food subsidy

8/9/2019 Food Subsidy

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FOOD SUBSIDY-

REVIEW OF

PROBLEMS

ROLL NO 30


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DECLARATION

I declare that the research project titled Food subsidy- review ofproblems submitted by me for the degree of masters in Economics in

University of Pune is the record of the work carried out by me during

the period from Jan 2010 to 15 April 2010 at the department of

Economics, University of Pune under the guidance of Prof.

Dhanmanjiri Sathe. This has not formed the basis for the award of any

degree, diploma, associate ship, fellowship titles in this or any other

university or any other institution of higher learning.

I further declare that the material obtained from other sources has been

acknowledged in this project. In case it is found otherwise, I understand

that I stand be duly punished.

Place: Pune

Date: 15th April 2010

Signat

ure

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Index

Pg no

1. Introduction 4

2. Review of literature

a. producer subsidy 6

b. consumer subsidy 10

c. recommendations 17

3. research objectives & methodology 19

4. Findings

a. overall food subsidy 20

b. producer subsidy 24

c. consumer subsidy 29

5. Conclusion &

policy recommendations 32

6. References 33

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INTRODUCTION-

Domestic subsidies can play an important role in achievingredistributive justice if used efficiently. They are used to correct the

underconsumption arising from the pure market mechanism. Hence,

while talking about subsidies we are aware of the underconsumption &

we assume it will be corrected through providing subsidies. But

subsidies are different from transfer payments & providing subsidies

generally means subsidizing the items consumed by the people to

whom the subsidy is targeted.

In India, three domestic subsidies viz. food, fertilizer & petroleumsubsidies are the most important, both for the large no of beneficiaries

of them & for the huge fiscal burden they create. I am particularly

interested in food subsidy at this point for two reasons. The recent

episode of high food inflation has turned the attention towards the

issues of food security, structural bottlenecks & inefficiency in the food

management in the country & various solutions being suggested by

researchers, govt. committees & media on improving the overall food

management. So I am going to review broadly the mechanism of food

management in the country & particularly the role played by food

subsidy in this system & in achieving food security to the poor.

Food subsidy is generally given for three items, wheat, paddy, levy rice

& sugar, I m going to look at only rice & wheat in detail. Rice means

paddy & levy rice combined unless otherwise mentioned. Food

Corporation of India procures 15-20% of the production of these food

grains at the minimum support price (MSP) declared by the

government. It maintains the buffer stock of these food grains as

decided by the commission on agricultural cost & prices (CACP) &

also distributes these food grains to the states through the PublicDistribution System (PDS) for the sale in fair price shops (FPS) mainly

to the poor at a central issue price (CIP). Hence, govt. gives food

subsidy to FCI as a difference between economic costs of wheat & rice

(including procurement costs) & the receipts through sale of these food

grains at central issue price. Other components are carrying costs of

buffer stocks & on account of levy sugar, import of sugar etc.

As we can see there are three main components of this subsidy- 1.

Producer subsidy, through procurement of wheat & rice at a minimumsupport price (which is directly given to farmers) 2. Consumer subsidy

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(as consumers get these food grains at a price less than market price) 3.

Economic costs to the FCI for maintenance & distribution of food

grains.

There are many problem areas in this system which are not yet beensolved fully even after around 60 years of its implementation.

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REVIEW OF LITERATURE

A report prepared by Ministry of Finance on central government

subsidies (2004) gives an overall picture of subsidies in India. Totalcentral government subsidies accounted for 4.18 in 2003-04, in which

explicit government subsidies which are accounted in the budget

documents were only 1.7 in 2003-04. Another very important measure

of calculating subsidies is its share in net revenue receipts & fiscal

deficit. For 2003-04, subsidies were 44% of revenue receipts &

accounted for 87.68% of fiscal deficit. Interestingly, recovery rate of

non merit subsidies was 47.25% while that of merit subsidies (in which

food subsidy is included) only 1%. The share of food subsidies in GDP

also grew to 0.93% in 2003-04 as against 0.43% in 1991. According toplanning commission working paper (2002), the share of food subsidy

in total government expenditure has gone up from 2.33% in 1990-91 to

5.17% in 2002-03.

As we know, there are two main issues in the food subsidy or food

management system. One is of higher MSP, procurement system &

resulting higher market prices. We will call it producer subsidy system.

The other issue is that of PDS & consumer welfare, we will call it

consumer subsidy system.

A. PRODUCER SUBSIDY

Lets take the issue of producer subsidy first. Central government

subsidies report has pointed out many negative fallouts of higher MSP.

It admits that higher MSP puts the pressure on central issue prices.

Further, with large part of marketed surplus with FCI, it reduces the

supply to open market & puts an upward pressure on market prices.

Everyone except those farmers with marketable surpluses of foodgrains

are affected adversely. The high MSP combined with open ended

purchases by FCI has created a negative incentive for vibrant wholesaletrade which actually has lower incidental & storage costs of food

grains.

According to planning commission working paper (2002), while higher

MSP does provide incentive to farmers to produce more, it has raised

the market prices & has reduced demand for cereals. It refers to the

study conducted at the National Council of Applied Economic Research

(Sharma: 2001) which shows that fixing of procurement prices above

the level recommended by the Commission on Agricultural Prices

(CACP) has resulted in additional procurement of 12.8 million tonnesof wheat and 3.4 million tonnes of rice. It thus recommends that the the

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recommendations of CACP should be strictly adhered while

procurement prices are fixed.

Balakrishnan & Ramaswami (2000) say that there is no explicit

mechanism for stock operations in India. Hence it becomes difficult to

decide if the government policy is stabilizing or inflationary. Theypropose the following model to decide the exact nature of policy.

Here D1 demand curve & P1 is the price in the absence of procurement

& public distribution system. With PDS, open market demand will fall

to D2. Now if govt. sets the procurement price at P3 it will have

stabilizing effect as it is below P1 but above P2. But if it sets the price

at P4 which is above P1 also, it will be inflationary. Hence, determining

procurement price is the key variable.

They also point out another important aspect of speculation. If futures

market are allowed & function well, the speculative activity in themarket will be more informed, it will obtain inter temporal allocation of

supplies & thus reduce the need for market intervention to that extent.

