Cash transfers and food insecurity

Distribution of basic food grains and fuel at controlled prices every month through the Public Distribution System (PDS) could be the largest service provided by the Indian State, touching as it does over 65 million families through a network of nearly half a million retail shops. Given that the urban middle class has little stake in the health of the PDS, there have to be some compelling reasons for the recent keen interest of mainstream media in PDS reform, evidenced by numerous op-ed pieces by economists, and extending even to television debates.

That the PDS is in need of reform is not in doubt. PDS users will readily relate the problems they face with a setup that is entirely people-unfriendly. Rations must be lifted as soon as they arrive in the ration shops, and their arrival is unpredictable. Any delay on the part of the consumer in reaching the shop could mean having to return empty handed. The quality of the rations is variable and the promised quota not available in all places. Officials managing the service are callous and unresponsive. Nonetheless, the PDS is still a lifeline for the poor.

The biggest problem with the PDS is not so much the quality of service but the fact that a large number of the poor have been excluded from accessing it altogether. Up until the mid 90s, access to the PDS was, at least in principle, universal. Then, as part of the economic reform agenda of cutting down on expenditure, the government moved to restrict access to the PDS to families whose ability to spend was below a certain minimum level, denoted the "poverty line". The "poverty line" was supposed to indicate a spending capacity just large enough to meet an average family's calorie requirement. Families below the "poverty line" clearly could not satisfy even their basic food requirements.

Using patently unrealistic figures for the "poverty line" spending capacity, the government came up with a figure of 65 million Below the Poverty Line (BPL) families in 2000, and it continues to provision the PDS for these numbers more than a decade later. While the government maintains that as of 2005, only 27.5 per cent of the population was below the poverty line, indicators such as incidence of child malnutrition show that access to food is a problem for a far larger section of the population. In 2005-06, 47.9 per cent of children between 0-5 years were found to be stunted in their growth, while 43.5 per cent were underweight relative to WHO standards.

There is another dimension to the problem of exclusion. While the central government deals with estimates to provision the PDS, the actual identification of families who qualify for BPL status is the responsibility of the states. The narrow targeting of PDS rations and several other social security benefits has created a 'demand' for BPL status among the people. Corrupt officials - who work as the gatekeepers of BPL lists - and local politicians have exploited this situation to the detriment of a large number of the poorest families who find themselves left out of BPL lists.

Given these long-standing problems, what is the thrust of the PDS reforms being proposed now?

In mainstream media, the voices are unanimous in calling upon the government to withdraw from public distribution of food grains and fuel. "Direct cash transfers" is the new catch phrase. "Money where the mouth is" screams an op-ed title. (Hindustan Times, 24 March 2011). Instead of distributing food and fuel at regulated prices, the government should hand out cash to BPL families to enable them to make purchases at market prices.

The government's economic advisors differ only in the details. Kaushik Basu, Chief Economic adviser to the Government of India, argues for distributing food coupons to BPL families that can be exchanged for food at private retailers. He sees the need for supporting the current retail outlets - the "fair price shops" - only in poor and remote areas that may not be attractive to private traders (Economic and Political Weekly, 29 January 2011). On the other hand, a government committee headed by Montek Singh Ahluwalia is reported to be recommending a more cautious approach. Cash transfers are to be made to BPL families having UID-linked smart cards which will be valid only at the network of Fair Price Shops. (Hindustan Times, 25 March 2011) This will keep the PDS intact in the interim.

However, the end game in all these approaches is the same, with the government getting out of distribution of food grains.

Cash in times of inflation

Proponents of direct cash transfers recognise that the safety net of the PDS is not available for millions of poor families. Media write-ups in favour of cash transfers routinely draw on the imagery of malnourished children and starving populations to damn the PDS. Yet, they simply sidestep this issue. Merely replacing food grain entitlements with cash transfers will not make food available to those excluded today from the BPL lists. Having moved from universal ration entitlements to a targeted PDS, the government is not about to universalise benefits again. Clearly, extending food security to all vulnerable Indians is not the agenda of its reforms.

