Editorials/Opinions Analysis For UPSC 12 August 2024

CONTENTS

1. Populism will not let Food Subsidy Reforms Take Off
2. Implications of Upheaval in Bangladesh on its Trade Relations Relations with India

Populism will not let Food Subsidy Reforms Take Off

Context:

In the Budget presented by Union Finance Minister on July 23, 2024, the government set the budget estimate (BE) for food subsidy in FY 2024-25 at Rs 205,250 crore, which aligns with the figure provided in the interim Budget. Over the last five years, the Central government’s expenditure on food subsidy has consistently exceeded Rs 200,000 crore each year: Rs 529,000 crore in 2020-21, Rs 372,000 crore in 2021-22, Rs 287,000 crore in 2022-23, Rs 211,394 crore in 2023-24, and Rs 205,250 crore (BE) in 2024-25.

Relevance:

GS3-

• Major Crops – Storage, Transport and Marketing of Agricultural Produce and Issues and Related Constraints
• Issues related to Direct and Indirect Farm Subsidies and Minimum Support Prices
• Public Distribution System – Objectives, Functioning, Limitations, Revamping
• Issues of Buffer Stocks and Food Security

Mains Question:

Over the last five years, the Central government’s expenditure on food subsidy has consistently exceeded Rs 200,000 crore each year. In this context, discuss the challenges associated with India’s food subsidy system and suggest a way forward strategy to deal with them. (15 Marks, 250 Words).

Analysing the Estimate:

• Although budget estimate (BE) for food subsidy is slightly less than the revised estimate (RE) of Rs 211,394 crore for FY 2023-24, it offers little reassurance, as the RE for any financial year often exceeds the BE.
• For instance, while presenting the budget for FY 2023-24, the Finance Minister had initially allocated Rs 197,000 crore for food subsidy. However, the RE ended up being Rs 14,394 crore higher.
• For FY 2024-25, food subsidy will constitute 4.2 percent of the total budget (Rs 4,820,000 crore), 5.5 percent of revenue expenditure (Rs 3,709,000 crore), and nearly 8 percent of the estimated net tax receipts (Rs 2,583,000 crore).

Controlling the Food Subsidy Expenditure:

• Controlling food subsidy expenditure is as crucial as achieving its primary objective, which is to ensure ‘food security.’
• An unchecked increase in food subsidy can lead to an unsustainable rise in the fiscal deficit (the gap between total receipts and total expenditure), potentially harming the economy through high inflation, increased interest rates, slower growth, fewer jobs, and lower incomes.
• This could create a demand for more financial assistance, including food subsidies, thereby worsening the cycle.
• There is significant potential to reduce food subsidies. To evaluate this, it’s essential to first understand how the subsidy is administered.

How is the Subsidy Administered?

• Under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), the Centre directs the Food Corporation of India (FCI) and other state agencies to procure food from farmers at the minimum support price (MSP) and distribute it for free to approximately 820 million people.
• The entire cost, which includes the MSP paid to farmers along with handling and distribution costs (HDC), is reimbursed to the FCI and other state agencies as a subsidy. This funding comes from the Union Budget’s allocation for ‘food subsidy.’
• The PMGKAY has been in place since January 1, 2023, but before that, the Centre provided food to 820 million people (7 kg of cereals per person per month for 120 million of the poorest individuals under the Antyodaya Anna Yojana or AAY families, and 5 kg per person per month for the remaining 700 million) at highly subsidized rates of Rs 2/3/1 per kg for wheat/rice/coarse cereals under the National Food Security Act (NFSA).
• Additionally, from April 2020, the government distributed 5 kg of food per person per month for free to all 820 million beneficiaries under PMGKAY to mitigate the impact of the Covid-19 pandemic.
• Starting January 1, 2023, the free component of PMGKAY was merged with the regular food security programs under NFSA.
• Now, under the new version of the NFSA, food is available for free to all 820 million beneficiaries through PMGKAY.
• This arrangement will continue for five years until the end of 2028, as announced by Prime Minister Narendra Modi in November 2023.

Potential Savings in Subsidy:

• Fundamentally, subsidized food is intended for the poor, who constitute no more than 15-20 percent of India’s population.
• However, the PMGKAY currently covers 820 million beneficiaries, which accounts for nearly 59 percent of the population.
• According to the Shanta Kumar Committee (2015), the number of people eligible for subsidized food under NFSA should not exceed 40 percent of the population. This excess coverage of 19 percent translates to around 270 million individuals.
• Additionally, according to a recent Niti Aayog report, 250 million people have risen out of poverty during the last nine-and-a-half years under the current government. These individuals could be removed from the list of beneficiaries.
• A rough calculation shows that providing free food to one million people requires a subsidy of Rs 200 crore annually. Excluding 250 million people could save Rs 50,000 crore.
• The current list of 820 million beneficiaries is based on the 2011 Census, but the Supreme Court (SC) has directed the Centre to consider the population as of 2021.
• On this basis, an additional 100 million people may need to be provided with free food. That would cost Rs 20,000 crore, but even after accounting for this, the government could still save Rs 30,000 crore annually.

