Gone with the wind

For an economy, heres how its debt can become unsustainable.

Say at time 0, Revenues are x, lower than expenditure y. Then bonds are issued and debt is built up to the extent of y-x. next year, time = 1, say with no change in level of revenue or expenditure, bonds are issued to the extent of (y-x) plus interest cost on outstanding debt: i*(y-x) in our case. The dynamic problem gives the solution that primary balance should be higher than the debt financing cost. More formally, (D/Y)(i-g)/(1+g) = primary balance.

Caught on an explosive debt path, economies should raise tax rates and cut expenditure. Some back of the envelope calculations show India’s primary balance fell below the sustainable level in FY10. In FY11 although, it has reversed.

India actual and sustainable primary balance as percent of GDP:

With a 7% increase in expenditure (ex interest payment) and 20% increase in receipts, the Govt. has been able to cut primary deficit to 1.9% of GDP in FY11 from 3.2% of GDP in FY10. Of the total non debt receipts, Rs 40k crores is budgeted from disinvestment and Rs 35k crores from 3G and BWA auction proceeds.

Is this fiscal prudence? fiscal discipline? What of next year when crude prices are high? or crisis worsens? And Govt has no more spectrum to auction? Even at the risk of getting sovereign debt downgraded, auction and disinvestment proceeds should not be used for emergency expenditure.

If there is a bad harvest, there isn’t enough foodgrains. If there is a good harvest, there is wastage of grains!

Budget FY11 underlines the need for accelerated investment for the construction of warehouses and cold storage facilities. The Govt has now also allowed ECB for this purpose. Besides, various excise, customs and service tax exemptions are available on equipments used in agri produce preservation and storage. Subsidies already in place included Rs 1.3 crore per cold storage facility.

Why with all the subsidies to the private sector, why does the Govt also spend on FCI rentals? FCI has been hiring godowns from private parties for a guaranteed period of seven years.

The Govt should link the subsidy to each warehouse with two years of one third warehouse space let out to the Govt, for no cost.

For the entrepreneur, if with Rs x profit per sack of grain led to a breakeven in t years, the break even under the proposed structure increases by just two-third of a year. The govt in the meanwhile can save on rent and build godowns that it now needs to do given the revised buffer foodgrain norms following the introduction of Food Security Bill.

Outsourcing malnutrition

Per cap grain availability has averaged over 300 Kg/year between 2000-10. Yet we continue to see a high incidence of malnutrition and malnourished deaths. WHO estimates 178 million malnourished children around the world.

Clearly, food production is not yet a bottleneck, and hunger is perhaps a direct consequence of the utter poverty of the lowest income groups.

The increasing number of agricultural land acquisitions in the lower income economies, by the advanced nations, is incredible, and highlights the role of govt policies and safety nets.

India's Food Security Bill is a commendable step towards achieving food security. However, more than intention, it is implementation which will determine the success of food security.