Hunger games

India grain subsidy may only outsource hunger

India's battle against hunger might end up breaking the rice bowl for the world's poorest. New Delhi has decreed that 67 per cent of India's population, or 800 million people, will have the right to buy up to 5 kg of rice, wheat and other cereals from the state each month, or receive cash compensation.

The expansion of the food subsidy, already substantial at 0.8 per cent of GDP, will hurt wobbly public finances. To see how, start with the Rs 13 ($0.21) New Delhi currently pays farmers for a kg of their rice paddy. Add storage, processing, transportation and distribution costs, and incentives to farmers to grow bigger crops, and the economic cost shoots up to Rs 26 a kg of rice. The burden on the exchequer - after recouping a mere Rs 3 from the consumer - could translate into a staggering $15 billion a year, assuming 40 million tonnes of demand. After including wheat, the subsidy bill balloons to an estimated $25 billion.

When the domestic Indian crop is insufficient, the programme may destabilise a thin global rice market, which trades only about five per cent of the world's production. Once the bulk of Indian consumption bypasses the local open market - where prices can and do rise in years of bad harvest - the full brunt of the country's demand will have to be met by supply from Thailand, Vietnam, Pakistan and the United States. That will in turn cause prices to surge for countries dependent on imports, such as Nigeria, Senegal, Bangladesh, Indonesia and the Philippines.

There is an alternative: to buy up stocks when prices are low and supply ample. To do that, New Delhi must increase its woefully inadequate storage by up to 70 per cent, at a cost of around $1.4 billion, according to a December 2012 study. That sounds modest. But assuming no change in the pace at which India has added storage capacity in the recent past, it will take 19 years. Besides, with vote-grabbing subsidies as the government's spending priority, the money may not be forthcoming. India's good intentions may just push its rice shortages on to the rest of the world.