Forget Handouts—India Is Starving for Growth; New Delhi’s decision to increase handouts of subsidized food doesn’t bode well for India’s economy
July 5, 2013 Leave a comment
July 4, 2013, 7:28 a.m. ET
Forget Handouts—India Is Starving for Growth
New Delhi’s decision to increase handouts of subsidized food doesn’t bode well for India’s economy.
New Delhi’s decision to increase handouts of subsidized food doesn’t bode well for India’s economy. The bigger problem, though, is that India is starving for growth. The National Food Security Bill, passed by the government Wednesday, guarantees cheap grain to 800 million Indians. But there’s no such thing as a free lunch. The new program will cost at least $4 billion a year, according to the government, on top of the roughly $18 billion a year India already spends on food subsidies. Critics say the move is a politically motivated handout meant to garner popular support ahead of next year’s general election, and does nothing to fix India’s woeful food supply infrastructure.The plan also weakens finance minister Palaniappan Chidambaram’s claims to fiscal credibility. He has promised to bring public finances under control and targeted a fiscal deficit of 4.8% of gross domestic product for the year ending March 2014. The food bill makes it less likely that India will meet that target.
That would be less of a concern, though, if India’s economy was firing on more cylinders.
When New Delhi financed ambitious welfare programs between 2005 and 2008, real GDP growth was about 9% and tax revenue was increasing by around 25% per year. The fiscal deficit looked comfortable around 3%-4% of GDP a year in that period. In the year to March 2013, though, real GDP growth fell to 5% and tax-revenue growth was just 17%.
To get India’s economy back up to pace requires more investment in roads, power plants and factories. Investment has slowed sharply in the past five years partly because of a backlog of approvals. But a new government body set up by Mr. Chidambaram has approved infrastructure projects worth $20 billion since December. The government also says it will ease conditions for road developers. Recent moves to raise power and gas prices should encourage investment in energy infrastructure too.
These moves are having some effect. Mumbai brokerage Emkay says that between March and May, credit disbursed to the power and road sectors rose 6.1%, much faster than the growth in overall credit. The International Monetary Fund says India’s GDP growth could hit 5.8% in the year to end March 2014.
If the economy really does pick up, that should lead to higher incomes all around—and food subsidies may no longer be on the menu.
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