Kirit Pareikh, Ganesh Kumar & Darbha (2003) have found out that the

increase in MSP of rice & wheat by 10%, with an applied general

equilibrium model for India, leads to decline in overall GDP, increase

in aggregate price index &reduction in investments. Even the increase

in agricultural GDP reduces rapidly & only a miniscule impact on

agricultural GDP remains after the end of third year. More importantly,

in terms of welfare the bottom 80% of rural & urban population is

worse off due increased market prices.

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Shikha Jha& P V Srinivasan (2000) show that mean producer revenue

increases in the absence of procurement policy. This result is very

important as it blows the very rationale behind the procurement policy.

It also shows that in the presence of govt price stabilization, removal of

procurement policy decreases price variability.It will be interesting to know Amartya Sens view at this point. He

bitterly attacks the whole system calling it food politics. In a speech

made in 2003, Sen clearly points out that the subsidy is mainly geared

up to keep the food prices high for the sellers of the food rather than to

make prices of the food low for buyers of the food. Sen also attacks the

pro poor argument for subsidies in the following words, the slightly

muddied picture of benefiting some farm-based poor encourages the

confused belief that high food prices constitute a pro-poor stance, when

in overall effect it is very far from that.According to Sen, the regimeof high prices in general expands procurement but decreases the

affordability of food. That is the reason why we have worst of

undernourishment in the world & the largest unused food stocks at the

same time. As the system only encourages producing more & more

rather than selling more at a lower price, it only leads to more income

for farmers (that to very limited no in few states). The overall net effect

of these subsidies is regressive in distribution.

Another important issue in producer subsidy is the continuous piling up

of the stocks with FCI. Central govt subsidy report shows that in 2002

January the actual stocks were 32.4 million tons as against the buffer

norms of 8.4 million tons. The excess as a % of minimum norm is as

high as 285.7%.. The stocks were piling up to such an extent, that

exporters had to be provided with food grains at a near BPL price.

Practically food grains were resubsidiesed for exports. Swati Kundu

(2005) points out that while poor consumers were unable to purchase

the food at high prices, exporters were being subsidized. She also points

out, that overflowing FCI godowns and lack of scientific storage

resulted in a substantial amount of food grains being wasted. In fact,estimated losses of food grains were about 10 per cent of the total

production, or about 20 million tonnes a year. To put things in

perspective, the loss suffered was about as much as what all of

Australia produces. This also pushed up the economic cost of the FCI.

In this light, Shikha Jha& P V Srinivasan (2000) show that the retail

margins of private traders are much lower than post procurement costs

incurred by the FCI. That means there are clearly net losses for the

economy. Central govt subsidy report points out the reason behind it.

Since all costs of FCI are automatically reimbursed in the extantsystem, there is little incentive to raise efficiency and reduce costs for

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FCI. One more point related to stocks & its relation with food inflation

is brought out by business standard in its article. It points out that,

Recent food inflation has also been created by govt policies to some extent.

Business standard article (11 Feb. 2010) points out that, while prior to 2004,public agencies used to mop up only around 50 per cent of the post-harvest

mandi arrivals, leaving the rest in the market to maintain year-round supplies,

now over 90 per cent of the arrivals are cornered by government agencies,

starving the market of supplies. It has definitely contributed to the food

inflation.Rajiv kumar, pankaj vashisht & gunjit kalita (March 2010) show

that govt did not effectively used open market operations for stabilising

wheat prices recently. With stock of 23.1 mt in January & next procuring

season starting in April, govt. conducted open market sale of just 0.5 mt

of rice & wheat together.

Central govt subsidy report, states that the concentration of FCI

purchases in just two food grains and a few States has facilitated tax

exportation by some of these States. Punjab and Haryana have imposed

taxes such as mandi fees on the purchases of food grains. With FCI

paying such taxes, the tax gets exported to consumers in other States. It

also raises the costs to FCI. Moreoverthe exclusive attention to wheat

and rice has distorted the cropping pattern of farmers in favor of these

two food grains alone. The higher water and fertilizer intensity of these

two crops in turn has had adverse environmental impacts.

B. CONSUMER SUBSIDY

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Now we take the issues related to consumer subsidy. First we will

discuss the broad framework of PDS. According to economic survey

2009-10, allocations of food grains for BPL and AAY categories are

made at the rate of 35 kg per family per month for all accepted 6.52

crore families in the country. The total BPL and AAY allocations madeduring 2009-10 were 276.77 lakh tonnes comprising 181.05 lakh tonnes

of rice and 95.72 lakh tonnes of wheat. Allocations under the APL

category are made depending upon the availability of stocks of food

grains in the Central Pool and past offtake. Presently, these allocations

range between 10 kg and 35 kg per family per month in different

States/UTs. During 2009-10, 197.17 lakh tonnes of food grains has

been allocated to States/UTs under the APL category as against 112

lakh tonnes during 2008-09. Central issue prices are as follows-

CIPs of wheat

Effective from

1.7.2002 to till

date

BPL APL AAY

415 610 200

(w.e.f.

25.12.2000)

CIPs of Rice

Effective from

1.7.2002 to till

date

BPL APL AAY

565 830 300

(w.e.f.

25.12.2000)

Source- dept of food & public distribution

According to a blog posted on India affairs website, whether a

particular household will be eligible for a BPL card or not depends on

two different processes. Firstly, the numbers of BPL households aredetermined based on the Planning Commission estimates of poverty

(from NSS consumption-expenditure surveys) superimposed on the

number of households from census data. Secondly, an independent

exercise of identification is conducted based on a household census

using criteria (proxy indicators) determined by the Ministry of Rural

Development (MoRD), with the restriction that the number of poor to

be identified by this process should be within the number estimated by

the Planning Commission.There are many identification problems in the PDS system. The datafrom the 61st round of the NSS shows that only 44% of the households

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in the poorest quintile have BPL cards, while 17% of the households in

the richest quintile also possess BPL cards. The exclusion errors are

lower in states that have a higher coverage of the PDS. Currently govt

uses 13 point criteria to identify poor. It has proxy indicators like

ownership of house, land, toilets etc. but this method has proved to beproblematic so far.

