Interview: government's cheap food plans to cost more than budgeted

By Jo Winterbottom and Mayank Bhardwaj

NEW DELHI (Reuters) - The government's plan to give millions more people cheap food will cost more than its forecast of 1.3 trillion rupees a year and will accelerate inflation, a leading adviser on food issues for the government said in an interview.

The bill aims to provide subsidised wheat and rice to 70 percent of the 1.2 billion people in India, home to 25 percent of the world's hungry poor, according to a U.N. agency, despite being one of the biggest producers of food supplies.

The Congress, which leads the coalition government, is pushing to pass the National Food Security Bill before elections, which are due by May 2014.

But the government's own estimates say the bill would increase the annual food subsidy by 45 percent, threatening to add to an already hefty fiscal deficit. Critics say it is little more than an attempt to divert attention from corruption scandals involving the government.

"Our calculation is that (1.25 trillion rupees) is front-end subsidy. There are many costs that have not been counted," said Ashok Gulati, chairman of the Commission on Agricultural Costs and Prices which advises the government on farm goods prices.

Consumer Affairs, Food & Public Distribution minister K.V. Thomas has said the bill could cost 1.2-1.3 trillion rupees a year. The budget for the current year ending March 31, 2014 sets aside 900 billion rupees as the bill still awaits passage by parliament.

Gulati, who advises the government on prices to pay farmers for their crops, said large-scale state grain purchases to meet commitments under the bill would lead to higher inflation.

"If the government is going to buy the bulk of wheat and rice, there will be a shortage in the open market, and that will lead to inflation," he said in his office, which is in the same corridor as the farm ministry.

Food inflation currently runs around 10.61 percent.

NEED NEW SYSTEM

Gulati said the government should do away with the current inefficient system of buying wheat and rice from farmers and storing it for later distribution to the poor, because it fails to deliver all the food and piles up stocks in inadequate storage facilities.

He said the government could cut costs by instead giving cash direct to the poor for them to buy food in the open market.

"We have worked out that if you go through the cash transfer route, you can save 400 billion rupees," he said.

Much of that cost is for months of storage before the food can be distributed. Buying for the current food subsidy system has already led to massive stocks of wheat and rice.

Then the government sells the food through a rationing system or through "fair price" shops. But some ration shop owners sell grain earmarked for the poor into the open market at higher prices.

Experts say more than 40 percent of food meant for the poor gets siphoned off in India, where over 40 percent of children under five are malnourished, according to the World Food Organisation.

The government is currently trying to reduce its storage costs by offering gain for export, but traders have baulked at the high floor price it is setting of around $300 per tonne.

Global prices are around $265-$280 free on board (FOB). Last month sources said the government was considering lowering the floor price to help boost shipments.

Gulati said the authorities should cut prices to save on storage costs.

"You drop prices by $20 today and save $80 (per tonne in storage costs), or you don't drop prices and carry the cost of $100 for two years," he said.

Gulati recommended the government start an alternative system of handing out cash in 33 cities where most people have bank accounts. India is already working on a plan to transfers some welfare money directly to the poor using a database being prepared for its entire 1.2 billion population under its Unique Identity project.

GRAPHIC: India food subsidies: https://bsmedia.business-standard.comlink.reuters.com/sam87t

Under the current system, the government says it will need about 61 million tonnes of grain a year if the bill is passed, only 3 million tonnes more than it currently makes available, while it hopes better distribution and a clamp-down on corruption will cut waste.

But Gulati said it could need much more to have enough stocks to protect against a bad harvest.

"In 2002, the drought year, grains production fell by 38 million tonnes in a single year. Where will you get that, in international markets?" he said.

(Editing by Jane Baird)