Reforms in food subsidy to reduce inflationary pressures, says Moody's

Moody's Investor Service, the global credit rating agency on Thursday said the recommended reforms in food subsidy and distribution will reduce India's inflationary pressures and fiscal deficit.

On January 21, a government panel had recommended reforms in the food subsidy and distribution system.

In an article in the latest issue of Moody's credit outlook Moody's associate analyst-Sovereign Risk Group said: "We expect the recommendations to prompt policies that will improve the efficiency of India's food supply chain, a credit positive because it will reduce inflationary pressures and the government's fiscal deficit, two key constraints on the sovereign's credit quality."

The reforms include decentralising grain procurement, a process for disposing of excess food grains, delivering food and fertiliser subsidies via direct cash transfers, and reducing food subsidy coverage as mandated by the National Food Security Act to 40 per cent of the population from 67 per cent.

According to Moody's, India's consumer price index (CPI) inflation has averaged 9 per cent over the past five years, driven largely by food inflation.

India's current food subsidy and distribution system support demand for food by lowering its costs to targeted consumers, suppresses the price signals that would prompt a supply response to India's growing food demand.

Furthermore, the loss of grain stocks through inefficiency or corruption has raised costs and lowered the socio-economic benefits of the system, Moody's said.

According to the rating agency, greater transparency and efficiency will lead to both demand and supply responding more quickly to price signals, diminishing the distortions that have kept food price inflation higher in India than globally.

Food accounts for about 50 per cent of the average household consumption basket, lower food inflation will dampen wage inflation, improve the interest rate environment and increase the economy's competitiveness.

India's general government fiscal deficit ratio of 7.2 per cent of gross domestic product (GDP) for the fiscal year ended March 2014.

Annual spending on food subsidies grew by 20 per cent on average over the past eight years, compared with 16 per cent overall expenditure growth during the same period, the rating agency said.

According to Moody's, the exact reduction in subsidy costs will depend on the measures that the government eventually adopts.

A reduction in food subsidy coverage is politically sensitive in India, where annual per capita income was $1,509 in fiscal 2014.

Therefore, it will be difficult to obtain parliamentary approval to amend the National Food Security Act and reduce the per centage of the population eligible for food subsidies.

But many of the panel's other recommendations were made in consultation with state governments, suggesting a political and policy consensus that could smooth their implementation, Moody's said.