IAS Economy Practice Question . 4

The proposed National Food Security Bill, 2011, if is enacted, may cause which among the following most probably?
[A]Demand Pull Inflation
[B]Cost Push Inflation
[C] Stagflation
[D]Hyperinflation


Answer: Demand Pull Inflation
The National Food Security Bill, 2011 is a potential source of pressure on inflation, and its inflationary impact will depend on the extent to which it will raise demand for foodgrains relative to the normal increase in supply. The proposed bill targets two categories of households – priority households and general households – under which 75 per cent of the rural population (with at least 46 per cent of the population belonging to priority households) and 50 per cent of the urban population (with at least 28 per cent of the population belonging to priority households) will become entitled to subsidized foodgrains. The price restrictions are quite exacting and failure by the government to meet the obligations entails payment of a food security allowance to the beneficiary. Estimates suggest that 68 per cent of the country’s 1.2 billion population will get a legal entitlement for foodgrains after the bill is enacted, significantly raising the annual grain procurement demand even as the available marketed surplus would not increase correspondingly. This will create demand pressures, which will inevitably spillover to market prices of foodgrains. Furthermore, the higher food subsidy burden on the budget will raise the fiscal deficit, exacerbating macro level inflationary pressures.

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