Associated Concerns:

Should Every Beneficiary Receive Free Food?

• The Shanta Kumar Committee recommended that non-AAY beneficiaries should pay 50 percent of the MSP.
• Other than AAY beneficiaries, there are 700 million people. Subtracting the 250 million who shouldn’t receive a subsidy and adding 100 million as per the Supreme Court’s order, we have 550 million people.
• Charging them 50 percent of the MSP, or Rs 11.4 per kg (for wheat), would result in annual savings of Rs 37,600 crore.
• The NFSA legislation, enacted in 2013, required beneficiaries to pay Rs 2/3/1 per kg for wheat/rice/coarse cereals, with these rates frozen for three years. Since 2016, there has been no legal restriction on increasing these prices. However, rather than raising the prices, the government reduced them to zero.
• Are all 820 million beneficiaries so impoverished that they can’t afford even a fraction of the cost (Rs 2 per kg of wheat is only 1/15th of the actual cost)? Even charging a nominal Rs 1 per kg could save Rs 5,000 crore annually.

‘Open-Ended’ Procurement System:

• Fourth, the original intent of the scheme was for FCI and other agencies to purchase only the quantities needed to meet beneficiaries’ requirements under NFSA, plus maintain a ‘strategic’ buffer for emergencies.
• It was never intended to be an ‘open-ended’ procurement system, which it has become today. This approach has contributed to unnecessary increases in subsidies and storage issues. Avoiding open-ended purchases could result in significant savings.

Other Issues:

• Currently, FCI and state agencies are reimbursed for handling and distribution costs (HDC) on an ‘actual’ basis, which allows for inefficiencies and cost padding.
• The stories of loaders receiving exorbitant salaries from FCI are still fresh in memory. Switching from ‘actual’ to ‘normative’ reimbursement could save a substantial amount in subsidies.
• The availability of around 60 million tons of food (the quantity distributed under PMGKAY) in the supply chain at zero cost is an open invitation for dubious operators to divert and sell it on the open market for profit.
• The PDS scam in West Bengal, involving the diversion of subsidized food grains worth tens of thousands of crores, currently under investigation by central agencies, is a prime example.
• This could be curbed by providing the subsidy directly to beneficiaries through the DBT (Direct Benefit Transfer) system.

Conclusion:

The potential for reducing food subsidies is vast. The government can implement any of these measures or all of them, depending on the level of savings it aims to achieve. However, under the current political climate, the government is unlikely to take even a small step like charging a nominal price of Rs 1 per kg.

Implications of Upheaval in Bangladesh on its Trade Relations Relations with India

Context:

Since Sheikh Hasina assumed office as the Prime Minister of Bangladesh in 2009, the country has emerged as a crucial ally of India. Her leadership has brought about substantial progress in bilateral relations, particularly in areas such as infrastructure development, connectivity, and trade. However, the recent political turmoil in Bangladesh has sparked concerns regarding the future of this vital partnership.

Relevance:

GS2- India and its Neighborhood- Relations

Mains Question:

The sudden turn of events in Bangladesh have raised concerns about the potential impact on trade, economic stability, and the broader geopolitical dynamics in the context of India- Bangladesh ties. Discuss. (10 Marks, 150 Words).

Political Crisis in Bangladesh:

• On January 8, 2024, Sheikh Hasina announced that her top priority for the next five years would be to boost Bangladesh’s economy.
• Despite these ambitions, by August 2024, the country was gripped by widespread and violent protests over a quota system for government jobs, which triggered a severe domestic political crisis.
• As the situation worsened, Sheikh Hasina stepped down from her position and sought refuge in India, raising serious questions about Bangladesh’s stability and the potential repercussions for Indo-Bangladesh relations.

The Evolution of Indo-Bangladesh Relations:

• Over the past decade, India and Bangladesh have cultivated a robust economic partnership, with infrastructure and connectivity projects serving as the cornerstone of their relationship.
• Since 2016, India has provided Bangladesh with $8 billion in credit to support the development of critical infrastructure, including roadways, railways, shipping routes, and ports.
• These investments have been pivotal in enhancing connectivity and fostering closer ties between the two nations.
• In addition to infrastructure, the two countries have collaborated in various sectors, including medical tourism, business expansion, and the international garment trade.
• Bangladesh, a significant player in the global garment industry, depends heavily on cotton imports from India to sustain its production.
• The textile and garment sectors are especially important, accounting for 56% of Bangladesh’s total exports to India, underscoring the country’s role as a key trading partner in South Asia.
• The financial year 2023-24 saw bilateral trade between India and Bangladesh reach an impressive $13 billion, as reported by the Union Ministry of Commerce.
• This figure highlights the deep economic integration between the two countries and the mutual benefits derived from their close cooperation.
• However, the recent political instability in Bangladesh could pose a threat to this flourishing partnership, raising concerns about the future trajectory of Indo-Bangladesh relations.
•  As the situation unfolds, both nations will need to navigate these challenges carefully to preserve the gains made over the past decade and ensure continued collaboration in the years to come.

