Dumping PDS For Cash Transfer Will Stop Foodgrain Wastage, End Market Distortion And Empower The Poor

Minister of State for Consumer Affairs, Food and Public Distribution C R Chaudhary informed Rajya Sabha on 28 July that 3,115.7 tonnes and 8,775.6 tonnes of foodgrains was accrued as damaged/non-issuable in Food Corporation of India (FCI) godowns during 2015-16 and 2016-17 respectively.

That’s almost 12,000 tonnes of foodgrain wastage in two years!

Currently, 80 crore people are covered under the National Food Security Act (NFSA). Of these, 10 crore are classified as priority beneficiaries, who receive five kilograms (kg) of foodgrains per month (per person), and the rest 70 crore people receive foodgrains on a household basis, receiving 35kg per family per month. For both rice and wheat are priced at Rs 3 per kg and Rs 2 per kg respectively.

This means that the amount of foodgrains that rotted away in FCI godowns in the last two years alone would have been enough to provide ration for 24 lakh priority beneficiaries for a month under the NFSA. The numbers may not appear substantial; after all, of the ten crore priority beneficiaries, the quantity of foodgrains that could feed only two lakh people for a year was wasted. The revenue outgo from this loss for the government would be around Rs 2-3 crore given that the government charges Rs 2-3 per kg at public distribution system (PDS) outlets.

But in the absolute sense, the numbers aren’t insignificant either, especially for a poor country like India. Also consider the fact that the wastage has come down heavily after 2014. For instance, in 2013-14, the wastage in FCI godowns stood at 25,000 tonnes a year. Last year it was around 9,000 tonnes. Things have improved, but it will not be possible to entirely get rid of this nuisance.

PDS is a typical subsidy system which involves the government delivering public goods at subsidised prices to a certain section of the population. Hence, it is bound to create avenues of corruption and rent-seeking. In addition to that, it distorts markets where one commodity is priced at two vastly different prices. It’s obvious then that people will be attracted to a shop which is selling it at a subsidised rate. Such incentives give rise to many problems of inflated beneficiaries, black market, rent-seeking and so on.

It is no surprise that the government is able to save thousands of crores of public money by moving from transfers in kind to cash transfers and at the same time purging bogus beneficiaries from the system as it has done with the LPG subsidy by crediting it directly into bank accounts.

The problems with PDS are manifold. The costs of procurement, storage and distribution are massive, and inefficiencies at every step of the process only make it worse. More often than not, the government procures more than it can afford to store properly. And it procures more than it even needs because of the fear of drought. The FCI doesn’t have enough storage facilities. If some states have built capacities, one can’t be certain of their quality and wastage of thousands of tonnes of foodgrains every year speaks volumes of their quality. Many workers associated with the agencies responsible for procuring, storing and transporting foodgrains are making a moolah left, right and centre, earning six-figure salaries as income!

Ramping up the facilities – for procurement, storage and distribution – and the costs of ensuring that there is no corruption or hoarding or fake beneficiaries waiting at PDS outlets raise the cost of welfare for a cash-strapped government. It is no one’s case that reforms can’t help improve the current system. They can. The government will have to commit to investing heavily in warehouses, improve their quality by letting private players handle their operations, leverage e-mandi platforms to ensure better prices for farmers, which will obviate the need to buy all the produce from them, thus freeing the government from the compulsion of procuring more than it needs and so on.

But we need to stop here and ask ourselves, is it worth all the effort – fixing hundred inefficient things so that it can deliver goods worth Rs 1,000 to a poor household? Wouldn’t it make everyone’s life easier, including that of the poor, if they directly received the money in their bank accounts?

In fact, it would do much more than that. It will put a stop to market distortion, rid us of foodgrain wastage and avoidable expenses on the part of the government, which can then be used to fund a part of the cash transfer. On top of that, we will free markets from price distortions. The poor can also get the money intended for them without putting themselves on display for everyone to see at a ration shop, thus preserving their dignity. Additionally, they would be empowered to spend the money the way they see fit. In a particular month, they may need to buy critical medicines or finance a part of their children’s education and so on.

The centre has made a commendable effort in this direction by prodding the states to revamp their PDS either by crediting PDS subsidy directly into the bank accounts of beneficiaries or implement Aadhaar-enabled PDS, where ration is provided after beneficiaries authenticate their credentials by fingerprints (10 states have already implemented it).

As argued here, cash transfer for food can be implemented throughout India in the next five years in a phased manner. Imposing it on all states uniformly will be too disruptive and hence not advised. A working paper on this theme authored by Infosys chair professor for agriculture, Ashok Gulati, and his colleagues has already laid down a timeline for implementation. The government will do well to heed their advice.

Replacing PDS with cash transfer will stop foodgrain wastage, end market distortion and empower the poor. It’s the ‘Smart Welfare’ way.