The food security Bill has received a lot of flak from experts and commentators alike. It will not only be ineffective in feeding the poor, but will also cause our fiscal deficit to rise significantly. The government has three sources of funding its welfare schemes. First, it can borrow from international institutions or domestic lenders. Given that the cost of borrowing has spiked recently, the government will be less willing to use this tool for fear of hurting the fiscal deficit. Any more blows to the deficit target will mean a ratings downgrade and an economic hara-kiri. Second, the government can turn to tax hikes. Merely pursuing the rich will not be enough to fund the huge cost of the Bill. This means that a massive tax burden will have to be shouldered by the middle class. Given the implausibility of these two options, the government will likely resort to the last available recourse - printing notes through the Reserve Bank of India. This option will inevitably lead to inflation by the time the benefits of credit expansion through a fractional-reserve banking system trickle down to the poor.
Harsh Vora Vadodara
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