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Ensure long run for food coupons by Shanto Ghosh


SINCE THE RELEASE OF THE ECONOMIC Survey, 2010, in February, much has been discussed — but far less debated — on the issue of substituting India’s public distribution system (PDS) with a food coupon-based targeted subsidy programme to benefit the below-poverty-line (BPL) families. As a leading proponent of this programme, the economic adviser to the finance ministry, Kaushik Basu, has gone on record advocating the use of food coupons declaring how more families will benefit from the switchover with a lower cost to the central exchequer.

While estimates vary, over 250 million Indian families are said to be surviving below the poverty line. As the country continues to record high GDP growth, policymakers argue that the pace of income trickling to the BPL families is unacceptably slow and hinders the notion of inclusive growth. Currently, several subsidy programmes, such as for fertiliser and food, are implemented through a market-based mechanism whereby the price at which the final output is sold in the market is regulated by the government and a resultant loss to the seller (or producer) is offset by a subsidy by the government. As a simplified example, if (specified quantities of) rice is mandated to be sold by the PDS stores at a price of Rs 10 a kg, and if the seller procures this rice at Rs 15 a kg, the government promises to provide the Rs 5 a kg shortfall to the seller (and some more to ensure a reasonable margin) to make good his loss.

Prof Basu rightly argues that the existing system of lowering the market price is inefficient. It not only provides the subsidy to all families who avails of the PDS (and not just BPL families), it also results in leakages and adulteration of the final product causing a huge cost to the government. Introducing food coupons would eliminate these problems and will directly target the subsidy to the ones who need it the most.

Economists Bharat Ramaswamy and Milind Murugkar had dealt with this issue in 2005 while discussing a proposal to introduce food stamps in the context of the Maharashtra Food Stamps Programme. They note that food coupons or stamps have certain advantages over the price-based subsidy operated through the PDS: (a) food stamps operate through the market and are, therefore, more efficient, (b) consumer has a choice between retail outlets, leading to better service, (c) zero illegal diversions, (d) better access, location, timings etc, (e) no liquidity problems to hold back the participation of the poor, (f) viability of fair price shops is not an issue, and (g) the programme is scaleable —can include other food commodities such as coarse cereals, milk etc as well as non-food items such as kerosene. The benefits are clearly palpable and call for a strong cause for introducing such a policy.

However, it is also important to be aware of pitfalls this policy may entail. To give credit to policymakers, some pitfalls have been acknowledged by them as a part of the ongoing debate. To begin with, the first issue lies with the problem of suitably identifying the BPL families. The UID programme should, therefore, be an integral part of this policy and the two should be harmonised to tackle the identification issue. Next is the issue of diversion: food coupons are akin to cash and, therefore, can be diverted for conspicuous consumption resulting in defeating the main purpose of ensuring a minimum calorie intake for all the members of a BPL family. Also, the inefficiencies and corruption in the bureaucracy that will administer and implement such a policy can soon convert the opportunists within the government to start enriching their personal wealth that will reinstate the issue of leakage from the system. As the policymakers are aware of these problems, it is perhaps reasonable to expect that the final form of the policy will have some inbuilt checks and balances to address these issues.

There are issues pertaining to the policy of food coupons that have been less discussed but are equally important for its long-term success. Evidence from food subsidy programmes in South Africa and Tunisia shows that self-targeting can clearly improve the distribution of food subsidies to the poorest members of society, but its power to alleviate poverty and reduce income disparities is limited by preference patterns, income inequality, and the size of individual subsidies.

Self-targeting through quality and product differentiation can be a useful means to reform subsidy schemes, but it should be considered a transitional tool while the capacity for implementing more precise mechanisms is developed. It is, therefore, imperative that the programme is implemented with an ex-ante commitment to the time by which it will be phased out. Else, the beneficiaries will lose incentive to alleviate themselves from poverty and will remain dependent on subsidies. Moreover, affirmative action programmes should be coupled with other efforts to address the root causes that result in the characteristic of the target population (i.e., poverty) and strive to eradicate the root cause itself in the long run.

Hence, policymakers should marry the food coupon programme to ones that aim to increase literacy, farm yields and vocational training programmes. As the population below the poverty line is equipped with means of substituting the subsidies with self-earned income, the long-term solvency of the subsidy programme will be sound. Finally, apart from the problem of identification of the intended beneficiaries, care should be given to quantify the amount of the subsidy based on a maximum family size such that there remains no perverse incentive by the beneficiaries to claim a larger share of the subsidy citing the reason that they have a large family to feed. This will result in increasing the BPL population and will give rise to a new problem of population explosion, adding to the woes of a government striving to remain enabling in the process of India’s economic development.