated at the lowest investment grade by Fitch Ratings, Standard & Poor’s and Moody’s Investors Service.
While the food bill comes with a cost, it will bolster the poor if properly implemented, which is an important step for economic development, said N. R. Bhanumurthy, an economist at the National Institute of Public Finance and Policy in New Delhi.
Consumer inflation was 9.31 percent in May, the second-fastest in the Group of 20 major economies. Wholesale prices climbed 4.7 percent, a 43-month low.
The Reserve Bank of India left interest rates unchanged in June after the rupee’s drop threatened to make imports costlier.
“We are in a spot of trouble due to this additional spending given that economic growth is likely to remain low,” said Religare’s Patnaik.
Elsewhere in the Asia-Pacific region today, China reported a subdued 2.7 percent rise in consumer prices in June from a year earlier and a drop in producer prices for a 16th month, underscoring weaker demand in the world’s second-largest economy.
In New Zealand, business optimism neared a four-year high and consumer spending rose at almost twice the pace economists forecast, adding to signs its central bank may be forced to raise interest rates sooner than signaled.
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