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LATEST NEWS UPDATES | Food security: Delivering the promise efficiently by Ashok Gulati, Jyoti Gujral & T Nanda Kumar

Food security: Delivering the promise efficiently by Ashok Gulati, Jyoti Gujral & T Nanda Kumar

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published Published on Jan 12, 2012   modified Modified on Jan 12, 2012

To banish hunger and malnutrition from the country, Parliament is likely to pass the National Food Security Bill (NFSB). In our earlier article on this issue, Can we Afford Rs 6-Lakh-Cr Food Subsidy Bill in 3 Yrs? (ET, December 17, 2011), we concentrated on the likely financial implication that we estimated at roughly Rs 6,00,000 crore over a period of three years. In this piece, we address the operational challenges this Bill imposes and ask whether the current modus operandi can deliver the promise. 

The operational rollout of the scheme is a bigger challenge than the financial aspect, and if not handled with due diligence well in advance, it can lead to a major fiasco on the food management front. In that context, we also look at the alternative options that can be tried to diversify risk and minimise costs. 

ALLOW STATES TO COME ON BOARD 

The Bill in its current shape gives a legal sanction to the Centre to literally impose a uniform approach of a highly centralised procurement, stocking and distribution model upon the states despite their varying needs and capacities to handle. 

Given that in a federal democracy, states are as much accountable for people's welfare as the Centre, the best approach could have been to trust in their ability and give them enhanced resources specifically targeted for alleviating hunger and malnutrition. The Centre could ask them to come up with innovative models to reduce hunger and malnutrition, and devise a transparent system of performance (outcome)-based allocations, rewarding the achievers. This would have been in the true spirit of federalism and, given the ingenuity of people at the state level, there would not be one but many models that could emerge. 

This would have allowed innovation, learning from each other, depending upon individual choices, strengths and weakness of the states. 

DIRECT CASH TRANSFERS IS THE WAY TO GO 

For instance, states could have decided whether they want to go for cash transfers, food coupons or distribution of grains or adopt other hybrid methods. Bihar, for example, has expressed the desire to adopt cash transfers. 

Bihar is a forerunner in using technology in MGNREGA implementation (e-Shakti programme for delivery) using smart cards and Adhaar to plug leakages and corruption. The state may, therefore, prefer to do a cash transfer to eligible households of, say, Rs 500 per month backed by Adhaarbased authentication. 

Even if states wanted to opt for physical handling of grains, they could have engaged their own agencies in preference to the Food Corporation of India (FCI), private sector, NGOs or other agencies in that business to cut down costs. For example, they could pursue a decentralised procurement model in their own states or use competitive bidding from other state and private agencies to meet their requirement. Why would these states pay a 12-15% tax to, say, Punjab, Haryana or Andhra Pradesh on minimum support price (MSP) for getting grain from it, when they can get it at a much lower price from some other states or countries at prevailing market prices? 

And why could they not put pulses or oilseeds or processed and fortified atta (wheat flour mixed with soya flour, for example) or even eggs and soya milk, and the like in the basket for the poor, that is in line with their diversified production basket of the state, even more nutritious and cost-effective than the current proposed arrangement under the NFSB? 

Learning from MGNREGA and JNNURM and piggybacking on infrastructure and technology already in place would help cut costs and ensure rapid scale up. For example, MGNREGA has ensured bank accounts or post office accounts are opened for their beneficiaries and payments are only made into these. India Post is putting into place technological solutions in one lakh post offices and so are banks for facilitating financial inclusion, all of which can potentially facilitate cash transfers to identified beneficiaries. 

Registrar General of India (RGI) proposes to provide smart cards to every citizen for offline authentication of identity. All these programmes propose to integrate Adhaar/other authentication measures for plugging leakages. So, a shift to a cash transfer system would require FCI to restrict itself to MSP purchases, strategic reserves and stocks for difficult regions such as Jammu & Kashmir and north-east. 

The cash transfer equivalent to the difference between market price and the proposed issue price for the poor, would amount to roughly Rs 500 per month per family. A task force set up by ministry of finance on cash transfers for kerosene, LPG and fertilisers has, in its interim report (June 2011), suggested that the institutional and implementation framework for cash transfers and the food subsidy can be additionally provided under the same umbrella. The total additional cost for building necessary technology infrastructure for cash transfers would be at the maximum 5-6% of the food subsidy amount unlike almost 30% in today's scenario. More importantly, this would also help plug leakages and recycling of grain. 

