The National Advisory Council has finalized its recommendations for the Food Security Act. In this piece, we calculate the likely rise in food subsidy cost over the period of the implementation of the program. We estimate that 167mn families will qualify to access subsidized food grains, which will increase the food subsidy bill to INR780bn (1.0% of GDP), about INR225bn (0.3% of GDP) higher than the current subsidy level of INR556bn. On the face of it, funding a food subsidy bill of 1% of GDP in the coming years does not seem such an uphill task; but add to it the possibility of further increases in other subsidy outlays, such as fertilizer and/or fuel items, the cumulative impact could put substantial strain on the fiscal position, especially given the fact that i) revenue generating tax reforms such as Direct Tax Code and GST will not be implemented in the next fiscal year and that ii) one-off windfall gain from non-tax revenue will be absent.

Eoin Treacy's view India has run what seems like a perpetual current account deficit, making it dependent on foreign investment and remittances from the not inconsiderable diaspora. In a democracy where such a large proportion of the population are barely subsisting, the government has little choice but to subsidise food to some extent. However if this situation is ever to be alleviated, a greater focus on modernising farm practices and improving yields will need to be undertaken. Pursuing a consistent policy of industrial and services development would also help to lift more people out of poverty and away from an agrarian lifestyle which could decrease opposition to farm modernisation.

The problem with attempts to fix prices for any commodity is that it shifts the risk of price fluctuations onto the government, which is often as ill prepared to deal with it as the public. Food price inflation remains a distinct risk despite the mostly favourable monsoon because of price pressures on global markets. A significant rally in grains and bean prices, which cannot be ruled out, would act as a headwind for India which displayed a pronounced vulnerability to commodity price inflation in 2008.