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LATEST NEWS UPDATES | Issues like food prices, PDS can hurt cash transfers plan in food-Madan Sabnavis

Issues like food prices, PDS can hurt cash transfers plan in food-Madan Sabnavis

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published Published on Nov 29, 2012   modified Modified on Nov 29, 2012
-The Economic Times

Cash transfers will become a reality soon, and one area that the government is going to align with this mechanism is the Public Distribution System (PDS).

While, prima facie, it appears to be a good idea, given that it removes quite a bit of inefficiency in the present system, there are certain issues that have to be addressed before we go in for the same as they could become obstacles in the implementation of this scheme.

First, the UID scheme provides an identity for a person, but by itself does not tell us whether the person is actually poor or not and whether or not requires to be subsidised. The present system of ration card is based on self-declaration where one mentions the household income to obtain ration. One of the inefficiencies in the system is that this benefit is not well-targeted, which means that the beneficiaries are not always those who are intended to get the benefit.

This leads to adverse selection that has to be addressed in the early stages before going in for cash transfers as, once implemented, it will be difficult to withdraw the unintended beneficiaries. Has this system of identifying the income of families been put in place?

Second, the PDS system provides essentially rice and wheat, along with sugar and cooking oil, which is delivered at a fixed price by the government. The procurement prices are fixed by the government, as is the issue price.

Therefore, both the farmer and the consumer are protected through these prices. Now, the consumer will get a cash transfer equivalent to the value of the quantity of these commodities.

While there can be a debate on how this money will be spent by the household, there are intrinsic problems in arriving at the right amount of money to be given to households.

Let us look at some retail prices at the extreme levels as presented by the ministry of agriculture for some of these proxy products for October 2012. The price of coarse rice varied from 16 per kg in Agartala to 33 per kg in Chennai. In case of wheat, it was between 14 per kg in Ludhiana to 36 per kg in Chittoor.

For sugar, the price varied from 31 per kg to 42 per kg in Ludhiana and Guntur respectively. For groundnut oil, the price band was as wide as 80-205 in Guwahati and Ernakulam. Clearly, we need a firm set of prices for various geographies as well as have differential cash transfers.

Are these systems in place? Presently, the issue prices are fixed. But once we move to cash transfers, the inflation rates in various centres have to be readjusted periodically. Do we have statistical tools in place for the same?

Third, today, we have an open-ended procurement scheme for wheat and rice where FCI procures as much as is offered. This is used for PDS, creating a buffer and a strategic reserve. Now, with cash transfers taking place, the PDS would be redundant. In that case, we would have to redefine the procurement system as the farmers' position would change as they cannot sell without a limit to the FCI.

The concept of minimum support price (MSP) will get diluted as farmers cannot be assured of selling to the government at an assured price as the existing scheme has to be changed, else, the FCI will be loaded with over 60 million tonnes of annual procurement that cannot be used for distribution with around 32 million tonnes required as buffer in July as per the norms.

The farmers lobby will not be too satisfied with this move and it could be politically-sensitive. As a corollary, the role of FCI has to be reviewed as we have a large organisation that will no longer be relevant beyond the role of holding on to the buffer and strategic stocks.

Fourth, with the FCI now holding on to stocks only for emergencies, the warehouse spaces under its purview need to be put to commercial use. For this, the organisation has to create a viable business model as the space has to be handed over to the private sector. Today, the FCI has around 34 million tonnes of warehousing capacity that is used along with those of CWC and SWCs to hold on to the food grainBSE 0.00 % stock in the country.

Given that either the FCI or the warehousing corporations will have excess space and have to let go, they have to learn to become commercial entities, which is a challenge given that so far they have run like government entities. Has this work begun at the ground level?

Last, we have around five lakh fair price shops spread across the country that enable the PDS. Once cash transfers are in place, these shops would become redundant. Have we thought of what will happen to these outlets considering that, on an average, they involve deployment of 2-3 persons, which means 10-15 lakh jobs? While most deal with other products too, the same may not be sustainable and they would have to be compensated.

Today, one of the main fears of FDI in retail is what will happen to the small retailers. Here, we have a government action that could pose a similar threat to these shops.

Clearly, while cash transfers are a sensible option for a country like ours, we do need to address these issues before implementing this scheme, else, we would run into certain contradictions as all these issues are intertwined and gigantic structures have been built that also involve political compulsions that cannot be separated. Unless we address them, we may just end up putting the cart before the horse.

(The author is chief economist at CARE Ratings. Views are personal)

The Economic Times, 29 November, 2012, http://economictimes.indiatimes.com/opinion/comments-analysis/issues-like-food-prices-pds-can-hurt-cash-transfers-plan-in-food/articleshow/17409169.cms


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