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LATEST NEWS UPDATES | A Real Priority by Bhaskar Dutta

A Real Priority by Bhaskar Dutta

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published Published on Jan 2, 2012   modified Modified on Jan 2, 2012

The Union government has tabled two bills in the Lok Sabha in the last week of the winter session. Since one of them is the lok pal bill, it has hijacked virtually all the public attention. This is a pity for two reasons. First, there is considerable doubt whether the lok pal bill — in any form — can really be the magic solution that Team Anna would like us to believe. Second, the other bill — the food security bill — has the potential to be one of the most important pieces of legislation in several years.

The bill, in some form or the other, is almost certain to be approved in the next session. Once this happens, it will rival the Mahatma Gandhi National Rural Employment Guarantee Act in terms of the impact it can have on the lives of the poor. The United Progressive Alliance government can rightfully claim that the reform process has not withered away completely.

The draft bill seeks to provide subsidized food to 75 per cent of the rural population and 50 per cent of the urban population. The bill divides beneficiaries into two categories, with the ‘priority’ group being promised a monthly quota of 7 kilograms of grain at highly subsidized prices (Rs 3 per kg for rice, Rs 2 per kg for wheat, and Re 1 per kg for coarse grains). The ‘general’ category of beneficiaries is promised three kg of grain every month at half the minimum support price paid to farmers.

A bill of this magnitude is bound to be contentious. Its opponents assert that the “huge” expenditure that will be required to finance the resulting subsidy will break the back of the Central and state governments. The government’s initial estimate is that the scheme will cost the exchequer close to Rs 1,00,000 crore. This figure is misleading since it also includes expenditure on a couple of related schemes, such as the integrated child development services. Since the current food subsidy bill is around Rs 60,000 crore, the additional expenditure on food alone is roughly Rs 25,000 crore. This is a minuscule sum compared to the overall size of the Central government’s budget. Moreover, if expenditure on subsidies has to be reduced, then the prime candidates must surely be subsidies on items consumed by the middle and upper income groups, a leading example being liquefied petroleum gas cylinders.

Others contend that unless there is a sustained increase in food production, the government simply will not be able to procure the quantities of foodgrain required to meet its obligations under the food security bill. But this is even more specious because we cannot claim to be on the brink of joining the league of developed nations if we cannot supply adequate food to our citizens, either by domestic production or through imports.

Only a small minority of economists still hold on to the belief that the trickle-down process will ensure that sustained growth in India will help the poor lead better lives. The evidence is overwhelmingly strong that this does not happen. For instance, India leads the world in terms of the proportion of undernourished children. As many as half the children under the age of three are underweight, 30 per cent of newborns have low birth weight.

So the need to have legislation which provides a legal guarantee to all citizens of a minimum quantity of foodgrain is unquestionable. Of course, this does not imply that the draft bill is an ideal piece of legislation. In fact, there are several reasons to argue that there are vastly superior ways of ensuring minimal food security for the needy.

Perhaps the biggest defect is the division of beneficiaries into ‘priority’ and ‘general’ categories. Experience with the targeted public distribution system shows that there is no mechanism by which households below the poverty line can be identified. Consequently, there are large numbers of errors of both kinds — many who should be issued BPL cards are without them, while a large number of households above the poverty line are issued BPL cards. This problem can be resolved very easily by specifying just one class of beneficiaries. The government would still have to identify the non-beneficiaries — 25 per cent of the rural and 50 per cent of the urban population. But, this is a relatively easy task since they will typically possess visible markers of relative affluence.

The uniform entitlement of food for beneficiaries can be set somewhere between the monthly quotas for the priority and general categories — say 5 kg per person. This would ensure that the amount of food required for this modified scheme is comparable to that under the draft bill.

Equally problematic is the government’s intention to rely solely on the public distribution system to supply food to the beneficiaries. There is overwhelming evidence of substantial leakages from the PDS. This is not a coincidence. When open market prices are substantially higher than the PDS prices, fair price shop owners will take every opportunity to divert grain meant for sale through the PDS to the open market. Add to this the inefficiency of the Food Corporation of India, the lack of adequate storage space under its control, and one gets some idea of the wastage involved in the PDS.

There are indications of significant improvement in the operation of the PDS in several states. However, the PDS continues to exhibit historical levels of inefficiency in many other states. This is why it is imperative that the government try out alternative means, such as cash transfers or food coupons, at least on a pilot basis, to implement the underlying objectives of the draft bill. States can be given the freedom to decide which option they prefer instead of the PDS being rammed down everyone’s throat.

There is another reason why cash transfers may be a superior instrument. The operation of the PDS requires the government to procure huge quantities of grain from farmers. Inevitably, the tendency is to procure more than is necessary because it is not possible to estimate the exact quantities required. This tendency will be accentuated once the beneficiaries are bestowed legal entitlement for subsidized food. Of course, the excess quantities stored in FCI warehouses mean so much less for the open market. This diversion of supply from the open market exerts an upward pressure on open market prices. Even the poor are adversely affected since they too buy a part of their food from the open market. Obviously, cash transfers will mean that such diversion from the open market does not take place, and should thus ensure lower market prices.

The author is professor of economics, University of Warwick

The Telegraph, 2 January, 2012, http://www.telegraphindia.com/1120102/jsp/opinion/story_14949966.jsp


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