Why markets should stop worrying about the food security bill

The bill may be passed but questions on how it will be funded still remains

Markets welcomed the Food Security Bill (FSB) cleared by the Lok Sabha with an over 600 points fall. Rupee kept on sliding with the FSB giving it a further push to breach 66 against the dollar. Even as politicians continue to pat their own back for clearing the bill, financial markets, which is a reflection of sentiment of the people who study numbers do not believe there is any reason to celebrate.
 

While there is no clear figure on the size of hole that the FSB would punch in the economy, general expectation is around Rs 130,000 crore. India’s fiscal deficit for 2012-13 stood at Rs 490,000 crore, which was equivalent to 4.9% of the GDP.

Assuming that the economy grows at 5% and government’s expenditure does not shoot up (unlikely scenario given the oil price rise and fall in rupee); FSB has the potential to take the deficit to 5.9%. Though the full impact of FSB will be felt next year, it still has the potential to take the deficit to 5.6%.
 

Just a day before the bill was cleared, rating agency Fitch warned about the dangers of a slipping fiscal deficit. Yet even after the bill was cleared, Finance Minister maintained that the red line of 4.8% of fiscal deficit will not be breached. There are three ways in which this can be achieved.
 

First the FSB will have no impact on the fiscal deficit, a very unlikely scenario. Second, the FM known for his jugglery skills with the budget, will make the deficit an off the book item, like some of the subsidies are being done. And thirdly, the bill will not see the light of the day as it was only meant to be a political announcement. 
 

A closer look at Sonia Gandhi’s speech and what experts in the field of agriculture say, the country does not have the infrastructure to launch the FSB. There has been no study on the beneficiaries of FSB and how it is going to be rolled out. It has taken over four years for the government to just announce the bill. Given its track record of implementation and the issues involved it will take longer for the FSB to be rolled out. Sonia herself said in her speech “There are people who ask whether we have means to implement this scheme; I would like to say that we have to figure out the means.” Markets can relax while the government ‘figures’ out its implementation.
 

But the FM is right, as always, in saying he will maintain the deficit.