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Moody’s Investors Service on Thursday said India’s sovereign rating might get a boost if the government implemented a high-powered panel’s recommendations on reforming the Food Corporation of India (FCI) and restructuring the food security law, as that would reduce inflationary pressures and fiscal deficit.
At present, Moody’s has assigned to India the lowest investment rating, Baa3, with stable outlook.
The panel, headed by former Union food minister Shanta Kumar, comprises a host of eminent economists and experts. Set up by the Narendra Modi-led central government, it had earlier this month suggested limiting the coverage of the National Food Security Act from 67 per cent to 40 per cent, transferring food and fertiliser subsidy in cash to more than 50 cities, decentralising grain procurement, and quick disposal of excess foodgrains stored in state-run warehouses, either through domestic sale or exports.
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Meanwhile, the employee union of FCI has threatened to launch a nationwide agitation, on the lines of the strike called recently by Coal India workers, if the government implements the committee’s suggestions related to lowering of staff strength and privatisation of godowns and warehouses.
“We are opposing privatisation, dismantling of zonal offices, allowing construction of warehouses on FCI land, among other recommendations made by the Shanta Kumar panel,” said J S Duggal, president of the Bhartiya Khadya Nigam Karamchari Sangh.
If implemented, the had panel said, the suggestions of the panel would help make FCI leaner and more efficient, and also help control costs.
“We expect the recommendations to prompt policies that will improve the efficiency of India’s food supply chain, a credit positive because it will reduce inflationary pressures and the government’s fiscal deficit, two key constraints on the sovereign’s credit quality,” Moody’s had said.
The agency’s analysis came a few days after another one, Standard & Poor’s, said further reforms by the Modi government would give a fillip to India’s rating. S&P, too, has assigned to India the lowest investment grade with a stable outlook.
The previous central government had earlier tried to convince the agencies to upgrade India’s ratings, but they had refused to do so. In fact, S&P and Fitch had lowered their India outlook to negative. While Fitch improved the outlook in 2013, while S&P did so in October last year.
The FDI revamp panel’s report has been accepted by the government and Prime Minister Modi has directed the food department to send its comments soon.
In Budget 2014-15, India’s food subsidy was projected at around Rs 1,15,000 crore, Rs 23,000 crore more than that in the revised estimate for 2013-14.
In its outlook, Moody’s had said India’s Consumer Price Index (CPI)-based inflation had averaged nine per cent over the past few years, driven largely by food prices. The current food subsidy and distribution system supported demand for food by lowering its cost to the consumers, but it also suppressed the price signals that would have prompted a supply response to India’s growing demand.
“Greater transparency and efficiency will lead to both demand and supply responding more quickly to price signals, diminishing the distortions that have kept food inflation higher in India than globally, as food accounts for about 50 per cent of the average household consumption basket,” the rating agency had said.
Though the exact reduction in subsidy costs would depend on the measures the government eventually adopted, changes to the system, at a minimum, would keep food subsidy expenditure from rising as rapidly as these had in past years, it had noted.
“As the government is likely to reduce, but not eliminate, food subsidies, lower inflation will cap its own subsidy bill going forward”, which in turn, would help narrow the government’s overall fiscal deficit ratios, Moody’s had said.
The report, though, had cautioned that a reduction in food subsidy coverage, as suggested by the panel, was politically sensitive in India, where annual per-capita income was $1,509 (around Rs 94,000 crore) in 2013-14.
“Therefore, it will be difficult to obtain parliamentary approval to amend the National Food Security Act and reduce the percentage of the population eligible for food subsidies. But many of the panel’s other recommendations were made in consultation with state governments, suggesting a political and policy consensus that could make their implementation smooth,” it said.