The NCAER study found the PDS rarely meets the full requirement

of cereals of the poor households. They have to depend on market for

remaining supplies. As a result, these households spend around 60 per

cent of their income on food items. It means that for achieving food

security market price stabilization is also important & mere PDS reform

will not be sufficient.

The performance evaluation of TPDS conducted by programme evaluationorganisation on the request of planning commission & ministry of consumer

affairs, food & public distribution is the most important document clearly

proving the very high inefficiencies in the TPDS & it states in plainly that

transition from universal PDS to TPDS has neither led to a reduction of

budgetary food subsidies, nor has it been able to benefit the large majority

of the food insecure households in the desired manner.

The main findings of the study are:

The implementation of TPDS is plagued by targeting errors, prevalence

of ghost cards and unidentified households;

Though the off-take per household has shown some improvement under

TPDS, High exclusion errors imply low coverage of the target group

(BPL households). Of the estimated 45.41 million BPL households

(March 2000), TPDS has extended coverage to only 57% BPL families.

Leakages and diversions of subsidized grains are large and only about

42% of subsidized grains issued from the Central Pool reach the target

group.

Table: total leakage

Abnormal Leakage

(More than 75%)

Very High Leakage

(50%-75%)

High Leakage

(25%-50%)

Low Leakage

(Less than 25%)

1 2 3 4

Bihar &

Punjab

Haryana,

Madhya Pradesh &

Uttar Pradesh

Assam, Gujarat,

Himachal Pradesh,

Karnataka,

Maharashtra & Rajasthan

Andhra Pradesh,

Kerala, Orissa,

Tamil Nadu &

West Bengal

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Table A: Leakage at FPS Level

Table 2-B: Leakage Through Ghost Cards

Very High Leakage(+30%) High Leakage(10%-30%) Moderate Leakage(less than 10%)

1 2 3

Assam, Himachal

Pradesh &

Madhya Pradesh

Bihar, Gujarat, Karnataka,

Maharashtra, Orissa,

Uttar Pradesh & West

Bengal

Andhra Pradesh, Haryana,

Kerala, Punjab,

Rajasthan &

Tamil Nadu

The table shows that the states having abnormal leakage have the highest

leakage at the FPS level.The cost of income transfer to the poor through PDS is much higher than

that through other modes.

Irregular delivery schedule of FPS quota is a persistent problem in most

States. This has contributed to low off-take by consumers and hence to

large diversion of subsidized grains to the open market.

The FPSs are generally not viable because of low annual turnover and

they remain in business through leakages and diversions of subsidised grains;

The off-take by BPL cardholders varied significantly across States.

A multivariate analysis suggests that the factors (supply and demand side)

contributing to this variation are: variation in BPL quota, facility of off-take

in installments, regularity in the availability of grains in FPSs, availability of

preferred cereals, seasonality in demand for PDS grains (wage in kind & low

prices in harvest seasons) and asset holding (particularly land and consumer

durables).

During 2003-04, out of an estimated budgetary consumer subsidy of Rs. 7258

crore (16 States), Rs. 4197 crore did not reach the BPL households. Around

Rs. 2640 crore of the Central subsidy never reached any consumer (BPL or

APL), but seems to have got siphoned off the supply chain of TPDS.

Except in Kerala, the Economic Cost (EC) is higher than the correspondinglocal market prices. This implies that in general, market is a more efficient

Very High Leakage

(+50%)

High Leakage

(25%-50%)

Moderate Leakage

(10% to 25%)

Very Low Leakage

(Less than 10%)1 2 3 4

Bihar, Haryana

& Punjab

Rajasthan &

Uttar Pradesh

Andhra Pradesh,

Gujarat, Karnataka,

Kerala &

Maharashtra

Assam, Himachal

Pradesh, Madhya Pradesh,

Orissa, Tamil Nadu &

West Bengal

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mode of transferring income to the poor than the public agencies. These calls

for looking for ways and means of reducing the Cost of transferring grains

through PDS. Because of the very high cost in public transfer, the budgetary

subsidy of Rs. 3061 core in 2003-04 is worth only Rs. 1990 crore to the BPL

families. Taking into account all the inefficiencies in the PDS, it is found thatthe GOI spends Rs. 3.65 through budgetary food subsidies to transfer Re 1 to

the poor.

Balance Sheet of Central Pool BPL Food grain

(Kg./BPL family/ annum)

State

Off -take by States

Govt.

2003-04

Off-

take

by BPL Families

Food

grains

not

reachingthe poor

households

1 2 3 4

Andhra Pradesh 466.16 197.65 268.51

Assam 490.76 227.32 263.44

Bihar 138.13 12.24 125.89

Gujarat 320.24 169.47 150.77

Haryana 416.16 138.79 277.37

Himachal Pradesh492.22 266.14 226.08Karnataka 480.80 139.91 340.89

Kerala 407.58 248.58 159.00

Madhya Pradesh 365.57 124.04 241.53

Maharashtra 347.29 227.27 120.02

Orissa 276.37 175.88 100.49

Punjab 364.24 38.25 326.00

Rajasthan 366.53 238.43 128.10

Tamil Nadu 525.95 181.14 344.81

Uttar Pradesh 285.16 92.73 192.43West Bengal 336.78 246.19 90.59

16 States (Avg.) 380.00 160.25 219.75

Central Unit subsidy for BPLState wise

(Rs./Kg.)

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Total Central

Subsidy for Off-take

By identified BPL

Intended Subsidy Unintended Subsidy/

Additional

Delivery Cost

State

1 2 3 1

13.75 5.83 7.92 Andhra Pradesh12.59 5.83 6.76 Assam

50.98 4.52 46.46 Bihar

8.77 4.64 4.13 Gujarat

12.44 4.15 8.29 Haryana

9.19 4.97 4.32 Himachal Pradesh

18.78 5.46 13.31 Karnataka

9.56 5.83 3.73 Kerala

14.53 4.93 9.60 Madhya Pradesh

7.32 4.79 2.53 Maharashtra9.16 5.83 3.33 Orissa

40.15 4.22 35.93 Punjab

6.39 4.16 2.23 Rajasthan

16.93 5.83 11.10 Tamil Nadu

14.13 4.60 9.54 Uttar Pradesh

6.63 4.84 1.79 West Bengal

12.24 5.16 7.08 16 States (Avg.)

