How We Can Dismantle PDS In Next Five Years And Take A Big Leap Towards Universal Basic Income

Last year, India’s Chief Economic Adviser Arvind Subramanian announced that Economic Survey 2016-17 would include a chapter on Universal Basic Income (UBI). One expected that suggestions in the said chapter will set the cat among the pigeons. It did anything but. From reading of the survey, it became clear that Subramanian didn’t think the time was ripe for implementation, only deliberation.

He is right. Despite the herculean success of Jan Dhan-Aadhaar-Mobile penetration (JAM) trinity, millions of poor remain outside of the system that will form the backbone of a UBI setup. If the government wishes to move towards the goal of providing UBI or an Indian version of it, it must first lay down a robust infrastructure on which this new social security system of future can stand on without dangling.

Incrementalism, not sudden disruption, must be government’s mantra. It is important to tread with caution and learn lessons from hubris of the past. In 2008, one year prior to general elections, the Congress government decided to extend Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) – a programme in pilot stage - all over India without much preparation and without any regard for economic, social, geographical differences between various regions in the country. By the time, the country realised that one size fits all schemes don’t work very well, it had served its purpose – getting Congress reelected and that too handsomely.

If UBI is to succeed, the schemes that it will replace (there is no other way) need to eventually convert from kind to cash transfers. Every year, the central government allocates almost Rs 8 lakh crore on various welfare schemes. If 30 crore poorest individuals (as household heads) are selected and each given Rs 2,000 per month, it will cost around Rs 7.2 lakh crore. Currently, food subsidy is the biggest component in welfare mix costing the exchequer slightly over Rs 1 lakh crore. Most of this sum is channelled to beneficiaries via the public distribution system (PDS) in form of kind-transfers. Transforming it into a cash-transfer which can directly be deposited in a beneficiary’s account will prove a fillip in moving towards some form of UBI.

How can this be done? Avoiding haste is the key. Equally important is learning from past mistakes. As the MGNREGS example show, this shouldn’t be implemented in one-go. Nor is it wise to treat all states equally (because they aren’t) and prescribe a uniform timeline for all.

A working paper (‘Indian food and welfare schemes: Scope for digitization towards cash transfers’) imbibes these lessons. Authored by Infosys chair professor for agriculture Ashok Gulati in collaboration with senior visiting fellow, Indian Council for Research on International Economic Relations, Siraj Hussain, senior consultant Shweta Saini, research assistant Sameedh Sharma and Joachim von Braun, it makes a case for rolling out of direct benefits transfer (DBT) for food subsidy in a phased manner.

These few baby steps towards cash transfer of food subsidy directly into bank accounts of beneficiaries can translate into a big leap towards UBI.

What’s wrong with the current PDS that we need to move to cash transfer?

Consider the numbers involved: PDS is now a part of National Food Security Act (NFSA) along with Indira Gandhi Matrutva Sahyog Yojana, and mid-day meal scheme. NFSA is aimed at delivering close to 62 million metric tonnes (MMT) of grains to over 80 crore people out of which 10 crore are classified as priority beneficiaries who receive 5 kilograms (kg) of food grain per month (per person) and the rest 70 crores get on household basis, receiving 35 kg per family per month. For both rice and wheat is priced at Rs 3 and Rs 2 per kg.

As one would expect with any government programme of such Himalayan magnitude, there were scores of avenues for leakages and corruption. Rates of grain leakage from the PDS stood at 54 per cent in 2004-05 and 40 per cent of the bottom 40 per cent of the country’s population was excluded from the PDS in 2011-12. There were crores of bogus ration cards. Fake beneficiaries were eating away the money intended for poorest of poor and channelling susidised wheat and rice from ration shops and selling at high prices distorting the markets.

The Narendra Modi government directed the states to revamp their PDS in two ways: Either credit PDS subsidy directly into bank account 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 a result, 2.33 crore bogus ration cards have been deleted from the system since 2014 (over 6 crore since 2006) translating into Rs 14,000 crore of savings under PDS alone.

The twin reforms initiated by the National Democratic Alliance (NDA) stood on the ones introduced by the previous United Progressive Alliance (UPA) government. As the working paper mentions the UPA directed the states to start digitisation of ration cards, seed them with Aadhaar cards and allocate foodgrains online. It was followed by nine-point action plan aimed at plugging leakages by reforming how fair price shops operate, making beneficiaries lists public and so on.

However, the costs of providing welfare are still too high and fiscally unsustainable. A planning commission report from 2003 “found that to deliver one Rupee of an income transfer to a BPL family, the government had to spend 3.65 Rupees.” Even after so many reforms, the cost may not have come down much. The paper mentions a study by Himanshu and Sen which calculated leakage in PDS to be around 54.8 per cent in 2004-5. A recent study by Gulati and Saini found leakage to be around 47 per cent in 2011-12.

