India Approves Food-Subsidy Plan

NEW DELHI—The Indian Parliament’s upper house passed a landmark food-subsidy law on Monday night, a week after it passed the lower house, clearing the way for the ruling Congress party to roll out the initiative, a cornerstone of its policy agenda.
Proponents of the Indian law said it would alleviate hunger at a manageable cost, despite fears that it could roil the government’s precarious finances.

Bloomberg News
Laborers sort onions at a storehouse in Lasalgaon, India, on Saturday.

The government estimated that the law would increase its spending on food subsidies by around $4 billion to roughly $20 billion, at a time when India is struggling to contain its fiscal deficit.
Finance Minister P. Chidambaram has said he would contain the fiscal deficit to 4.8% of gross domestic product to help revive the country’s slowing economy and bolster its depreciating currency.
The law extends India’s existing food-subsidy program, offering rice, wheat and other food grains at a fraction of market prices to low-income people. About 70% of India’s 1.2 billion citizens fall into that category.
India’s economy is expected to grow this year at its slowest rate in over a decade—4% growth in the financial year through March 2014, HSBC said on Monday. India’s GDP expanded 4.4% in the second quarter and 4.8% in the first quarter of 2013, while the Indian rupee has lost 18.5% of its value since May.
The government may have to cut back on infrastructure projects, such as roads and ports, to pay for the food subsidies and meet deficit-reduction targets, said I.V. Subramanian, the chief investment officer at Quantum Advisors, a financial-services firm. “I don’t see any major new drivers of revenue, so the government will have to cut either [fuel] subsidies or capital expenditures,” he said.
Some ratings firms warned that the increased subsidy for food could affect the country’s credit outlook. “The measure is credit negative for the Indian government because it will raise government spending on food subsidies to about 1.2% of GDP per year from an estimated 0.8% currently, exacerbating the government’s weak finances,” Moody’s Investors Service said on Thursday.
Supporters of the law said that concerns over spending were overblown and the food subsidies were necessary to feed millions of hungry citizens. India is home to a quarter of the world’s hungry and a third of the world’s poor, according to the United Nations.
The government could balance the costs by reducing spending on infrastructure by around 10%, said Madan Sabnavis, chief economist at CARE Ratings, an Indian credit-risk advisory. “This is a trade-off the government has to do, because distributive justice is important in the long run,” he said.
“Some people forgot when India was growing at 8% that it still faces huge challenges in eradicating poverty,” Mr. Sabnavis said.
The law’s impact is expected to be muted in the coming months, as the government has already budgeted nearly $15 billion for food subsidies in the current fiscal year ending March 2014.
The law must still be signed by the president, usually a formality.
Congress party President Sonia Gandhi said in Parliament last week that India would have to make resources available to fund the program if it wants to uplift its millions of poor.
“It is not a question of whether we can afford to implement this bill,” Ms. Gandhi said. “We just have to do this.”
Write to Niharika Mandhana at niharika.mandhana@wsj.com

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