The average of 16 major states show that out of 380 kg/annum offtake for Bpl by stategovt only 160.25/kg actually reaches the poor, while more than that (about 219kg) get

leaked in the system.

Similarly, out of 12.24 rs/kg subsidy by central govt only 5.16rs/kg is an intended

subsidy, while 7.08 rs/kg is the additional delivery cost.

These findings reveal that the present situation of TPDS & ground reality, which calls

for some urgent corrections in the system.

There are many arguments to replace the system with either food stamps or universal

PDS. We take up both the alternatives one by one. World Bank discussion paper bysubbarao & radhakrishna (1997) had suggested the use of food stamps in urban & rural

areas & keeping Fair Price Shops in remote areas. Tenth five year plan has elaborately

given the mechanism required for the implementation of food stamps. It suggests that

state governments can issue a subsidy entitlement card (SEC) instead of ration cards.

SEC will show no of members in the family, their age & entitlement level for food

stamps. It suggests more entitlement to adults & less for children. Each family could

collect food stamps from prescribed distribution centers, on showing their SEC. they

could then use these food stamps at any food supply shop to buy food at a price below

the market price. The retailer will then be reimbursed by the govt. High level committee

report of Abhijeet Sen on PDS (2000) has also recommended the use of food coupons

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to be discounted at the FPS, (but interestingly they favour universal PDS). The tenth

plan discusses in detail the possibility of issuing food credit/debit cards. It emphasizes

on the Andhra Pradesh experience of using food coupons. The leakage through FPS &

ghost cards has substantially reduced in Andhra Pradesh, saving 14.67 crore per month.

Recent justice Wadhawa committee (2009) suggested the use of biometric identificationof beneficiaries & use of electronic smart card. Chandigarh has launched a scheme to

introduce smart card on pilot basis. The smart card with a 32Kb capacity will have

biometric data of three family members of the card holder. The beneficiary will know

the ration allocation already done and also the remaining balance in his account. There

will be resubmission of the fingerprint of the beneficiary after the allocation. The

system can work in both online & offline mode. (News on wellsphere.com Jan 2009).

But there are many counter arguments regarding food stamps. Madhura Swaminathan

points out that there is problem of indexing or inflation adjustment of food stamps in

which case the real transfer to the poor might reduce. Second there can beadministrative problems in issuing food stamps & reimbursement. She also states that

when the income inequalities are high & needs are uniform direct rationing should be

preferred over income transfers. But keeping in mind the recent advances in technology

& success of Andhra Pradesh model for ten years, the food coupons, smart cards &

food credit/debit cards seem to be the future of PDS.

There is also a debate going on between targeted vs. universal PDS. Madhura

Swaminathan & Reetika Khera (2009) seem to favour universal PDS over Targeted

PDS being implemented. Firstly, there are large exclusion & inclusion errors in TPDS.

When the food insecurity is widely prevalent, the leakage from a universal programme

will be small and the benefits of targeting will be limited. Secondly, programme for the

poor tends to become programmes of poor quality, as Amartya Sen points out. Thirdly,

universal programme does not mean universal benefits. Swaminathan suggests that if

the target group is large it makes sense to provide benefits universally & then to claw

back benefits from rich through taxes. Khera (2009) also makes some important

arguments. Equity argument or universal entitlement to food is important in the light of

coming right to food act. (But the contradiction is that the govt. is deciding to reduce

the quota from 35kg/month to 25 kg/month.) Secondly, the whole BPL approach is very

divisive in contrast with programmes like NAREGA where all are eligible.But universal PDS may not be feasible & not as necessary as it seems. Khera herself

has counted the cost of universal PDS which will be around rs 1, 15,000 crore which

will increase the fiscal deficit tremendously & there will be other repercussions of it on

the economy. Also, M H Suryanarayana (2008) has proved that already more than four

fifth of rural households & two third urban households are covered with PDS. But a

very small proportion actually makes purchases from rice & wheat. Hence issue is not

of universalisation but of improved functioning of PDS. Observation of TPDS

evaluation committee in this regard is important. The offtake by the poor under TPDS is

substantially higher than under earlier universal PDS. It implies that the poor are pricesensitive & the move towards targeted PDS was a right step.

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C. RECOMMENDATIONS BY COMMITTEES

Now we will look very briefly at the recommendations of the various committeesappointed by the Govt till now & the World Bank report on PDS on the food subsidy

system as a whole.

1. World Bank report (1997) suggests doing away with the procurement operations,

making the grain markets free from restrictions & limiting the role of FCI as a holder of

strategic buffer stocks intervening only in case of national level food shortages.

2. Abhijeet Sen committee on PDS (2000) recommends the uniform CIP for all

consumers & additional subsidy to poor to be given in form of cash. FCI should

withdraw from states like Punjab & Haryana & operate mainly in states where distress

sale occurs.3. Expenditure reforms commission (2001) recommends that FCI should procure all

the rice through a levy system. The national food security buffer stock of 10 millions

should be maintained all the times but the cost of buffer stocks held in excess of this

stock should be treated as producer subsidy.

4. Planning commission working paper (2002) discusses the alternative farm

income schemes suggested by Prof Naik of IIMA. In Direct payment scheme farmers

will be paid difference between actual market price & MSP. In income insurance

scheme average income levels are protected. But planning commission has found out

that there will be no saving in subsidy due to either of the schemes. Also it will be

difficult to implement in rural areas where people do not maintain proper records.

Regarding exports it recommends to renounce the use of export restrictions. Domestic

shortages should be met through imports & not export regulation. (Though the rationale

behind it is not explained in the paper, the recommendation is quite interesting). It also

recommends lifting the ban on futures trading & stocking of all agricultural

commodities.5. Tenth five year plan (2002-2007) clearly states that the objective of the food

procurement policy should be food price stabilization rather than subsiding producers,

because PDS can fulfill the food requirements only partially. FCI should gradually hand

over it role of procurement to private traders.6. Central government subsidy report (2004) recommends that the MSP of wheat

should immediately be rationalized & should adhere to the CACP determined C2 cost.

