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Budget Session Cut Short Without Passing Key Reforms

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India cut short the budget session of parliament on Wednesday, two days ahead of its scheduled close and without passing major reforms like the food security and the land acquisition bills.

The session, one of the least productive on record, has been disrupted for two weeks by opposition demands for the resignation of Prime Minister Manmohan Singh and his law minister over a federal police investigation into how the government awarded coal concessions to private and state companies.

Two long-stalled economic reforms - one to lift the foreign ownership cap in insurers to 49 per cent from 26 per cent and another that would simplify land acquisition for factories - were expected to be passed in the legislature during the budget session but ended up being side-tracked by the political ruckus.

The food security bill, which aims to give millions more people cheap food, is seen as crucial to the ruling Congress party's hopes of reelection.

Food Security Bill To Prove Costly For Government
The government may soon pass the National Food Security Bill to give millions more people cheap food, fulfilling an election promise of the ruling Congress party that could cost about $23 billion a year and take a third of annual grain production.

The bill, which aims to feed 70 per cent of the population, could widen the already swollen budget deficit next year, increasing the risk to its coveted investment-grade status.

The ambitious bill, a priority for Congress President Sonia Gandhi, will raise the annual food subsidy spending by 45 percent. It promises wheat and rice at a fraction of the cost to some 810 million people, expanding current handouts to roughly 318 million of India's poorest.

Critics say the food bill is little more than an attempt to help Congress, reeling from corruption scandals, win re-election in a vote expected by next May.

The government has already budgeted 900 billion rupees for the scheme in the current fiscal year ending March 2014. If the bill is passed, it will need to come up with as much as 1.3 trillion rupees in 2014/15, adding to a total subsidy burden that already eats up about 2.4 percent of gross domestic product.

"It is very difficult to say whether the government will be able to get the Food Security Bill passed or not, but it is definitely going to further widen the budget deficit," D.H. Pai Panandiker, head of private think-tank RPG Foundation, said.

"The finance minister is already worried about the budget deficit, and it is going to add to his agony."

Reducing fuel and fertiliser subsidies would be the best way of mitigating the costs, Panandiker said. Other measures will also be needed to fund the plan, which may include spending cuts and higher taxes.

Finance Minister Palaniappan Chidambaram said in March the rollout of the new food subsidies was unlikely to happen before the middle of the current fiscal year, which started April 1, curbing the financial cost. Chidambaram aims to cut the fiscal deficit to under 4.8 percent of GDP in the current year from around 5 percent in 2012-13.

Bulging Stocks
Feeding its poor is a matter of urgency for India, home to about 25 per cent of the world's hungry poor, according to the World Food Programme, the food aid arm of the United Nations.

India is one of the world's biggest producers of rice, wheat and sugar, but it is also one of the largest consumers with a 1.2 billion population. It exports little and builds up stockpiles to cover handouts, which are now overflowing after bumper harvests, which have come close to 200 million tonnes a year of rice and wheat.

The law would have little effect on India's export volumes in a good crop year, but "in a year of shortage, there could be some impact" on international markets, a Singapore-based trader said.

The bill will give rice at 3 rupees per kg to the poorest people, less than 10 percent of current retail prices, and wheat at 2 rupees per kg.

The government estimates it would need about 61 million tonnes of grains, only 3 million tonnes than it currently makes available, to provide the extra food, hoping better distribution systems and a clamp-down on corruption will reduce wastage.

Last year only about 41.4 million tonnes was actually distributed by state governments in cheap food schemes.

The Congress party, which leads the ruling coalition, wants to pass the bill by May 10 when the parliament session ends.

But debate this week has been disrupted by opposition parties, which say the government is pushing the populist move as a smokescreen to avoid defending itself over corruption scandals.

Last week, police arrested the nephew of Railway Minister Pawan Kumar Bansal in connection with allegations that he accepted a bribe of $160,000 to arrange the promotion of a railway official.

The government may try to pass the bill again in the parliamentary session that starts around July 23 or push it through without a vote when parliament is not sitting, using special constitutional powers. It must then win approval for the bill within six weeks of parliament's return.