The Arguments over the Reform of India’s Public Distribution System

10. 3. 2012

Introduction

India’a Public Distribution System is controversial as an agri-food topic in the fast developing country because it represents the issue of food security which is commonly concerned amongst nations with growing population and also the world-largest scale of government intervention in food production and distribution. 

The Public Distribution System (PDS) was once reformed into the Targeted Public Distribution System (TPDS) in 1997 due to national and international criticism of its economical and financial inefficiency, yet the problem has remained deep-rooted after the reform. Nevertheless, to make matters worse, the targeting scheme has raised a new political fear that mistargeting might cause insecure of food accessibility of the poor. 

Arguments over the economical loss and targeting accuracy of the TPDS seem to split up into two major opinions: to replace the distribution system with less market-distorting alternatives while keeping the governments intervention for food security at a minimum level; and to appreciate the contribution of the TPDS to prevention of hunger and adjust it based on the present scheme to the changing agri-food sector. 

This report first explains the outline of India’s Public Distribution System and the transition from the universal aid to the targeted aid, then introduces two different opinions from the viewpoints of politics and economics and evaluate the validity of their discussion, and finally summarizes the main claims from both sides’ arguments as conclusions. 

Overview of the PDS and TPDS

India’s national food policy consists of three different objectives: to ensure livelihood security especially for small farmers; to ensure that poor households have access to food; and to ensure food security through national self-sufficiency. For these goals, three different policy instruments has been launched, but actually they are closely rerated and interfering each other. In this chapter, primarily, it is explained what roles they played respectively in terms of achieving food security and how the interference caused a number of economic and financial inconveniences and was tried to be removed.

India’s Public Distribution System (PDS) was established primarily as a domestic food aid program for the poor in the country, which is the largest public food distribution in the developing world. In this program, the country’s essential commodities, mainly staple foods such as rice and wheat, are purchased from farmers by the Food Corporation of India (FCI), a government-authorized organization set under the Food Corporation Act 1964, and distributed at prices subsidized by the government of India below the prices at procurement so that the lowest-income family has economic access to those indispensable food products. The distribution is represented by a nation-wide network of Fair Price Shops available for everyone in the country; the PDS is universal in nature. 

In order to secure an adequate amount of calories to be supplied to the fast growing population of the country, preventing from supply fluctuation corresponding to market and production risks, the FCI maintains buffer stocks of food grains corrected from domestic grain producers and if necessary imported from other countries. The FCI’s storage costs,  as well as procurement and distribution costs, are covered by budgetary subsidies although only the expenditure filling the price gap between procurement and sale is devoted to the consumers. 

In addition to the consumer support, the PDS is linked to some of producer support programs, one of which is the Minimum Support Price (MSP): a guaranteed price that is applied to the procurement of food grains by the FCI. The MSP policy contains multiple goals, that is, price stabilization and income support; as to the former goal the guaranteed price level is set in accordance with domestic and global market conditions while buffering sudden price fluctuation; the latter one is achieved by measuring production costs and reflect them onto the minimum price with which farmers can get enough income to make their living. 

However, the PDS, the food security policy combined with price support for domestic producers, turned out to contain a number of economic and financial problems.

First, food grain transfer was carried out under corruption. Leakage of the PDS grains into the private market, i.e., illegal resale somewhere in the process of the distribution system, substantially existed. Actually, approximately 35 to 40 percent of rice and wheat supposed to be distributed through the Fair Price Shops did not reach the consumers (Srinivasan, 2003). 

Second, the FCI’s distributional operation costed too much for benefits for the poor. Srinivasan (2003) also points out that the PDS costs the central government around 4.27 rupees to transfer one rupee to the poor in the process of food subsidization. In this context, the FCI’s operational costs for procurement, storage, and distribution account for more than four times as much as the unit expenditure to make up the price gap between procurement and sale, which is the real value transferred to the consumer, or evaluated in transfer efficiency, it represents only 0.19.

Third, the PDS’s characteristic combination of consumer support and producer support makes its budgetary balance complicated. As India’s farm sector modernized, the increase in production costs has been reflected onto the MSPs, so the government needs to invest more budget into the extending price gap between the MSPs and consumer prices (Landes and Gulati, 2003). Otherwise, higher consumer prices corresponding to the rising support prices would have adverse impacts on the food grain consumption. Also as a result of agricultural modernization, annual yields of food grains has grown dramatically and expanded the scale of the buffer stock; consequently, the FCI’s storage costs for the growing stock put a more burden on the national budget.  

These problems altogether had caused the budgetary cost expanded unlimitedly even though its considerable portion did not contribute to achieving food security amongst the country’s low income population. 

In order to reshape the wasteful program into a more efficient scheme and increase effectiveness of the government expenditure, the PDS was restructured as targeted PDS (TPDS) in 1997. The TPDS attempted to differentiate consumers based on income; consumers at or below the poverty line (BPL) were entitled to access to heavily subsidized grains; on the other hand, consumers above the poverty line (APL) were given access to grains at the price including a portion of the FCI’s operation costs. 

However, the reform has remained untouched as to the problems of leakage, transfer efficiency, and budget expansion although it might had considerably improved budgetary balance by targeting entitled consumers. Moreover, the reform caused the potential risk of the exclusion error, namely, whether the identification by income is really effective, and even if so, what income level is proper to be set in order to distinguish the poor family facing hunger from other households. 