Purchase operations should not be open ended. A system of price insurance should be

introduced to those who do not benefit from the procurement operations. The

reimbursement to FCI should be based on the normative unit costs & actual quantity

involved instead of reimbursement on the actual basis. In PDS, purchases should be

allowed on weekly basis.

7. The performance evaluation committee on TPDS (2005) has suggested some

important things for the improvement in the mechanism of TPDS, such as doorstepdelivery of grains to retail outlets, weightage to local preferences in food grains,

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observing the seasonal variability in offtake, allowing PDS shops to sale non PDS items

to increase their viability, finding easily observable qualitative criteria for identifying

BPL, preferring co-operatives & SHGs for giving FPS dealership.

8. CACPs report on kharip crops 2008-09 recommends that practice of providing ad

hoc bonus should be stopped, as it does not help farmers to get more income nor ithelps govt to procure more. Also procurement operations should reach unreached areas.

9. Justice Wadhawa committee (2009) has recommended computerization of PDS,

use of biometric cards, use of radio frequency identification service in delivery

mechanism, central monitoring system for tracking carriages to prevent leakage

& use of food stamps.

RESEARCH OBJECTIVES-

After this extensive review of literature, I have decided my research objective as

follows-

1. to look at the food subsidy situation 2000 onwards- analyze the trends in MSP,offtake & stocks & other parameters after 2000 with empirical data

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2. to look at the food subsidy as a whole & analyze some problems not been

considered yet

3. to recommend policy changes required

METHODOLOGY-

I have used empirical data to establish all the arguments. Data from 2000 to 2010 is

essentially used to analyse latest trends in subsidy bill, MSP, offtake, Procurement,

stocks, consumption pattern, PDS offtake, BPL population. The main sources of data

are economic survey 2009-10, budget documents of various years, agricultural statistics

given by ministry of agriculture & NSSO 61st round. The whole analysis is divided into

3 parts as a overall subsidy, producer subsidy & consumer subsidy & problems in each

section are deal with separately, though there are obviously links between various

points in each section. At the end conclusion & policy recommendations are given.

FINDINGS

A) OVERALL FOOD SUBSIDY-

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Food subsidy has become the single largest component of the total

government subsidy bill over the years. Following chart shows the

trend of food subsidy as % of total subsidy bill.

total subsidy in 2004-05 budget estimatesyear total subsidy food subsidy % of total

In rs crore In rs crore

2000-01 28271 12060 42.66

2001-02 32722 17499 53.48

2002-03 45189 24176 53.50

2003-04 46869 25200 53.77

2004-05 46514.43 25800 55.47

2005-06 46874.12 23200 49.49

2006-07 53462.6 24203.92 45.272007-08 69742.06 31545.59 45.23

2008-09 129707.63 43751 33.73

2009-10R 131024.94 56002.01 42.74

2010-11E 116224.04 55578.18 47.82

Source- basic data from various budget documents

The data shows that food subsidy has started declining recently as a %

share of total subsidy after reaching peak of 55% in 2004-05. But in

2010-11 estimates, it has again started increasing & has been given47% share in total subsidy bill. In the light of coming food security act

& pressure for universalisation of PDS, increased estimates of 7.5

crores of BPL population by Suresh Tendulakar committee (as against 6

crore BPL presently) we can expect further increase in food subsidy bill

if there are no special efforts to curb the bill.

Annual growth in food subsidy

Food

subsidy

Annual

growthRs crore) %

1999-2000 9,200.00 5.75

2000-01 12,010.00 30.54

2001-02 17,494.00 45.66

2002-03 24,176.45 38.2

2003-04 25,160.00 4.07

2004-05 25,746.45 2.33

2005-06 23,071.00 -10.39

2006-07 23,827.59 3.282007-08 31,259.68 31.19

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2008-09 43,668.08 39.69

2009-10r 56,002.01 28.24

2010-11E 55,578.18

TGR 19.86909091

Source- basic data from economic survey 2009-10 & budget 2010-11

The above table shows that subsidy tends to jump up in some years &

it is sticky downwards. Hence, in overall effect the subsidy has risen

by targeted growth rate of 19.86%. If we compare the growth rates with

90s growth rate of 19.43%, the subsidy has grown slightly faster in this

decade, when actually we should expect it to shrink or at least grow

slower due to implementation of TPDS since 1997. But the huge

increase in MSPs after 2000 along with keeping the central issue priceconstant after 2002 seem to have contributed to this rise in subsidy bill.

Share of food subsidy in total govt. expenditure (in rs crore)

Actuals of

2008-09

2009-10R 2010-11E

total 883956 1021546.53 1102749.24

food

subsidy

52489.72 56002.01 55578.18

% of

total

5.9380466

9

5.48208117

4

5.039965387

Source- various budget documents

One positive development is that the share of subsidy in total govt

expenditure is low compared to other developing countries & it has

started declining in the recent years.

But while large amount is being spent on food subsidy, there are hardly

any efforts to strengthen the PDS or increase the efficiency of FCI,

which all the committees have recommended. In 2009-10 only 40.40

crore were allocated to evaluation, monitoring & research in foodgrains

management & strengthening of PDS. The figures were revised to only

14.60 crore in budget of 2010-11. & 2010-11 estimates allocate only

29.69 crore (remaining of 40 crore?) towards strengthening of PDS.

Now lets look at the trends in procurement, offtake & stocks after

2000.

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Public Distribution System Procurement, Offtake and Stocks

(Million tonnes)

Year Procurement Off-take Stocks

Rice Wheat Total Rice Wheat Total Rice Wheat Total1 2 3 4 5 6 7 8 9 10

2000-01 18.93 16.36 35.29 10.42 7.79 18.21 23.19 21.5 44.98

2001-02 21.12 20.63 41.75 15.32 15.99 31.3 24.91 26.04 51.02

2002-03 19 19.03 38.03 24.85 24.99 49.84 17.16 15.65 32.81

2003-04 20.78 15.8 36.58 25.04 24.29 49.33 13.07 6.93 20.65

2004-05 24.04 16.8 40.83 23.2 18.27 41.47 13.34 4.07 17.97

2005-06 26.69 14.79 41.48 25.08 17.17 42.25 13.68 2.01 16.62

2006-07 26.3 9.23 35.53 25.06 11.71 36.77 13.17 4.7 17.93

2007-08 26.29 11.13 37.42 25.23 12.2 37.44 13.84 5.8 19.752008-09 32.84 22.69 55.53 24.62 14.88 39.5 21.6 13.43 35.58

2009-10 4.1 24.4 28.5 . . . . . .

