India is suffering from a spate of economic ills: too much state control in the government, too much inflation, too high deficits, and so forth.
And it may be on the verge of making things worse.
India’s lower house of parliament just passed a food bill that will give subsidized grain to 2/3rds of the country’s citizens. The aim of the bill, which is supported by Prime Minister Manmohan Singh, is to reduce hunger. But economists are saying things might backfire.
In a note to clients this morning, Nomura says the law (if it goes all the way through) will be problematic for several reasons.
In our fiscal balance estimates for FY14 (year ending March 2014), we expect the food subsidy bill to rise to INR1.04trn (0.9% of GDP) versus the government’s budgeted target of INR900bn (0.8% of GDP). The full fiscal impact of the bill will not be felt this year, as half of the current fiscal year is already over and states will take some time to identify the list of beneficiaries. However, once the bill is fully implemented (likely from FY15), the total cost is likely to rise substantially for two reasons. First, the food subsidy bill will rise, and second, there will be ancillary expenditures associated with creating the infrastructure to implement this bill. Additionally, we see the bill as inflationary, because it creates a demand-supply mismatch, requires raising minimum support prices to encourage production, could create a shortage of non-grain food items and reduces the marketable surplus for the private sector. Overall, while the bill aims to promote inclusive growth and the government hopes to garner political mileage from it (general elections are due by May 2014), we believe that a reliance on the existing, very leaky, public distribution system will have adverse macro repercussions and cause increased imbalances in the agriculture sector. The economy can ill-afford this at the current juncture.
Here’s a one year chart of the US Dollar vs. the Indian Rupee which shows both how bad the Rupee has performed over this time frame, and as well as the immediate past, including today.