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India Today, February 15, 1999
Feb 15, 1999

KAUTILYA
New Subsidy Raj

The PDS has been reformed but problems remain.

By Jairam Ramesh

If Kautilya were Atal Bihari Vajpayee's spin doctor, he would have encouraged the prime minister to say something like this: We are a responsible Government and so we cut subsidies but we are also a responsive Government and so we rolled back the cuts. No tears need be shed for sugar and LPG consumers, who have been enjoying huge subsidies that are simply not justifiable. But what about subsidies on the staples, rice and wheat?

There is a popular belief in this country that the public-distribution system (PDS) -- the network of 4.3 lakh fair price ration shops that distribute essentials like wheat, rice, sugar, edible oil and kerosene -- works in the interest of the poor. The PDS started off in the mid-'60s, but not as an instrument of supplying cheap food to the poor. It began as a buffer-stocking operation and was meant to stabilise prices for vocal urban consumers. Over time, governments began to see it as a poverty-alleviation programme.

If poverty were to be the criteria, Uttar Pradesh's share in the PDS subsidy should have been 18 per cent, whereas it has been around 8 per cent. Similarly Bihar's share should have been 16 per cent, while it has actually been 5 per cent. The major beneficiaries of the PDS are:

Kerala which has drawn 10 per cent of the subsidy while its "poverty" share should be 3 per cent.
Andhra Pradesh which has drawn 13 per cent of the subsidy as against a "poverty" share of 5 per cent.
Gujarat and Karnataka are also major gainers. Ironically, Gujarat is among the country's largest producers of edible oil and also among the largest users of edible oil from the PDS.

There have been any number of studies to show that the PDS, which is based on the principle of universal coverage, does not reach the truly poor, except perhaps in Andhra Pradesh, Kerala and Tamil Nadu. These states also run subsidised food schemes and nutrition programmes of their own and manage the PDS more effectively.

Some economists have argued that open market prices would have been lower but for the PDS. R. Radhakrishna and his colleagues at the Centre for Economic and Social Studies (CESS), Hyderabad, have shown that the impact of the PDS on nutritional status and on poverty has been minimal. They have found that the PDS is not cost-effective since the Centre spends over Rs 4 to transfer Re 1 of income to the poor.

Wage-programmes like the Jawahar Rozgar Yojana and Maharashtra's Employment Guarantee Scheme as well as the Integrated Child Development Services are better instruments of poverty alleviation. Nearly a third of the total food subsidy, according to the CESS study, is the carrying cost of buffer stocks -- which, as agro-economist G.S. Bhalla has calculated, is 8-10 million tonnes over optimal levels. Offtake of sugar and kerosene from the PDS has been high. But for rice and wheat, the gap between allocation and offtake has fluctuated. In 1994-95 and 1995-96, offtake of wheat was just 55 per cent of the allocation.

In 1992 P.V. Narasimha Rao launched a Revamped PDS or RPDS. It first attempted some changes by providing for special subsidies and increased allocations for the poorest 1,750 blocks of the country. But the RPDS was not successful. Total offtake from the PDS declined between 1992-93 and 1995-96, even though inflation in years like 1993-94 was high.

P. Chidambaram's July 1996 budget proposed another major restructuring of the PDS. After that it was a fierce battle between those in the United Front who wanted increased open-ended subsidies and those like the then finance minister who wanted the subsidies to bear some relation to poverty. He got a calculation done that was never made public since it was a political hot potato.

This calculation showed that in 1996-97 Uttar Pradesh's poverty-based share of the food subsidy should have been Rs 1,031 crore, while it would have been Rs 375 crore if distribution was based on the prevalent criteria of the previous year's offtake. Corresponding figures for Bihar were Rs 923 crore and Rs 143 crore, for Madhya Pradesh Rs 575 crore and Rs 220 crore. But there would have been losers. Tamil Nadu's share would have fallen from Rs 625 crore to Rs 495 crore, Kerala's from Rs 623 crore to Rs 166 crore and Andhra Pradesh's from Rs 622 crore to Rs 392 crore.

After seven months of negotiations and based on state-wise Planning Commission estimates the new subsidy package was unveiled in February 1997. It was based on the BPL (below poverty line) and APL (above poverty line) concepts. BPL helped Uttar Pradesh, Bihar and Madhya Pradesh. APL protected the southern states.

Each BPL family was to get 10 kg of foodgrains per month at subsidised prices. The subsidy for BPL families was to be 50 per cent and for APL families 10 per cent. Today it is 66 per cent for BPL and 20 per cent for APL families. Subsidy here refers to the difference between the economic cost of supply and the PDS issue price. The Targeted PDS -- or TPDS -- is a major step forward. This, even though it remains centralised and has been criticised for the uniform 10 kg-a-family norm and for the fact that the retail outlet sells the same commodity at two different prices, an in-built incentive for "leakages".

The TPDS is also silent on how to improve the unwieldy Food Corporation of India, the procurement and distribution agency. It also depends very critically on the infrastructure of the state government to identify the poor and distribute the foodgrains. Since one year of the TPDS has passed, it is time for a concurrent evaluation system to be instituted.

The author is secretary of the AICC's Economic Affairs Department.
The views expressed here are his own.

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