Source- economic survey 2009-10

Procurement of wheat had shown a declining trend until 2007-08 which

was reversed only after declaring highest MSP of Rs10000 & Rs10800

for 2008-09 & 2009-10. Even though the wheat production has

increased over the years its growth rate is lower than that of rice &

more steps need to be taken to raise the production & procurementrather than just increasing MSP. Merely increasing MSP & procuring

more, the open market supplies reduce which increases the market

price. It is evident in the ever increasing WPI of wheat. It has increased

from 179 in 2007-08 to 191 in 2008-09. Is it a coincidence that

procurement has doubled & stocks more than doubled in the same years

when production had increased just by 2 million tonnes? It thus clearly

establishes the relation between increasing procurement, stocks &

market prices. Offtake has shown a declining trend for wheat in this

decade even after keeping the issue price constant mainly due todecreasing stocks. Hence, govt had to increase stocks to increase

availability of wheat for PDS. Both these explanations show that govt

has to draw a fine line between keeping enough stocks & not fuelling

market prices through rising stocks.

In case of rice, procurement has shown a consistently rising trend.

During 2005-06 to 2007-08 procurement, stocks & offtake are constant

& high. But in 2008-09 sudden rise in procurement due to high MSP of

8500/ ton has resulted in decreased off take in PDS (24 million ton) &

rise in WPI in open market.(from 216 to 225).

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One point here can be noted, MSP thus seems to affect procurement

rather than production. And the link through stocks, offtake, open

market prices directly comes to net availability of food grains (apart

from population & aggregate demand affecting net availability). In

2008-09 the net availability of rice in gram per capita came down to175 from 194 in 2007-08. Similar exercise for wheat shows that rise in

MSP has affected net availability in case of wheat also. It decreased

from 157gm/capita in 2007-08 to 145gm/capita in 2008-09.

B) PRODUCER SUBSIDY

Now we will look at some problems in producer subsidy. Due to openended procurement operations of FCI wheat & rice farmers are

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benefited. But 69% of wheat procurement is done from 3 states alone

viz., Punjab, Haryana & Uttar Pradesh. In case of rice, 67% of rice is

procured from 3 states Punjab, Uttar Pradesh & Andhra Pradesh.

(Economic survey 2009-10) Hence, practically major portion of the

procurement benefit goes to farmers in these 4 states only. According tofinance ministry report, majority of these farmers are not even poor. If

we look at the no of farmers in these four states, it shows that out of

total 8 crore farmer households in India, only 2 crore or 30% farmers

are living in these four states. Even after making the assumption that all

these farmers produce either wheat or rice only & they all are able to

sell their produce to FCI, maximum 30% of farmers are covered by FCI

open ended procurement operations.

If we look at the costs of production in these states, it can be seen thatcosts are much less than the MSP in these states. Hence these states

reap the maximum benefit of high MSP. The table below makes this

point clear.

Cost Estimates of Principal Crops

Crop/State Year Cost of msp/qtl

Production

C2

(Rs/qtl.)1 2 3 5

PADDY

Andhra Pradesh 2003-04 488.83 550

2004-05 503.73 560

2005-06 540.96 570

Punjab 2003-04 442.56 550

2004-05 448.62 560

2005-06 487.28 570

Uttar Pradesh 2003-04 440.56 550

2004-05 570.7 560

2005-06 559.19 570

WHEAT

Haryana 2003-04 506.72 620

2004-05 522.87 630

2005-06 577.41 640

Punjab 2003-04 504.24 620

2004-05 494.35 630

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2005-06 556.27 640

Uttar Pradesh 2003-04 482.78 620

2004-05 597.81 630

2005-06 654.22 640

Source- ministry of agriculture, agriculture statisticsat a glance 2008 & economic survey 2009-10

Hence, rice farmers in these states are getting profit of Rs 61/quintal

while wheat farmers get benefit of Rs 85/quintal on an average

according to this table. As the MSP is always more than costs for these

states (due to economies of scale in these states, costs remain low) they

continue to reap highest benefit from FCI procurement operations.

One way out from this cycle seems to be introducing cap on maximumprocurement that can be done from one single farmer. If such a cap is

there, large farmers cannot sell their entire procurement & small

farmers will also have a chance to enter into the system. Hence small

farmers will be protected, FCI will have to expand their procurement

operations & the reach to farmers will increase. And even if large

farmers will need to depend on market, they are more capable of

competing in the market than small farmers. It might also increase the

availability of supplies to market & reduce unnecessary piling up of

stocks with FCI. The extra costs incurred by FCI in procuring from

large no of small farmers will be more than compensated if these

benefits are achieved.

Here we come to the question of rising stocks over the buffer stock

norms.

wheat Rice

as on minimum

buffer norms

actual

stocks

as on minimum

buffer norms

Actual

stocks

Apr-04 40 69.31 Apr-04 118 130.69

Jul-04 143 191.52 Oct-04 65 60.92

Apr-05 40 40.66 Apr-05 122 133.41

Jul-05 171 144.54 Oct-05 52 48.49

Apr-06 40 20.09 Apr-06 122 136.75

Jul-06 171 64.12 Oct-06 52 59.7

Apr-07 40 47.03 Apr-07 122 131.72

Jul-07 171 129.26 Oct-07 52 54.89

Apr-08 40 58.03 Apr-08 122 138.35

Jul-08 171 249.12 Oct-08 52 78.63

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Apr-09 40 134.29 Apr-09 122 216.04

Jul-09 171 329.22 Oct-09 52 153.49

Jan-10 82 230.92 Jan-10 118 243.53

Source- basic data from economic survey 2009-10 (figures in lakh tons)

In this table we are going to consider only two periods regarding stocks.

In case of wheat we are going to consider April (least buffer stock

requirement) & July (maximum buffer stock requirement). It shows that

barring the period from July 2005 to July 2007, the actual stocks are

higher than minimum buffer stocks and recently they have again started

piling up. In case of rice, we are going to consider stock positions on

April (maximum requirement) & October (minimum requirement). It

shows that barring only one exception of October 2004, the rice stocks

are also piling up over the years.