Can we be sure that the reforms will benefit at least the existing consumers of the PDS service? The familiar argument advanced in response is that once people are free to buy their food grains at market prices, competition between private traders for their business ensures better quality and availability at the best price.

One has only to transport oneself back in time a few months to re-live the sudden market failures in one agricultural commodity or another, leading to rapid and extraordinary price rises. Most Indians will not have forgotten the inflationary spikes in the prices of onion, sugar, pulses, edible oils, and even rice in the last few years. Leave aside controlling these spikes, government's economists were unable to offer even convincing explanations for what caused these spikes when they occurred. The reasons given have ranged from shortfalls in production due to natural causes, or as fallout of government policy, shortfalls in availability due to exports, imports at rapidly rising international prices, and of course hoarding and speculation.

The price rise in rice in 2008 is illustrative. The retail price of rice rose by 75 per cent in Delhi in 2008 though the government increased the Minimum Support Price (MSP) paid to farmers only by nine per cent. There was no shortage of rice after a record harvest in 2007. There was not even an expectation of a shortage with indicators pointing to a higher production in 2008. There is one likely explanation for why prices rose. The international price of rice had doubled in the first half of 2008 and there was massive hoarding of rice by traders in the expectation that a killing could be made when the government allowed exports.

All this happened in the central government's own backyard, Delhi, with the government unable or unwilling to intervene. Who will monitor, and how will relief be provided to BPL families with weak purchasing power in remote and undeveloped districts and interior villages if prices rise all of a sudden?

The Montek Singh Ahluwalia committee for PDS reform has reportedly recommended cash transfers to BPL families equal to the difference in the MSP price and the PDS regulated price. If this is implemented, what will happen to the food security of BPL families if grain prices rise without relation to MSP as they have sometimes done in the past? If the government's economic managers can do little to quench inflationary spikes in food items every now and then, are they justified in leaving the food security of the poorest millions to the mercy of the market, ask critics.

There is also a glib statement in most discussions on PDS reform on how inflation need not be a worry, as cash transfers can be annually adjusted for inflation. The fact is that after all these years, the government has not managed to provide a consumer price index that is transparent, reliable and can track price rises that affect the retail consumer. Despite inflation-proofing of salaries, the government has to carry out wholesale pay revisions for its own employees every few years, clearly evidence of the inability of its consumer price indices to capture inflation accurately.

This past experience hardly gives rise to any confidence that the government will be able to inflation-proof food purchases in a just and fair manner for several hundred million people spread over 6 lakh villages and thousands of small towns across India.

Bringing down the "food subsidy"

The obvious agenda of the government's money managers in proposing PDS reform in its current form is to effect cuts in expenditure. The grounds for moving in this direction were prepared a long time ago by labeling net government expenditure on the PDS as a "food subsidy" - an ideologically loaded term. "Subsidies" raise the hackles of free market economists and call out to be done away with. Removing subsidies gets instant support, and economists from academia around the world have not disappointed. Those writing for the financial press have been most vociferous in demanding reforms, anticipating investment opportunities in replacing public distribution.

Moving from ration cards to smart cards linked to a Unique ID will certainly enable the government to effect some savings by isolating fictitious and duplicate ration cards. This "plugging of leakages" is bandied as a major advantage of the cash transfer scheme.

However, one suspects that the real advantage seen by the government's money managers is that with the "cash subsidy", the government frees itself from a commitment to supply every BPL family with a certain quantity of food. The logic shifts from meeting human needs to providing a "subsidy". It is hard to justify a cutback on ration entitlements, but easier to cut subsidies citing lack of resources and easier still to let them fall in real value by under-compensating them for inflation.

Returning to the issue of real reforms of the PDS, there is of course a different perspective that may be entirely alien to government's economic advisors. In this view, what ails the PDS is fundamentally not different from what ails government delivery of other services to ordinary citizens, be it healthcare or education. In this view, real progress lies not in looking for technological solutions to sidestep corrupt administration, but in empowering the citizen to hold the administration to its task.