The government and a section of activists and academicians have been insisting that cash transfers replace the provision of subsidised goods and services to reduce government expenditure and to minimise leakages in social welfare programmes. One of the schemes that is sought to be dismantled is the Public Distribution System (PDS), primarily on the ground that its inefficient targeting does not benefit the needy. The freed subsidy is proposed to be distributed directly to every household.
Is it a good idea to replace the PDS with cash transfers? According to the latest large sample National Sample Survey (NSS) data of 2011-12, nearly 47 per cent of the households buy food from PDS shops, costing a central food subsidy of less than Rs 600 per head for 2011-12. If these households lose access to PDS, they would incur extra expenditures to buy from the market. Our calculations from household food consumption show that over 63 per cent of PDS beneficiary households’ annual extra expenditure will be more than Rs 600 per head and for more than 25 per cent of them, it is over Rs 1,200. Hence, directly distributing the central food subsidy to everybody in cash instead of running the PDS will leave more than 63 per cent of the PDS beneficiaries under-compensated. Restricting the cash transfer to the bottom 50 per cent of the population would still leave 25 per cent of them under-compensated. Moreover, the problems of targeting that the current PDS suffers from will persist. Even pooling state governments’ food subsidies won’t be adequate to compensate all the current PDS beneficiaries. Hence, a considerable expansion of public outlay is the only option if cash transfer replaces the PDS.
Another concern is in a country where minimum wages and wages for public work (MGNREGS, for instance) are slow in inflation indexation, upward revision of a welfare allowance of this kind will have considerable time lag. Moreover, mere consumer prices (CPI) indexation of cash would not mean secured food consumption; calorie intake reduction over time at poverty line expenditure despite it being updated by CPI is a pointer to this fact. So cash transfers will require regular Pay Commission-style upscaling if it has to take up the role of basic income providing for basic necessities.
These inferences also stack up with micro-experiments on ground. Cash transfer experiments were successful where the transfers were (a) fairly large, as in a 2011 UNDP-Delhi government experiment where BPL households barred from PDS were compensated with Rs 1,000 monthly in cash or Rs 2,400 per head annually (assuming a five-member family), which is more than four times the amount that can be distributed per head to everybody from the central food subsidy of 2011-12, and, (b) where cash did not replace any existing social welfare programme as in the 2011-12 UNICEF-SEWA experiment conducted in Madhya Pradesh. The latter experiment also upwardly revised the cash transfer amount after a year by 50 per cent (from Rs 1,920 to Rs 2,880 per head annually) to compensate for inflation, which clearly shows the necessity of frequent large upward revision of cash transfers. On the other hand, two prominent experiments to replace PDS with cash transfer that did not have these characteristics — the Delhi Annashree Yojana and a similar one in Puducherry — faced many obstacles and were discontinued.
Dismantling of the PDS also has wider macroeconomic repercussions. First, the government will have little control over the country’s food security. Second, greater benefits from the PDS ensure higher food consumption, increasing food-sufficiency and hence, higher food demand. Of those PDS beneficiary households who would require transfers of more than Rs 600 to be fully compensated for withdrawal of the PDS, 45 per cent are food sufficient (defined as per-capita calorie intake of 2,200 and 2,100 calories or more for rural and urban areas respectively) compared to 41 per cent among overall PDS beneficiaries. Those who would require more than Rs 1,200 in transfer, 53 per cent of them are food sufficient. Third, it will expose the agricultural sector to the whims and fancies of the oligopolistic agricultural market. Neither the farmers nor the consumers will benefit. Instead of strengthening institutions and systems to efficiently allocate public resources according to needs, the current discourse seeks an escape route in an evidently less efficient system of redistribution.
However, the most puzzling aspect of this particular approach is its commitment to provide people with cash entitlement yet adhering to the logic of budget neutrality through slashing other social sector expenditures. Even the liberal opinion within the set which reckons cash transfer to promote economic activity and growth, doesn’t call for expansion of public expenditure to finance cash transfers. In India, extremely low social sector expenditure is the main reason for its rotting social protection system. Dismantling the PDS and not demanding an increase in public outlay will neither improve food adequacy nor promote economic growth. This conservative fiscal approach makes this particular cash transfer model logically unconvincing.