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Cash vs kind

It is no wonder that the report considers the PDS broken and recommends its gradual replacement by cash transfers.

Written by Rohini Somanathan |
Updated: March 14, 2015 12:16:59 am
PDS It is no wonder that the report considers the PDS broken and recommends its gradual replacement by cash transfers.

By Rohini Somanathan and Anders Kjelsrud

Given indicators that the government is considering moving to cash transfers and replacing the public distribution system (PDS), and the release of the Shanta Kumar Committee report, the debate on how best to provide food security has been rekindled. The report has a careful analysis of the sources of inefficiency at various stages of the procurement, storage and distribution system. Especially heartening is the admission that the Food Corporation of India (FCI) is an anachronistic institution that must be trimmed and transformed. It was set up in the mid-1960s, when food aid formed half of the national wheat production and foreign exchange reserves were insufficient to pay for imports in the absence of aid. Household food security was impossible if farmers were not provided with incentives to raise production. We live in a different world today. India is the world’s largest rice exporter and the cost of procuring and storing unreasonably high stocks by the FCI fuels inflation instead of containing it.

Many of the committee’s suggestions on how to rationalise the system are welcome. These include the active decentralisation of procurement and distribution to the state level, improved warehousing facilities and limits on procurement based on the needs of the food security act to avoid stockpiling. There is painstaking detail on possible improvements, many of which can be implemented easily and immediately — lowering labour costs through fewer employees, tying prices for items sold through the PDS to inflation and procurement prices, electronic lists of beneficiaries, ears on gunny bags rather than hooks to avoid wastage through torn bags and methods for controlling quality.

The report reflects a much better understanding of procurement than that of distribution. Some of the critical and most publicised statistics relating to the PDS in the report are dubious and the policy conclusions based on them, suspect. The widely cited estimate of PDS leakages of 47 per cent is an important example. A common procedure to estimate grain diversion is to compare estimates of mean consumption of subsidised grains from household surveys with offtake figures (the quantity each state receives from the FCI). The two sets of figures should, in principle, match up, so the difference between them can be used as a measure of leakage. The committee uses leakage computations taken from a recent paper by Ashok Gulati, one of the members of the committee. These figures, based on the recent National Sample Survey (NSS), grossly underestimate the purchase of foodgrains from the PDS. They use the average consumption of PDS grains across all households multiplied by the number of ration cardholders. But they should have either used average consumption only across cardholders or multiplied the average across all households by the population of households, rather than by only those with cards. To illustrate the problem, suppose that six out of 10 households each receives 20 kg of wheat. The average for the 10 households is 12 kg, and if this is multiplied by the six families getting it, we would get 72 kg and a leakage estimate of 40 per cent, even when leakages are zero.

It is no wonder that the report considers the PDS broken and recommends its gradual replacement by cash transfers.

Independent studies of PDS efficacy in recent years provide a more encouraging picture. Historically, it was richer states like Tamil Nadu and Kerala that had the best coverage, while households in poorer states had more limited access. This is now changing because of significant improvements in Chhattisgarh, Odisha and Bihar. In 2004-05, only 2 per cent of households in Bihar used the PDS. By 2011-12, this had increased to 43 per cent, according to NSS data. While the report claims two-thirds leakages in Bihar, one-third in Odisha and zero in Chhattisgarh, our estimates are between 10 and 20 per cent for the first two cases and about 2 per cent for the third. Household surveys in Bihar roughly match these aggregate numbers. In our survey of 2,000 families from 40 villages across Bihar, households consumed about 20 kg of grains per month, as compared to their entitlement of 25 kg. Another recent survey in Bihar by Hemanshu Kumar, focusing on Dalit households, finds the same pattern. Dismantling the entire PDS, as it finally is about to make a real difference in some of the poorest places in India, may not be such a good idea.

The committee recommends a gradual move to cash transfers based on faulty leakage figures and probably also because many economists have argued that transfers equivalent to the amount spent on the PDS can raise welfare by reducing wastage and aligning food purchases to preferences. We believe that the opposition of cash and kind in this debate is not right. We should, of course, assess the costs and benefits of government programmes, reform and perhaps even dismantle those that function poorly. But can we decide that the PDS does not function well enough for us to maintain it without replacing it with a cash alternative? Should we transfer cash equivalents to the amounts spent on public schools? And hospitals? If we believe cash transfers are feasible given financial constraints, we should implement them without going through each budgetary head, computing a cash equivalent and then trying to decide how to transfer while keeping the programme in place.

Somanathan is professor of economics, Delhi School of Economics and lead academic of the International Growth Centre’s Bihar programme. Kjelsrud is research fellow, department of economics, University of Oslo

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