Economic Inefficiency of the TPDS: Need for further reform

Given such structural defects in the TPDS remaining unsolved, a variety of literatures propose recommendation for further reform, some of which contain drastic changes in the present scheme or minimization of the government roles in assuring food security. In this chapter, a typical report which criticizes the TPDS strongly and provides with a series of effective reform is introduced. 

A World Bank report by Radhakrishna and Subbarao (1997) argues consistently for the need to change the structure of the TPDS totally controlled by the central government. Their proposition of reform consists of two columns: decentralization and food coupons. 

For the first reform option, decentralization, the literature insists that the public distribution should be operated at the state government level and that the central government’s role would be restricted into the allocation of the food subsidies as a conditional grant to the states (Radhakrishna and Subbarao, 1997). This proposal comes from the variation of grain yields amongst the states; the FCI has to manage to make ends meet in terms of food grain balance of each state, some of which have surplus, but others suffer from shortage. Under this reform, the central government would be relieved of the complex tasks, and the grain leakage and transfer efficiency could be somewhat improved but not cleared up completely.

Secondly, abolition of the Fair Price Shops and introduction of food coupons. The report suggests that the central government should distribute food coupons to the targeting agency responsible for the identification of poor households and leave retail operation to private dealers which would cash the coupons at any financial institutions (Radhakrishna and Subbarao, 1997). Under the reform, consumer support would be substantially decoupled from the MSPs, so the authorized institution could concentrate on the issue of food security without considering the link to the producer support policy.

Contribution of the TPDS to Food Security

Whereas authentic criticism and proposal for further reform are aimed at the inefficient aspects of the TPDS, the current scheme needs to be analyzed from the viewpoint of what it has done in prevention of hunger, and its advantages should be utilized in a new concept of food security that is adjusted to the changing agri-food sector of India. In this chapter, a reliable statistics which proves the TPDS’s importance amongst economically vulnerable groups in India is provided, and a new economic norm to identify the poor effectively is proposed. 

Ranjan (2007) focused on a calorie-based norm, the prevalence of undernutrition (POU), for the evaluation of the TPDS. The POU is measured as the percentage of households who are unable to meet their daily calorie requirement, e.g., in the case of the Indian poverty line for the rural and urban populations, 2400 and 2100 kilo calories per capita per day, respectively (Ranjan, 2007). The POU criterion tends to marks higher than the expenditure-based poverty estimated used as the official poverty line because the former measures hunger while the latter measures inability to buy both food and non-food necessary for survival. As a norm to estimate the risk of food insecurity, the POU seems more appropriate than the conventional expenditure-based criterion even though the monetary scheme is still useful to measure poverty comprehensively. 

The literature also suggests that a few undernourished APL households has been discovered by using the POU instead of the expenditure-based criterion. Thereby, the study shows skeptical attitude towards simply restricting the TPDS to BPL households and calls for a better targeting strategy. This consequence emphasizes the fatal defect of the current poverty line which has possibly overlooked the exclusion error amongst the APL households; however, a certain extent of accidental exclusion might be inevitable, considering costs for perfect identification of the poor. 

Based on the POU, Ranajn (2007) found that the present policy plays an important role in securing adequate amount of calorie intake amongst female-headed households in nutritionally poor states. According to the analysis, by comparing the rural calorie based POU rates in the presence and absence of the TPDS, the actual data and hypothetically calculated data respectively, statistically significant differences in the POU were observed in the calorie-poor southern states. It can be interpreted from the study that poor households in the some hungry states heavily depend on the TPDS as an anti-poverty program, so, if any reform required, the policy prescription needs to be organized properly to the changing economic circumstances of the individual states.

Conclusions

The former study, Radhakrishna and Subbarao (1997), consistently claims that a series of inefficiency of the TPDS comes from its over-grown structure. Therefore, it proposes to reshape its operational scheme of the central government into a simple function by decentralization of the FCI’s operation. In addition, its budgetary system also needs to be  reformed into an independent form from the price support policy by applying food coupons instead of the ration. 

On the other hand, Ranjan (2007), introduces a new norm, the POU: an estimator of hunger with daily calorie intake, as a better estimator of food insecurity.  As a result, the study discovered some undernourished families among the households above the conventional poverty line. Moreover, the TPDS turned out to be indispensable for some of hungry states as an anti-poverty program, so it is important to consider the impacts of reforming the national food policy at the state level as well as the nation level. 

References

Landes, R. and Gulati, A. Policy Reform and Farm Sector Adjustment in India. Workshop on Agricultural Policy Reform and Adjustment Imperial College, Wye October 23-25, 2003.

Radhakrishna, R. and Subbarao, K. India’s Public Distribution System — A National and International Perspective. World Bank Discussion Paper No.380, November 1997. 

Ranjan, R. Changes in Food Consumption and the Implications for Food Security and Undernourishment: India in the 1990s. Development and Change 38(2): 321–343, 2007.

Srinivasan, P.V. Food Security and Agriculture. Paper prepared for the Roles of Agriculture International Conference, 20-22 October, 2003.