Food subsidies in India: a new fiscal risk
The increase in the BPL family headcount as well as the wider scope for per capita subsidy will clearly raise the food subsidy bill going forward.
According to the FY10/11 budget, the food subsidy is estimated to be about INR556bn, slightly lower compared to the spending in FY09/10 of INR560bn. However, the FY09/10 figure, in all likelihood, would be revised upward. Recent reports suggest that higher procurement and rising economic cost of food grains caused the actual budgetary outlays in this category to have reached INR722bn in FY09/10 (about 30% higher than the estimate mentioned during the presentation of the FY10/11 budget). This is a 65% rise over the subsidy cost of FY08/09 (INR437bn). Note that this rise in the food subsidy bill took place despite a lower BPL family headcount and excluding the provision of the food securities act.
Our calculations show that the incremental cost of food subsidy (see table below), after incorporating the above two conditions is about INR60bn, in line with the Planning Commission's latest estimates.
The question however is whether this additional INR60bn should be added to last year's official estimate (preliminary) of INR560bn or the recently reported INR722bn. If one were to take the latter figure and add the above estimated INR60bn, total food subsidy would again amount to about 1.1% of GDP in FY10/11, posing a 0.3% of GDP upside to total spending and the fiscal deficit.
Our estimate may be an upper bound as far as risk to the deficit is concerned as procurement cost and quantity could be lower this year due to a better monsoon or less need to build government food-stock reserves. Still, the discussion above clearly illustrates that a non-trivial upside risk to the spending envelope has risen due to the government's intention to expand the scope of its food subsidy program.
Eoin Treacy's view The
Indian government will always have to attempt to balance the need to keep a
vast impoverished electorate placated with demand for further opening up the
economy and speedier infrastructure development. Increasing food subsidies would
seem to be a direct plea to the electorate that the government continues to
have their best interests at heart.
However, India needs to import both rice and wheat and such a strategy is hostage to the vagaries of international prices for these commodities. In addition, India has a heavy dependence on imported oil which could also act as a headwind. This edition of Deepak Lalwani's India report for Astaire Research has some commentary on India's reliance on imported oil:
The Government is still very keen to push through the nuclear liability bill. This was postponed last month following sharp criticism from the BJP which felt the bill favoured private firms as it seeks to put a maximum liability of about $450m on state-run operators without placing any compensation burden on private firms. The issue is sensitive because a gas leak in 1984 killed 3,800 people at US's Union Carbide factory in Bhopal, India in one of the world's worst industrial disasters. The bill has been cleared by the cabinet, and while the Government has a majority in the powerful lower house (Lok Sabha), it needs the support of the BJP to ratify the bill in the upper house (Rajya Sabha). A civilian nuclear deal with the US ended India's nuclear isolation since its 1974 atomic test, and gave it access to US technology and fuel for civil nuclear purposes. India imports about 70% of its oil and needs to almost double nuclear power's share in India's electricity grid to about 6%, helping to address global warming issues linked to fossil oil emissions.
Rough Rice prices hit a near-term peak in the region of $16 in December and pulled back to test the lower side of the developing base near $12. Prices retested the lower side of the one-month range this week and rallied but would need to sustain a move above $13.50 to indicate demand is returning to medium-term dominance.
Wheat continues to trade in the lower portion of the developing base formation and would need to sustain a move above 525¢ to indicate a more convincing return to demand dominance.
Both of these grains share a high degree of commonality with soybeans and corn. All of these charts suggest that a new floor for grain and bean prices is being formed at levels that are relatively expensive by historic standards; although less so in inflation-adjusted terms. A significant buyer such as the Indian government, with a well publicised need for food could be the marginal demand needed to encourage further investor interest in the sector. Another weak monsoon this year could also have a knock-on bullish effect on these commodities.
Oil prices have sustained the move above $80 rather well and today's rally broke the one-month progression of lower highs, indicating the likelihood of a successful upside break has increased. Right now, while food price inflation remains a factor in India, the pressure would appear to be more a domestic rather than international issue. Advancing oil prices are a more immediate inflationary pressure. This supports the bullish Rupee argument.
The US Dollar remains ain a consistent downtrend against the Rupee and while somewhat overextended relative to the 200-day moving average, a sustained move back above R45 would be required to check scope for further weakness, while a rally back above R47 would be needed to begin to question medium-term downside potential.
The Sensex lost upward momentum from October and continues to range above 15,000. It has been consolidating below 18,000 for the last six weeks and a sustained move below 16,000 would be required to question potential for a successful upward break.
The Bombay Banks Index has been a leader and broke upwards to another new recovery high this week. A sustained move back below 10,500 would now be required to begin to question the consistency of the medium-term uptrend.