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Monday, March 01, 2021

Unsteady state theory

Will the food security legislation get us out of the subsidy mess?

Written by Bibek Debroy |
July 28, 2009 4:58:46 am

In science,Big Bang is now preferred to Steady State. However,in policy-making,since we don’t like big bangs,we continue to have an unsteady state. The Congress party’s electoral manifesto promised a right to food law,especially for “most vulnerable sections of society”. Every BPL (below the poverty line) family will be entitled to 25 kg of rice/ wheat a month at Rs 3 per kg. The July 6 Union Budget promised a draft food security bill for “public debate and consultations”. Unlike 2004,when NREGA and RTI were pushed through in virtually 100-day timelines,there is reticence on the right to food security. That is because there is a ditch of subsidy-targeting ahead. When one tries to jump a ditch,one cannot approach it in steady state fashion,jumping 20 per cent of it incrementally and saving the rest for later. There has to be a big bang jump. Else,one sprawls in the muck at the bottom. Notwithstanding pronouncements to the contrary,the UPA does not want subsidies targeted. The poor need subsidies. The rich do not. The present system has a double problem — inclusion of the rich and exclusion of the poor. However,the moment one pins down vulnerable sections or BPL,excluded non-poor are no longer a support base.

Depending on the recall method used,the poverty ratio in 2004-05 was 21.8 per cent or 27.5 per cent. For all one knows,the figure may

be lower today. But how can one accept such low poverty figures? In IFPRI’s (International Food Policy Research Institute) Global Hunger Index for 2008,India performs worse than many sub-Saharan African and South Asian countries. The National Family Health Survey (2005-06) gives a malnutrition (lower than average weight used as proxy) figure of 45.9 per cent among children. Using the same 2004-05 data,didn’t the Unorganised Sector Commission tell us 77 per cent of India’s population is vulnerable? That’s one of the beauties of using poverty lines. By raising the bar of the poverty line,whatever percentage of population one wishes can be shown to be poor. And 50 per cent of India’s population must be poor. That’s what averages are about. Fifty per cent of the population is below the mean per capita income (or expenditure) and they must be poor. (Strictly speaking,median rather than mean.) It’s odd how this 50 per cent exogenously imposed poverty figure characterises our public discourse,such as in reservations too. Or in the rural development ministry’s attempts to first fix 50 per cent and then justify it through calorie norms. It’s a separate matter that lifestyle changes,even among the poor,have made those calorie norms of the early-’60s outdated. But even if we agree 50 per cent is BPL,we won’t agree the remaining 50 per cent is APL (above the poverty line) and undeserving of subsidies.

Despite the prime minister being an economist,no one listens to economists. This is what Arvind Panagariya wrote (India: The Emerging Giant): “Beginning with the food subsidies to the poor,India must gradually move to a system of direct cash transfers. There are at least three reasons why this instrument is superior to the alternatives. First,given that all states have now identified the BPL families,cash transfers can place the money directly into the hands of the poor. India can cut virtually all costs of intermediation present in the current system… Second,in today’s electronic age,direct cash transfers have a much greater chance of containing corruption… Finally,cash subsidies are transparent,and therefore more amenable to public scrutiny.” And this is what Devesh Kapur,Arvind Subramanian and Partha Mukhopadhyay wrote in The Economic and Political Weekly in April 2008: “Let us start with the simple arithmetic of resources. According to the Economic Survey 2007-08,about 27.5 per cent of India’s roughly 1.13 billion people are below the poverty line,ie,about 310 million people or 70 million households… Indeed,if the government simply gave eligible households the amount of money it spends on the PDS,this alone would entail a monthly transfer of more than Rs 500 to each household,ie,about 40 per cent of the entire food budget for a household at the

poverty line. More pertinently,such a transfer allows them to buy the entire monthly PDS entitlement of 35 kg of rice or wheat,even at the relatively high current market price.”

Forget economists,no one listens to finance ministers either. In December 2007,the then finance minister told the National Development Council that for the PDS,the cost of transferring one rupee of benefit to the poor was Rs 3.65,because of high administrative delivery costs. When he was not FM,P. Chidambaram wrote (India Today,September 2001): “It is my belief that the PDS has outlived its utility. The PDS indeed works in some states,in Kerala for example. But by and large the PDS is a byword for corruption. The poor need food,but the better way is to give them the money to buy food. In 1997,the ministry of finance mooted the idea of food coupons,but it was shot down.” Unconditional direct cash transfers across all subsidies are impossible. But what’s wrong with conditional direct cash transfers,the equivalent of food stamps? In 1997,there wasn’t a Congress government. But in the first Budget of UPA-I on July 8,2004,the FM promised food stamps on a pilot basis. It’s not clear what happened to that idea and what UPA-II plans. The finance ministry and the World Bank jointly undertook a feasibility study of using smart cards for PDS,in Thane in Maharashtra and Anand in Gujarat. The report was submitted to the ministry in December 2007,but hasn’t been placed in the public domain. Whether one uses food stamps (paper-based) or smart cards (electronic),the idea is similar — broaden choice beyond existing fair price shops and allow entry to private service providers. For below threshold (25 kg),purchase prices are subsidised. But above threshold purchases are at market prices.

To quote from the report,“The advantage of switching from the existing PDS,to the PPP model implemented through smart card mechanism is that it results in efficiency in handling the stocks of food grain/ kerosene,etc,as there will be scale effect which is not confined to ration card holders only. In the smart card based PDS system a considerable amount of subsidy leakage through diversion of ration quantities to open markets would be plugged.” If enough leakage is curbed,costs of setting up PPP systems can be recouped. However,any implementation requires acceptance that non-AAY (Antyodaya Anna Yojana) and non-BPL households don’t deserve subsidies. Since we won’t accept that and since MSPs (minimum support prices) will be hiked in excess of CACP (Commission for Agricultural Costs & Prices) recommendations,we will continue to have a food subsidy problem,compounded when the right to food legislation is implemented. The unsteady state continues to flounder in the ditch.

The writer is a Delhi-based economist

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