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Forget Grains On Subsidy, India's Poor Can Really Do with the Cash Instead

Jul 28, 2016

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In the column dated July 21, 2016, I had said that the Food Security Act does not really provide "food security" to the citizens of this country. And given that nearly three years have passed after the passage of the Act, it is time that the government took a relook at the functioning of this Act.

In case you haven't read the piece that appeared on July 21, 2016, I suggest you do that, before getting around to reading this one.

Other than the fact that the Food Security Act does not provide food security, there is also a lot of wastage of rice and wheat that are distributed to the citizens of this country under the Act.

The food grains are distributed using the network of around 5,00,000 fair price shops located all over the country. The trouble is that this network is extremely leaky. Economists Ashok Gulati and Shweta Saini calculate this leakage in a research paper titled Leakages from the Public Distribution System and the Way Forward.

In this research paper Gulati and Saini calculate the total amount leakage through the public distribution system. The union government supplies rice and wheat to states and union territories in order to meet the grain distribution commitments under the Food Security Act. Over and above the normal allocations, ad-hoc allocations are also made.

Further, the state wise monthly per capita consumption of rice and wheat is also available. This is used to calculate the consumption numbers of rice and wheat for every state. As Gulati and Saini point out: "The grains off-taken by each state gives the total grain supply in the year and the consumption figures give how much is received by the targeted consumer. The excess of what is supplied over what is consumed should reflect the extent of leakage of grain from the system. Our calculations show that in 2011-12, 25.9 MMTs or 46.7 per cent of the off-taken grain leaked from the public distribution system." Hence, a little less than half of the grains distributed through the public distribution system do not reach those who they are meant for.

In fact, in 15 states, the leakage was more than 50 per cent. This included: Delhi (82.6 per cent), Gujarat (72.2 per cent), Haryana (70.3 per cent), West Bengal (69.4 per cent), Bihar (68.7 per cent) and Punjab (60.7 per cent). In fact, in some North Eastern states, like Nagaland and Manipur, the leakages were as high as 95 to 97 per cent. In absolute numbers, Uttar Pradesh comes at the top of the list. This is followed by West Bengal, Bihar, Maharashtra, Rajasthan and Madhya Pradesh.

Other estimates suggest that the leakage of the public distribution system is anywhere between 40 per cent to 54 per cent. Hence, the point is that the leakage of the public distribution system run through the five lakh fair price shops, is excessive. It means that a major portion of the food grains distributed through these shops does not reach the intended beneficiaries.

As the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report) points out: "Leakages don't happen in a vacuum. There is connivance at several levels, breeding corruption. It is now time to think out of the box and find some alternative policy solutions that can plug such large scale leakages and associated corruption, and that can ensure that benefits reach directly to the neediest."

And how can this be done? The answer lies in giving cash directly to the beneficiaries of the Food Security Act. There is this great belief among the well-off that giving money directly to the poor will mean that the men will simply drink it away. This argument only sounds true because it plays on a stereotype of the poor being poor because they waste their time drinking.

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Nevertheless, as economist Joseph Halon points out: "Poverty is fundamentally about a lack of cash. It's not about stupidity." (Source: Rutger Bergman's Utopia for Realists). Hence, if poor do get money under an unconditional cash transfer scheme, they don't waste it on alcohol and tobacco. In fact, there is enough research from all over the world that proves that.

As Rutger Bergman writes in Utopia for Realists: "The great thing about money is that people can use it to buy things they need instead of things that self-appointed experts think they need. And, as it happens, there is one category of product which poor people do not spend their free money on, and that's alcohol and tobacco. In fact, a major study by the World Bank demonstrated that 82% of all researched cases in Africa, Latin America, and Asia, alcohol and tobacco consumption actually declined."

In fact, such an experiment has happened in Delhi as well, and the results were along similar lines. As Gulati and Saini point out: "It is worth noting that a study by the Government of Delhi and SEWA, under the GNCTD-UNDP project, tested the effects of substituting PDS rations by cash transfers for BPL families in a west Delhi region in the year 2011. It found that the consumption of the studied food items did not fall, and interestingly, the consumption of items like pulses, eggs, fish and meat went up. Contrary to expectations, the alcohol consumption did not increase; rather, the efficiency of PDS shops surely increased!"

The Food Security Act just distributes rice and wheat at subsidised prices. A nutritious meal is about consuming other food items as well. By giving cash directly to families, families can decide what is best for them. In fact, by moving to cash transfers, the country can save close to Rs 33,087 crore, Gulati and Saini calculate, and that is clearly a lot of money. This money can be better utilised elsewhere.

Given this, the Shanta Kumar committee has recommended that cash transfers should be introduced by starting with the "large cities with more than 1 million population; extending it to grain surplus States, and then giving option to deficit States to opt for cash or physical grain distribution." The Committee has also said that the "cash transfers can be indexed with inflation" and "given to the female head of the family".

The trouble is that the infrastructure that allows the government to do this (Jan Dhan bank accounts seeded with Aadhar numbers) is not yet ready. The sooner this gets ready, the better it will be for the nation as a whole.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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5 Responses to "Forget Grains On Subsidy, India's Poor Can Really Do with the Cash Instead"

abhay dixit

Jul 29, 2016

To increase ease of business. why not dissolve PF, EPF ESI departments? Hand over the money to beneficiaries. I wonder what is the cost of collecting -- managing these funds? Employees can invest in debt/equity/ppf what the amount they want. This will reduce work for employees and avoid frauds of deductions but not depositing with government.

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krishnan vc

Jul 29, 2016

The thought is very nice but our political breed DOES NOT WANT IT. If the poor start getting the real transfers what will happen to our POWER CRAZY political establishment. No bllying! No currying favours! What is the worrth of being a politician? if the poor feel well fed they will start thinking and start questioning and do you think ANY RIGHT THINKING POLITICIAN will ever want this? Please understand that the whole oppostion ganged up against the ruling party questioning the use of the UID and Adhaar card for subsidy payment.

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LOGANATHAN

Jul 28, 2016

Sir,

It is astonishing to note that the implementation of Food Security Act or PDS system leads to significant leakage in all Regions of India barring South India. It is time some synergies are brought in implementation than just amending the act. If there are any best practices available in some regions, better adopt them than just blaming and blaming the intentions.

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Venkatesh Iyer

Jul 28, 2016



Really appreciate and agree with your views. The subsidy for LPG cylinders is already being transferred to the bank accounts and this must also be done. Also the prices for pulses are sky rocketing and the government should also consider giving it in the PDS system.

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V Thiruvalluvan

Jul 28, 2016



If this really results in savings, the same amount can be spent on the poor and more cash can be put in their account. If such a scheme is proposed, pit will be welcome by the poor

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