The Impact on Trade:

• Under Sheikh Hasina’s leadership, trade between India and Bangladesh experienced significant growth, resulting in a substantial trade surplus for India.
• However, the ongoing political unrest in Bangladesh poses a serious threat to this economic partnership.
• The civil disturbances and deteriorating economic conditions have raised security concerns that could disrupt Indian exports, commercial activities, and infrastructure projects in Bangladesh.
• One of the major challenges lies in the area of bilateral trade. After reaching $12.21 billion in 2022-23, India’s exports to Bangladesh declined to $11 billion in 2023-24.
• Similarly, Bangladesh’s imports from India decreased from $2 billion in the previous fiscal year to $1.84 billion in the most recent year.
• Indian exporters are increasingly worried about the instability in Bangladesh, fearing that the ongoing crisis could have a detrimental effect on commerce between the two countries.
• A critical issue contributing to these trade disruptions is the severe dollar shortage in Bangladesh.
• According to the Global Trade Research Initiative (GTRI), this scarcity has already significantly limited Bangladesh’s ability to import goods, particularly from India.
• The reduced availability of foreign currency is straining the country’s capacity to meet its import needs, which in turn is affecting trade volumes between the two nations.

Uncertainty Surrounding the Free Trade Agreement:

• In October 2023, India and Bangladesh explored the possibility of a free trade agreement (FTA) during a Joint Working Group (JWG) on Trade meeting held in Dhaka.
• An FTA could simplify regulations, encourage investment, and boost commerce by potentially removing customs tariffs, thereby enhancing trade between the two countries.
• According to a 2012 World Bank working paper, a full-product FTA could increase Bangladesh’s exports to India by as much as 182%, while a partial FTA might still achieve a 134% growth.
• Such an agreement would not only bolster Bangladesh’s trade and transport infrastructure but also significantly strengthen its commercial links, leading to a considerable rise in exports.
• However, the current political crisis has cast a shadow of uncertainty over the future of these FTA discussions.
• With Sheikh Hasina’s resignation, the momentum behind the FTA may slow down or even come to a halt.
• This could stall the expansion of trade and commerce between the two nations, particularly in new and emerging sectors.
• The potential benefits of the FTA, such as increased market access, reduced trade barriers, and enhanced economic cooperation, now hang in the balance as both countries navigate the uncertainties brought on by Bangladesh’s internal turmoil.
• The political instability in Bangladesh thus presents a dual challenge: not only does it threaten the immediate trade relations between India and Bangladesh, but it also puts at risk long-term strategic initiatives like the FTA that could have greatly benefited both economies.
• The outcome of this crisis will be crucial in determining the future trajectory of Indo-Bangladesh economic relations.

Challenges for the Textile and Garment Industry:

• The ongoing political crisis in Bangladesh threatens to severely impact several key sectors, with the textile and garment industry being one of the most vulnerable.
• In the fiscal year 2021-2022, Bangladesh exported garments worth $42.613 billion, establishing itself as the second-largest apparel exporter in the world.
• However, recent incidents, including the burning of factories, have cast a shadow over the future of this critical industry.
• Many of these textile units are owned by traders with ties to the Awami League Party, making them prime targets amidst the current political unrest.
• The disruption in Bangladesh’s garment sector could have far-reaching consequences, not just for the country but also for global supply chains.
• The instability is creating uncertainty for international buyers who rely on Bangladesh’s vast garment manufacturing capabilities.
• This could lead to delays, cancellations, and a loss of confidence among global retailers who have long depended on Bangladesh for affordable and high-quality apparel.
• India, with its robust textile and garment industry, could potentially step in to fill the gap left by Bangladesh.
• As a neighboring country with a well-established manufacturing base, India is well-positioned to supply garments to developed economies if Bangladesh’s production falters.
• However, there are significant challenges to this shift. Bangladesh enjoys the benefits of being classified as a Least Developed Country (LDC), which allows its exports to enter many markets with zero-duty advantages.
• In contrast, Indian goods often face tariff barriers, making them less competitive in the global market.
• If the political situation in Bangladesh leads to prolonged border closures or the suspension of duty-free export-import activities, there could be an increased demand for Indian garments.
• However, the complexities of global trade mean that any shift in demand may not be immediate or straightforward.
• Indian exporters would need to navigate tariff barriers, establish new supply chains, and possibly adjust pricing strategies to remain competitive in markets that have been dominated by Bangladesh.
• Moreover, while India could benefit from increased demand in the short term, the long-term implications are uncertain.
• The instability in Bangladesh could also lead to shifts in global sourcing strategies, with buyers diversifying their supplier base to reduce dependence on any single country.
• This could create opportunities for other garment-producing nations as well, further complicating the landscape for Indian exporters.

Conclusion:

While there is potential for India to capitalize on the disruptions in Bangladesh’s textile and garment industry, the situation remains fluid. The advantages that Bangladesh currently enjoys as an LDC, coupled with the uncertainties surrounding the crisis, make it difficult to predict the exact opportunities and gains that might emerge. The coming months will be crucial in determining how the textile and garment industry in South Asia evolves in response to these challenges.