Will cash transfers work any better than current ration shops?

An issue in the budget that will ignite discussion is food subsidy. Everybody agrees that it is a good idea, but it does not work quite the way it is intended to. It is, therefore, tempting to look at alternatives. Also, the system leaks, which means we should change the way we distribute these benefits.

Cash transfers are what people are talking about as this will obviate the need to actually get into the act of handling and transporting foodgrain, which has tended to create other kinds of distortions in the agricultural markets.

Let us understand the present process flow. The Food Corporation of India (FCI) has an open-ended procurement scheme wherein it buys wheat and rice at pre-determined prices. These grains are then stored across the country and distributed through fair-price shops (FPS) that are part of the PDS (public distribution system).

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There are around 500,000 such outlets. They distribute grains to those holding a ration card, which stratifies households on the basis of being above (APL) or below the poverty line (BPL). The entitlement per member is fixed as is the price, which varies for APL and BPL families.

These stocks are also used as a strategic buffer. There are certain buffer stock norms laid down for every quarter, but invariably the FCI ends up holding over 50 million tonnes of grains which, at an average cost of, say, Rs 18,000 per tonne (economic cost), works out to around Rs 90,000 crore of capital that is blocked. It also gives rise to wastage due to rotting of grain as warehousing capacity is limited.

The FCI today is the largest hoarder of rice and wheat as it does not know what to do with these stocks. Therefore, we have anomalies wherein bumper production is also associated with scarcity as farmers tend to sell more to the FCI.

Critics say that having the FCI to procure and then distribute grain through these channels is extremely inefficient and cumbersome. The economic cost of rice, for example, is around Rs 20 per kg, of which 30 percent goes for incidentals. The issue price could vary from Rs 3-8.50, depending on the classification of the household and the poverty scheme under which they are covered.

Two issues surface here. First, the subsidy is large - between Rs 11.50 and Rs 17 a kg. Second, the people targeted are often the wrong ones. There are leakages in terms of flow of grains and diversion to the commercial market through unfair accounting by fair-price shops. This means that while the food subsidy bill of, say, Rs 60,000 crore is being used to fund such an inefficient system, increasing such outlays under the Food Security Scheme will only multiply these losses.

Votaries of change say getting out of this system could help reduce these inefficiencies and accompanying costs. The FCI’s role should be to hold on to the buffer and anything that is required strategically. But it has to change its model of procurement to balance the selling requirements of farmers. There is currently a bias in terms of having a machinery to collect grain only from a limited set of states: Punjab, Haryana, Uttar Pradesh, Madhya Pradesh, Chhattisgarh, Bengal and Andhra Pradesh. How does one exclude farmers then? The existing model of procurement will lead to the government becoming the largest selling agency in the country, which will surely distort the market.

In the new system, though, the FCI machinery itself will need to be reduced. This means that there has to be de-staffing here. Is it acceptable? The warehouses it owns have to be let out or sold. Will this be efficiently done? The fair-price shops will become largely redundant, and there will be at least 10 lakh unemployed people given that each fair-price shop will have at least two persons working there. The entire scenario relating to FDI in retail has created a storm over what happens to kirana shops. The same holds here. Therefore, while there is a strong case for changing the system, it may not be practically feasible in the short-term.

[caption id=“attachment_227813” align=“alignleft” width=“280” caption=“In the new system the FCI machinery itself will need to be reduced. This means that there has to be de-staffing here. Is it acceptable? Reuters”]  [/caption]

But let us remember that there is something theoretically good about the PDS. First, there is a fair average quality of grain being distributed at a fixed price across the country. Second, this being a fair quality, it cannot be easily resold for money. Therefore, the grains go for consumption. Third, the reach is extensive in terms of coverage given that it is a very old scheme spanning decades. Fourth, it is scalable.

One can increase the basket of products offered here through the existing outlets. Fifth, at least around half the recipients are genuine, which means that some good has come about.

Now, coming to the alternatives that we are talking of, cash transfers, prima facie, look like a good substitute for the existing PDS system. If we give money instead of a ration card, then we save on the cost of transmission of the PDS scheme. People get the money and buy the same at market prices. What can the issues be here?

Identification is again the primary challenge. While the unique ID scheme is a good idea, how does one verify that the person is poor or needy? Further, it has been seen that even under NREGA there are allegations that the system has been gamed where fictitious accounts have been opened up to claim the wages through direct account transfers.

If this be true, the same cannot be avoided here. How can one be assured that the claimant does not have to continuously pay a bribe to get this benefit? There are morbid stories in some regions where borrowers don’t get the full amount of the loans they seek from banks. Let us suppose that this too works out well and the money goes to the right hands. Will the money be spent in the right manner? This can never be assured as the money can be diverted to drinking or gambling - something which is quite prevalent in rural India.

Let us suppose that even this is addressed. How will the government fix the rates, given that prices vary across the country? The price of coarse rice in the retail market varied from Rs 12 a kg in Kolkata to Rs 25 in Hissar for 3 February. Similarly, wheat ranged from Rs 12 in Hissar to Rs 28 in Chittoor. How will the amounts to be transferred as cash be determined given that there are such price variations?

Further, there will be political bargaining to ensure that each state gets a higher cash value. The entire purpose of subsidising the poor will be defeated through this form. Also, once in the open market, one is susceptible to inflation as the price will increase when this entire demand for 35-40 million tonnes, which is the PDS offtake today, is shifted to the open market. These cash transfers, which will finally go as the local price of, say, 30 kg of cereals, have to be changed every year to adjust for inflation, or else the user ends up getting a worse deal than in the existing PDS scenario.

The question really is whether or not we have thought of all these issues when thinking of migrating to a new system. Agreed, the PDS leaks and needs reform. But changing to a system that has its own set of problems is more like abandoning the old one instead of repairing it. We must not get carried away by merely having intelligent people who create new systems, as those who have to run it need to be competent and, more importantly, honest. When integrity does not come easily to us, there will always be an incentive to game the system. Also, making existing institutions redundant will not be digested easily politically.

We need to think seriously about how to make the system work and not create another white elephant and leave it to the same machinery to run. Privatising food distribution is a very attractive proposition and there are several companies that have made a difference to the lives of the poor in villages. Maybe on a pilot basis, the e-Chaupals of ITC can be used for distribution where the UID is used along with the existing system to carry out the scheme.

Surely, there should be better ways of doing the same thing. Which one is it?

Madan Sabnavis is Chief Economist, Care Ratings. These views are personal