Despite the Bali victory

India got its way at the WTO. But modernising its food security system to reduce its subsidy bill is in its best interest.

Written by Ajay Chhibber | Updated: January 9, 2014 11:57 pm

India got its way at the WTO. But modernising its food security system to reduce its subsidy bill is in its best interest.

In 1968,US President Lyndon Johnson held off PL 480 food shipments off the Bombay harbour until India voted with it at the UN and triggered India’s desire to achieve food self-sufficiency. India reacted to this by not only expanding the public distribution system (PDS) but also setting up an elaborate system of grain procurement and buffer stocks at the Food Corporation of India. That desire to not allow any outside power to interfere with its food security played itself out in the recently concluded WTO discussions in Bali,where India rightly opposed a push by the US and others to limit the size of its food subsidy. But having won that battle,India must now try and modernise its food security system — for its own sake,rather than under pressure from the WTO.

India’s food subsidy bill has risen considerably in the last few years because of open-ended grain purchases at high minimum support prices,large and costly stock holdings and a food distribution system riddled with inefficiencies and leakages. The government now buys a major share of the marketed grain — 50 per cent in the case of wheat and 40 per cent in the case of rice. It is now holding

almost 80 million tonnes of grain,more than twice the strategic buffer stock needed. The new food security act will expand the scope and coverage of the PDS. In order to understand the likely impact of the new act on the food subsidy bill and to deliver on its promise,it is important to understand the shortcomings of the existing PDS and its impact on the grain market and on the users of the system.

In 2005,a careful evaluation of the PDS concluded that,taking into account all the inefficiencies of the PDS,the Indian government spends Rs 3.65 to transfer Re 1 of real benefits to the poor. About 57 per cent of subsidised grains do not reach the target group,of which a little over 36 per cent is siphoned off the supply chain. Implementation of the PDS is plagued by large errors of exclusion and inclusion and ghost cards. The PDS is a less efficient mode of income transfer. The economic costs of grains are higher than the market prices in most states. Only 23 per cent of sample fair price shops (FPSs) are viable. The rest survive on leakages and diversions of subsidised grains.

In order to modernise the system,India must make some choices. One option is to keep the current state-run system,in which the government buys grain at the MSP,stores and transports it to FPSs and then sells it at a subsidised price to ration cardholders,but find ways to mitigate leakages and corruption. A second option is to shift entirely to direct benefit transfers (DBT) and get the government completely out of the grain trade,but keep a strategic buffer or pay private wholesalers to do so on behalf of government.

A third option is to do a partial reform — shift urban areas to DBT,pay private wholesalers to deliver grain to FPSs at a pre-specified price,but provide cheap grain to beneficiaries.

A committee of secretaries chaired by Nandan Nilekani,chairman of the Unique Identification Authority of India,was established to look into how best to increase transparency and efficiency in the PDS and reduce these errors. But none of its recommendations have been implemented. Nevertheless,there are reports that the system has improved in many places for a variety of reasons,as in Chhattisgarh,for example,because of the introduction of universal coverage instead of the targeted system,thereby increasing the stake of the wider grain consumers in the system. Some studies have suggested that the system has improved because of greater monitoring and awareness.

Recent studies using the latest NSSO data have also shown that there is a positive nutrition and poverty impact through the PDS. Some pilot studies have been conducted in Delhi to compare benefits under the existing PDS with a cash transfer programme of an amount equal to the implicit food subsidy. In Madhya Pradesh,an unconditional cash transfer was provided and the spending pattern of the households was tracked. It showed that the poor make rational choices in spending,including on food. More such pilots are needed in both urban and remote rural settings to understand better how best to provide food security to the poor.

In several countries,especially in Latin America,the food security system has shifted almost entirely to cash transfers. In Mexico,the shift is almost complete. Mexico has dismantled its equivalent of the FCI and successfully moved entirely to cash transfers to provide food security. Brazil has the Bolsa Familia programme of cash transfers to reduce hunger and poverty. The Philippines has also now expanded its cash transfer programme.

In India’s case,the issue of using DBTs for food is under discussion. India has begun to use the DBT for other benefits,such as gas cylinders and scholarship programmes,but its use for food has not yet been accepted. One concern is that in many places,especially in rural areas,it is difficult to deliver cash to people and that even if people have cash,food will not be available. Another is that the DBT will not be adequately indexed to rising food prices. But we need to learn from countries like Mexico on how to deliver better food security at a lower cost.

The writer is director general,Independent Evaluation Office,government of India and former UN assistant secretary general.