Now the question is why the government does not release these excess

stocks in the open market & help reduce the prices? There is certainly

not the question of farmers welfare here. Because once the

procurement of wheat is done in April (both by FCI & private traders)

& Procurement of rice is done in November, in the remaining year the

stocks are either with the FCI or private traders. Hence, there is no

harm in open market sales & pushing down the price for the benefit of

all the consumers. But govt does not seem to do that. High prices in

open market thus seem to be benefiting only private traders with FCI

incurring huge costs of carrying buffer stocks & consumers paying high

prices & govt incurring fiscal deficit.

Balakrishnan & Ramaswami (2000) say that the govt faces a dilemma.

Either it accommodates consumer valuations by keeping issue prices

sufficiently below market prices or it ignores these valuations but at the

cost of carrying larger stocks. Either way scope for reducing the food

subsidy is constrained by quality differentials between the grain

supplied through the PDS and in the open market. The question arises

here that, in the present situation govt. seems to loose on both thefronts. Govt has kept the issue price low & fixed since 2002 & it is still

piling up buffer stocks due to high procurement in some years. Hence it

is increasing economic cost & with low issue price, the food subsidy is

increasing.

Now lets look at some recent initiatives by the govt to improve the

system. They have got positive results. Decentralized procurement

scheme started in 1997, is working well in recent years. Under this

scheme state govt. themselves procure & distribute food grains, moresuitable to local tastes, more farmers are covered & transportation costs

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are indeed reduced. Central govt. still gives the difference between

economic cost & CIP as a subsidy.

Procurement of Rice in DCP states (in lakh tons)

State KMS KMS KMS KMS KMS KMS KMS2002-

03

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

2008-

09

Chhattisgarh 12.9 23.7 28.4 32.7 28.6 27.43 28.48

Karnataka - - 0.2 0.5 0.2 0.18 1.07

Kerala - - 0.3 0.9 1.5 1.7 2.37

Orissa 8.9 13.7 15.9 17.9 19.9 23.38 27.9

Tamil nadu 1.1 2.1 6.5 9.3 10.8 9.68 11.99

Uttar pradesh 13.6 25.5 29.7 31.5 25.5 28.91 36.87

Uttranchal 2.3 3.2 3.2 3.4 1.8 1.47 3.49West bengal 1.3 9.3 9.4 12.8 6.4 15.08 16.67

A&N - Neg. Neg. - - 0 0

Total 40.1 77.5 93.6 109 94.7 107.8

3

128.84

Source- economic survey 2009-10

Procurement of rice in DCP states has shown a growing trend. Non

traditional states in procurement have started procuring more. Mainly

Chhattisgarh, Orissa & Tamil Nadu really seem to benefit fromdecentralized procurement. In case of wheat also similar picture can be

seen. But Uttar Pradesh still seems to dominate the scene. The main

point here is that the positive effects of the scheme have started

reflecting in economic costs of FCI. In case of rice, for the 1st time

distribution costs have fallen by 16.63% & in case of wheat,

distribution costs have fallen by 19.94% in 2009-10. Hence the scheme

is benefiting more farmers plus it is helping to reduce the distribution

costs.

APMC act has been repealed from October 2006. In majority of the

states the reforms in the act have taken place as suggested. (Economic

survey 2009-10) The main feature of it is that farmers can now sell their

produce at any place in the country where there is higher price. Hence,

market forces will now ensure that there is demand-supply equilibrium.

The results of this step will be seen in coming years.

C) COSUMER SUBSIDY

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According to official figures PDS is covering 6.5 crore families, out of

which 2.5 crore are Antyodya card holder (AAY). Each family BPL &

AAY family is entitled to 35 kg/ month of wheat & rice together, at a

differential rate. As we know there are lots of type 1 & type 2 errors in

the whole system of identification of BPL or AAY card holders. Inrural areas, 51% of people owning land below 0.01 hectors(least land)

possessed no BPL card, while in the top 5% people 11% held BPL card

(NSSO 61st round) that shows the skewed distribution of BPL cards. If

the BPL cards are not provided to most needy people they practically

remain outside the net of PDS. Then they can purchase in PDS only at

APL prices, which are comparatively high. That is the reason why APL

offtake is also considerably high and it should not been mistaken as

mistargeting as is generally perceived in the literature. According to my

view, APL offtake is generally by the people who are poor but do notpossess BPL or AAY card (that is not officially poor). The other

misconception is that the BPL offtake from PDS is low. It is indeed

very low compared to allocations but one more thing should also be

kept in mind, that BPL card is actually possessed by people in all types

of classes. NSSO revealed that 11-18% of people in each class possess

BPL card, who practically do not use PDS for food grain purchase.

(They might use it for kerosene or sugar or for taking benefit of other

govt schemes) hence to that extent the figures of offtake are

underestimated.

Now we turn to one widely discussed question of state wise penetration

of PDS. I want to present some observations in this regard.

Consumption of rice in rural areas

states poverty

line

average qty

consumed

no of

households

by

BPL

reporting

consumption

frompds

fromother

from pds/1000

sources

andhra

pradesh

15.8 15.68 30.83 622

aasam 17.6 15.83 44.96 90

bihar 41.4 0.693 35.953 10

chhatisgarh 40.9 14.97 49.197 217

gujrat 16.8 2.902 6.351 315

harayana 14 0 2.854 1

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jharkhand 40.2 2.767 47.124 44

karnataka 25.1 18.204 6.526 585

kerala 15 15.868 21.583 346

madhya

pradesh

38.3 4.716 10.646 179

maharashtra 30.7 6.974 7.53 275

orissa 46.4 8.731 54.328 215

punjab 8.4 0.023 4.336 1

rajasthan 22.1 0 1 0

tamil nadu 22.5 19.808 18.452 789

uttar

pradesh

32.8 4.424 18.998 58

west bengal 24.7 3.411 54.742 128

Source NSSO 61st

round & economic survey

The table shows the fact that in states like Tamil Nadu, Andhra

Pradesh, Karnataka, Kerala, the no of households reporting

consumption from PDS per 1000 is very high. All these states give

additional state subsidy to consumers. In these states purchase of rice

from other sources is comparable or less than purchase from PDS.

