A landmark food-subsidy law has been approved by the Indian Parliament’s upper house, allowing the ruling Congress party to move forward with the initiative, a priority in its policy agenda. Despite fears that it could hurt the government’s uncertain finances, supporters of the Indian law argue it would alleviate hunger at a reasonable and manageable cost. It is estimated that the law would increase government spending on food subsidies by about $4 billion to approximately $20 billion.
Finance Minister P. Chidambaram has stated he could contain the fiscal deficit to 4.8 percent of gross domestic product to help jump-start the country’s slowing economy and bolster its diminishing currency. The law extends India’s current food-subsidy program, offering wheat, rice and other food grains at a fraction of market prices to low-income individuals. About 70 percent of India’s 1.2 billion people fall in this category.
Some firms are concerned that the increased subsidy for food would affect the country’s credit outlook. “The measure is credit negative for the Indian government because it will raise government spending on food subsidies to about 1.2 percent of GDP per year from an estimated 0.8% currently, exacerbating the government’s weak finances, “said Moody’s Investors Service.
On the other hand, supports of the new law argue that concerns over spending were being overblown, and the food subsidies were necessary to feed the millions of citizens who are not receiving adequate food and nutrition for basic survival. According to the United Nations, India is home to a third of the world’s poor and a quarter of the world’s hungry.
To implement the program the government may have to cut back on infrastructure projects, such as ports and roads, to pay for food subsidies while meeting deficit-reduction targets, explained I.V. Subramanian, the chief executive officer at Quantum advisors, a financial-services firm.
Madan Sabnavis, chief economist at CARE Ratings, an Indian credit-risk advisory, said the government could balance these extra costs by reducing infrastructure spending by 10 percent.
“This is a trade-off the government has to do, because distributive justice is important in the long run,” he said.
– Ali Warlich