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LATEST NEWS UPDATES | Stamp of possibility by Bhaskar Dutta

Stamp of possibility by Bhaskar Dutta

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published Published on Apr 8, 2010   modified Modified on Apr 8, 2010

An inquiry committee appointed by the Supreme Court to look into the functioning of the public distribution system has just turned in a damning report to the effect that the system is riddled with corruption and has virtually collapsed in some states. This observation will not come as a surprise to most people. Indeed, it is not a coincidence that even the Central government’s own Economic Survey mentions the need for a restructuring of the PDS, and has suggested that a programme of “food coupons” be introduced in order to reduce some of the leakages associated with the PDS.

The system of ‘food stamps’, as it is better known, involves the issue of stamps or coupons to the target population, entitling the beneficiaries to buy food at unregulated market prices. The use of food stamps originated in the United States of America in 1964, and has since then been used in several countries including Sri Lanka, Jamaica, Mexico and Honduras. Naturally, there has been some variation in the extent to which the system has succeeded in the different countries. However, all country evaluations report that there has been some increase in the food consumption of the target population.

In the Indian context, we already have the PDS, and so the appropriate question to be asked is whether food stamps can reduce the size of the food subsidy bill without affecting consumption levels of households below the poverty line. Some idea of the quantitative magnitude of the leakages associated with the current PDS will help to emphasize the importance of this question.

Under the targeted public distribution system (TPDS) introduced in 1997, only the BPL households were supposed to be provided with subsidized food. Thus, while all households were entitled to a monthly quota of 35 kilograms of foodgrain, the households classified above the poverty line were required to pay a price equivalent to the economic cost incurred by the government— this is the cost incurred by government agencies in procurement, storage, transportation and distribution. In contrast, BPL households were supposed to pay only 50 per cent of the economic cost.

Since the goal of the TPDS is to restrict subsidies only to the BPL families, the system has to be evaluated in terms of the amount of income subsidy received by the poor. Some recent estimates suggest that the BPL families receive only 10 per cent of the total food subsidy bill. In other words, ninety paise out of every rupee of public money spent on the TPDS ‘leaks’ out of the system.

It is important to have some idea of the sources of this leakage — only this will provide some indication of what savings can be expected from a system of food stamps. Not surprisingly, the sheer magnitude of the volume of leakage can only be accounted by ‘errors’ and inefficiencies of many different kinds. For instance, despite its name, the TPDS is very poorly targeted and there are errors of both inclusion and exclusion.

The former refers to the inability of the system to prevent APL families from enjoying the subsidies meant for the poor. For instance, it is well known that in many states, the number of BPL ration cards issued far exceeds the estimated number of poor families. At least a part of this targeting error is genuinely unavoidable because it is difficult to identify, absolutely correctly, exactly which families are poor. But, the states also treat BPL ration cards as a means of rewarding their vote banks. Of course, these targeting errors will remain even under a system of food stamps since these stamps will be issued even to APL families.

However, another channel through which APL families currently enjoy some subsidies can be eliminated through a proper use of food stamps. Although the prices of rice and wheat charged to APL families in the ration shops are supposed to cover the full economic cost to the government, these prices have not been revised after 2002. But, of course, the cost to the government has gone up quite considerably. An implication of this is that APL families paid only 50 per cent of the economic cost in 2009. This source of leakage can be eliminated completely if the APL families buy their foodgrain from the market.

The present system also suffers from significant errors of exclusion — surprisingly large numbers of BPL families do not buy foodgrain from the PDS. An important reason for this is simply the inability of the state governments to identify every BPL family. For instance, many BPL families do not possess ration cards because they do not have a fixed abode and so have no proof of residence. Of course, the food stamps programme will face the same problem of identification. But, there will be one reason why the food stamps programme will have lower exclusion errors than the TPDS. The latter forces everyone to make purchases every fortnight and the really poor simply do not have the resources to make bulk purchases. The ‘divisibility’ of food stamps will help the poorer families get round this problem.

Other factors add to the size of the overall volume of leakages. An important source is the illegal diversion of foodgrain from fair price shops to the unregulated market. Because of the price difference between subsidized grain and grain sold through regular marketing channels, there are powerful incentives to arbitrage and make illegal profits. The difference in price provides for a lucrative source of profit to unscrupulous traders. A Planning Commission estimate suggests that as much as 37 per cent of the total supply of subsidized rice and wheat was illegally diverted to the unregulated market in 2003-04. Other studies report even higher estimates. Of course, food stamps will wipe out this source of leakage completely since there will essentially be only one market for foodgrain, with the BPL families being able to ‘pay’ for their purchases with food stamps.

The last source of leakage is the relatively high cost of delivery of public traders compared to the private traders. The Planning Commission’s own study shows that the government’s food subsidy costs would have been lower by 35 per cent if the government costs matched that of the private sector. Given this, it is somewhat surprising that the Economic Survey does not recommend that private traders be entrusted with complete responsibility for delivery of foodgrain. Instead, it suggests that BPL families be allowed to exchange food stamps at the fair price shops. Perhaps, the underlying rationale is that age-old institutions cannot be demolished in one step.

The Telegraph, 8 April, 2010, http://telegraphindia.com/1100408/jsp/opinion/story_12304072.jsp


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