REFILE-India draft bill eyes cheap grains for 810 mln people

(Refiles to add dropped word)

By Krittivas Mukherjee

NEW DELHI, Sept 14 (Reuters) - India's government has agreed on a draft law to provide cheap grains to two thirds of its 1.2 billion people, a plan that could widen fiscal deficit but help win voter support for the government and its allies.

Voter anger at high food prices has damaged the popularity of Prime Minister Manmohan Singh's centre-left government in a country where 40 percent of its population live below the U.N. poverty line, threatening his Congress party's chances in a key state election next year and the 2014 national elections.

The bill to subsidise food for 810 million people could give the Congress party-led coalition a political edge at a time when it is struggling with corruption scandals.

But it will also hurt the government's finances. The planned subsidies double the cost of an existing programme that sells cheap grains and pulses to nearly 180 million poor families in Asia's third largest economy, the agriculture ministry says.

Last year, the government spent $12 billion, or 1 percent of GDP, on that programme. Other schemes to shield rural areas from reforms that have driven growth elsewhere in the economy helped the government win a second term two years ago.

India says it aims to achieve a goal of cutting its fiscal deficit to a targeted 4.6 percent in 2011/12. Private economists say the target is not realistic.

In the 1990s, Singh ushered in many reforms that helped India achieve rapid growth over the last decade. But with inflation at almost 10 percent and parliament upset with government corruption, the prime minister is struggling to push through further reforms.

FREE MEALS

In the long run, India may find it hard to produce enough grains to sell at subsidised rates to a growing population, since farm yields are falling.

The food security bill, which was released by the food ministry for public debate, must be approved by parliament to become law, possibly during a winter session that starts in December.

The draft law proposes widening subsidies to 75 percent of the rural population and half the urban population with higher and cheaper allocations for the poorest.

About 70 percent of India's population lives in rural areas.

The government now needs around 4 million tonnes of grain every month to sell to the poor at cheaper rates. Detailed plans in the draft bill are expected to give the government a better idea on how much grain India will have left over for exports.

Through Sept. 1, India held wheat and rice stocks of 33.6 million tonnes at government warehouses, nearly double the target of 17.1 million tonnes. The government has built up supplies as a hedge against inflation and because of uncertainty over the contents of the food security bill.

Many fear the new food security scheme may bypass the intended beneficiaries. Millions of tonnes of grain are wasted in India due to, corruption, inadequate supply chains or storage facilities. (Editing by Frank Jack Daniel and Yoko Nishikawa)