(Except AP which is rice surplus state) incidentally poverty line is low

in these states. Also, TPDS evaluation committee has reported low

leakage levels in these states. Hence, PDS seems to work well in thesestates, reducing the incidence of poverty. On the other hand, states like

Bihar, Orissa, Madhya Pradesh, U.P., Jharkhand, Chhattisgarh where

poverty line is as high as 40-46%, consumption from PDS is very low

& people have to depend on other sources for consumption of rice &

very low % share of total rice consumption comes from PDS. Hence,

PDS does not seem to work where it is essential.

Now I will try to build a model to calculate actual benefit to consumers

through food subsidy. MSP (which is floor price in market) is taken as

market price. So difference between Market price & issue price is the

subsidy to the consumer. Per consumer per ton subsidy is coming out to

be Rs 1831 (18.31/kg) for wheat & Rs 758 (7.58/kg) for rice in

2008-09.

The methodology is as follows- the offtake of rice & wheat in 2008-09

is calculated at both at MSP & CIP & the difference between it is

divided by total no of beneficiaries(6.5 crore) offtake figures are for

1000 tons. MSP- CIP figures are absolute figures.

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rice 2008-09

OFFTAKE

BPL AAY APL TOTAL

10,031.384 6,326.078 5,710.298 22,067.760

at CIP 5.67E+10 3.57E+10 4.74E+10 1.39815E+11

at

MSP

8.53E+10 5.38E+10 5.03E+10 1.89289E+11

msp-cip 49473915700

per consumer per ton subsidy 758.802388

wheat 2008-09

OFFTAKE

BPL AAY APL TOTAL

5,624.399 3,198.559 3,710.086 12,533.044

at CIP 2.33E+10 1.33E+10 2.26E+10 59246800300

at

MSP

5.62E+10 3.2E+10 3.71E+10 1.2533E+11

msp-cip

66083639700

per consumer per ton

subsidy

1831.097089

Source- as compiled by author

CONCLUSION

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The literature review & findings of the research suggest that there are

many problems in the food subsidy system as follows-

1. huge & inefficient FCI operations

2. political pressures for high MSP & thus inflationary nature of

MSPs3. piling up of stocks

4. leakages in PDS, state wise different penetration in PDS, high

subsidy for consumers which in reality does not reach them

5. net loss of consumer welfare in the system

6. farmers welfare also concentrated in 4 states & reach only 30%

farmers

Hence, we come to the issue of food security of a nation sacrificed in

this huge, inefficient food management system which requires urgent

attention. There is a hope that coming food security bill will address allthese issues & introduce long awaited reforms & will not just do away

with some fancy schemes catering to their political needs.

POLICY RECOMMENDATIONS-

1. Strengthening of PDS requires urgent attention. More funds &

firm policy framework is required for that.

2. Increasing wheat & rice production is necessary in view of

increasing aggregate demand. But avoiding piling up of stocks is

also necessary to increase market supplies. The tendency to

increase stocks should be curtailed by open market sales at the

right time, consumers should benefit from increased production.

3. Cap on maximum procurement from one farmer should be

considered & policy in that direction needs to be worked out.4. Decentralized procurement system should further be

implemented. States should be given all required assistance (both

financial & logistics) to implement DCP.

5. Special attention in PDS needs to be given to states with high

incidence of poverty & high leakage. Smart cards, biometriccards & coming unique identification cards will prove helpful in

reducing the no of ghost cards & leakages.

6. in the long run, Andhra Pradesh model of food coupons needs to

be tested on a pilot basis & then implemented at all India level.

REFERENCES-

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1. Balakrishnan, Ramaswami, 2000, analyzing public intervention

in the foodgrains markets, in public support for food security,

edited by N. Krishnaji & T.N. Krishnan, Sage Publications, New

Delhi

2. Jha, Shikha &Shrinivasa, P.V., 2000, liberalization of foodgrainmarkets: implications for food security & price stability, in

public support for food security, edited by N. Krishnaji & T.N.

Krishnan, Sage Publications, New Delhi

3. Khera, Reetika, 2009, right to food act: beyond cheap promises,

in Economic & political weekly, vol XLIV no 29, July 18, 2009

4. Kumar Rajiv,Vashisht pankaj, Kalita gunjit, 2010, food inflation:

contingent & structural factors, in Economic & political weekly,

vol XLV no 10, March 6 2010

5. Parikh, Kumar, Darbha, 2003, growth & welfare consequences ofrise in MSP, in Economic & political weekly, vol 38 no 9, 1

March 2003

6. Suryanarayana, M, 2008, Agflation & public distribution system,

in Economic & political weekly, vol 43 no 18, 03 May 2008

7. Swati Kundu,2005, news article Food subsidies: Scarcity

amongst Plenty

8. news article food prices & PDS, business standard, New Delhi,

11 February 2010

9. news article Rot in PDS: over 2 crore ghost cards, Times of

India, 22 dec 2007

10.blog what ails PDS on India current affairs website

11. Sen, Amarya, 2003, speech at a public hearing on hunger & the

right to food, Delhi university, transcript by right to food

campaign

Reports by various committees-

12.Radhakrishna, Subbarao, 1997, Indias public distribution

system national & international perspective, world bank

discussion paper no 380, Washington D.C. 199713. Abhijeet Sen, 2000, high level committee report on PDS,

prepared for ministry of consumer affairs, food & public

distribution

14.report of expenditure reform commission, 2000

15. Virmani arvind, PV Rajiv, 2001,excess food stocks, PDS &

procurement policy, planning commission working paper no

5/2002PC

16.central govt subsidies in India,2004, report by ministry of

finance, department of economic affairs

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17.performance evaluation of targeted public distribution

system(TPDS), 2005, report prepared for ministry of consumer

affairs, food & public distribution system

18.CACP kharip report for 2008-09

19.justice Wadhawa committee report, on computerization of PDSoperations,2010

Official sources

20.statistics at a glance 2008, ministry of agriculture

21.economic survey 2009-10

22.various budget documents

23.tenth five year plan

24.handbook of statistics, RBI

25.NSSO 61st round data

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food subsidy

Documents