Key benefits of the cash transfers model from the Centre's point of view is that this could save the government embarrassment in times of drought and other calamities - that happen every 4-5 years - as the expected shortfall in production could easily touch 15-20 million tonnes. Remember that in 2002-03 drought, the cereal production dropped by more than 35 million tonnes over the previous year. Under this model, the government would simply need to procure strategic reserves and manage contingencies. 

The system can bypass corruption and collusion riding on technology. The opportunity of innovations and varied experiments seems to have been lost with this top-down model delineated in the NFSB, despite the meek mention about states doing something with permission from the Centre. What can one do to promote efficiency and cut down costs, if the Centre persists with this centralised top-down approach in NFSB? Is there still scope to improve upon this second-best, or may be third-best, solution? 

UNBUNDLE FOOD SECURITY OPERATIONS 

Unbundling the food security complex into procurement, stocking and distribution, and introducing competition and transparency at each stage could bring in more accountability and efficiency in each function and reduce costs. The government can decide what functions can be completely privatised and where it needs to maintain a degree of control. Let us first take up procurement. 

Food grains can be procured by anyone who offers the service at least cost while ensuring MSP - why pre-empt anyone and go against the spirit of competition policy of India? Rather than creating a monopoly of the state or the arhtiya (cartels have been formed, courtesy the license raj), FCI can create a multitude of potential service providers or aggregators (eg, producer companies, corporates, NGOs and SHGs) who would then charge a fee to FCI, innovate and compete to bring down the operational costs. Even assuming this can bring down the procurement incidentals by about 15%, saving of about.`6,000 crore annually is possible. 

Stocking and distribution can be privatised and large warehousing companies can be encouraged to take over the FCI facilities through a public-private partnership programme. This could also help lower costs of operations. By promoting the use of newly-introduced negotiable warehouse receipts, mandis can be bypassed and attendant benefits of sharing risks with the private sector as certified warehouses would encourage FCI to reduce its stocking role, allowing private parties (eg, farmers, traders, millers, etc) to store a much larger share of the total crop and invite bank financing. Transportation is already through trucks or railways and the logistics can be handled by warehousing companies. Assuming resultant savings of around 10-15% in the distribution, incidentals costs can be brought down by around Rs 3,000 crore. 

FCI pilots on open market operations done through spot exchanges have been successful in managing consumer prices and need to further integrate with the commodity exchanges. All this would basically amount to using the 21st century instruments in grain management promoting efficiency and in line with the market-based approach rather than state takeover of grain trade. About half a million FPS form the PDS. States have no control over how to check leakages at the point of FPS that allegedly divert grain to open market. 

Improving the business case for FPS is key for its success, so permit all stores that have ongoing viable operations to cater to the targeted population for delivery. A special counter can be created to accept food coupons (much like the Sodexho coupons). The computerisation of the public distribution system (PDS) would easily cost around Rs 10,000 crore with a recurring annual cost of Rs 2,000 crore, but no point pouring water in a leaking bucket by trying to reform a flawed business model. 

PLUG LEAKAGES 

So, allowing innovations is critical to promote efficiency, plug leakages and save precious resources for investments. The innovations can range from cash transfers at one end of the spectrum to bringing in multiple players in each of the functions of procurement, stocking and distribution of grains, including some hybrid models in between. Unfortunately, cash transfers are not envisaged or permitted under the Bill and would require amendments or revisions in the PDS order. This can save the country over Rs 2,00,000 crore over three years (out of an otherwise estimated expenditure of roughly Rs 6,00,000 crore), ie, a saving of more than 30%. 

Savings come largely from the need to procure and keep much lower level of stocks (maximum 20 million tonnes as critical reserves and for some difficult areas, against around 70 million tonnes that the Bill will require), much lower level of investments needed for agriculture (compared to Rs 1,10,600 crore that the ministry of agriculture has asked to ensure food for smooth functioning of NFSB under its current form), and much lower costs associated with cash transfers compared to physical delivery of grains by the state dominated agencies. Fundamentally, one needs to remember that use of price policy (subsidised grains in this case) as an instrument to achieve equity ends is inherently flawed and will lead to large inefficiency in the system. The right choice is to use an income policy (cash transfers or food coupons) to address equity concerns. 

(A Gulati is chairman, Commission for Agricultural Costs and Prices; J Gujral is director, Infrastructure Development Finance Co; and T Nanda Kumar is member, National Disaster Management Authority, and former secretary, department of food and agriculture)

The Economic Times, 12 January, 2012, http://economictimes.indiatimes.com/opinion/comments-analysis/food-subsidy-bill-can-be-lowered-by-rs-2-lakh-crore-through-cash-transfers/articleshow/11456207.cms


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