Even if we assume that it has fallen by half, it is still huge. DBT is our best bet to ensure that the public monies reach the intended beneficiaries.

But DBT has problems too

Chandigarh and Puducherry recently ran a pilot programme where the former replaced the current PDS with DBT but the latter ran DBT without discontinuing PDS. Gulati et al in their working paper lists various problems that the two UTs grappled with. Beneficiaries found that DBT wasn’t sufficient to buy total ration they used to get under PDS and more often than not the amount credited would be such (Rs 768 for instance) that they couldn’t withdraw it from ATMs. There are other issues like lack of awareness, confusion due to multiple bank accounts, banks’ inability to send SMS etc, but these can be fixed rather easily.

Currently, the food subsidy is calculated as follows: 1.25XMSP-CIP where CIP is central issue price is price at which the government makes foodgrain available at ration shops (Rs 2 for wheat, Rs 3 for rice per kg, etc). Gulati et al propose that this formula should be changed to 1.5XMSP-CIP so that the complaint of inadequate cash subsidy can be addressed. Another easier method they propose is giving subsidy equivalent to retail price of commodity minus CIP.

The paper makes policy recommendation on revamping infrastructure, which would involve ensuring sufficient grain availability in open markets especially in states and areas which are food deficit. What happens to 5 lakh ration shops once subsidy is deposited directly into bank accounts? Rajasthan has come up with an innovative method where these shops have been converted into village malls, general stores if you will, in partnership with Kishore Biyan’s Future Group under Annapurna Bhandar Yojana. Financial literacy and financial inclusion will have to be the top priority, which should include specifically targeting those who are beneficiaries of food subsidy. The government will also be free from much of its responsibility of storing and distributing grains. It can then focus on procurement alone and ramp up its exports to China, South-East Asian, Middle-Eastern and African countries where it already has huge market. Proceeds from these exports can be used to finance a part of DBT.

Make Haste Slowly

Gulati et al have suggested that uniform timeline for all states should not be set. They recommend that DBT for food subsidy should be achieved in a phased manner by 2022. Every phase will target a set of states and what states are covered in which phase will depend on their readiness in implementing DBT.

In the working paper, all 36 states and Union Territories have been measured on three parameters and classified under different phases depending on their readiness. These parameters are: studying each state’s demographic profile (urban or rural? If more urban, then more ready; poverty ration - if less number of poor, more ready; literacy rates; population of malnourished children), its PDS performance (if more leakage, lesser dependence on PDS for meeting consumption and good progress on the PDS reforms, then such states should shift first), lastly banking infrastructure and financial inclusion (more they score on these, readier they are for shifting).

Here is how states score on above criteria:

Four phases suggested in the paper, and the states they should cover are given below:

First phase (2018 deadline) covering six states: Delhi, Daman and Diu, Goa, Puducherry, Chandigarh and Punjab.

Second phase (2019 deadlines) also covering six states: Haryana, Tamil Nadu, Andhra Pradesh, Telangana, Karnataka and Kerala.

Third Phase (2021 deadline) covering 13 states: Madhya Pradesh, Chhattisgarh, Rajasthan, Jharkhand, Bihar, Odisha, Uttar Pradesh, West Bengal, Maharashtra, Gujarat, and Dadra and Nagar Haveli.

Fourth Phase (2022 deadline) covering remaining 13: Arunachal Pradesh, Assam, Himachal Pradesh, Jammu and Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Uttarakhand, Andaman and Nicobar Islands and Lakshwadeep.

The working paper mentions some recent studies which estimate that almost half of the grain from government storage centres does not reach the intended beneficiaries. This is not an insurmountable challenge. If implemented in phases and state governments take the task seriously, it is very much achievable in the time frame provided by Gulati and others.

Moving towards a form of UBI, which can replace hundreds of central government schemes costing around Rs 8 lakh crore, and hundreds of other welfare schemes run by state governments, will surely test the strength of cooperative federalism. The success in bringing Goods and Services Tax Act to fruition is before everyone to see. Implementing UBI or even phased introduction of DBT of food subsidy will require efforts of such scale if not more.

The government has flushed enough of public money down the drain by spending it in injudicious manner. It can’t afford to keep doing so.

India Today journalist, Uday Mahurkar, who has known Prime Minister Modi for the past three decades, recently told Swarajya in an interview that Modi believes that every paisa that doesn’t go to the poor it is intended for, makes the job of poverty alleviation in the country that much harder. Well, what better way than DBT-Food (and later UBI) to make sure that 100 out 100 paisa reach the poor.