PDS in peril

Print edition : December 02, 2011

In Cuddalore, Tamil Nadu: The portability proposed under the UID project is largely incompatible with static fair price shops. - C.VENKATACHALAPATHY

The promotion of the PDS as an Aadhaar application would fundamentally alter its form and character.

NO scheme of the Indian government would be transformed more fundamentally by Aadhaar than the public distribution system (PDS). The nature of this transformation appears to be taking the form of a virtual dismantling of the PDS; even if a skeletal fair price shop (FPS, or ration shop) system continues to exist, it is likely to be squeezed to death sooner than later.

Universal PDS was established in India in 1965 as part of a national food policy. An important feature of this policy was the integration of food procurement and distribution. The government procured foodgrains from farmers at a procurement price and distributed the grain across the country through the PDS. The policy was formed on the basis of experience that showed the market to be a poor substitute for state action in moving foodgrains.

In the period after 1965, the outcomes of state intervention in the food economy were mixed. On the one hand, the PDS acted as a check against exacerbation of regional disparities in foodgrain consumption (see Food insecurities, Frontline, July 17, 2010). On the other hand, the PDS was not serving a large section of India's population and its performance across States, judged by the off-take of grain, varied considerably. Thus, by the 1990s, the challenge was how to extend the PDS to more regions and sections. However, the official policy after 1991 took the PDS on a different trajectory.

In 1997, the government abolished universal PDS and replaced it with targeted PDS (TPDS). The population was classified into above poverty line (APL) and below poverty line (BPL) households. Only BPL households were eligible for subsidised grain. The experience after 1997 shows that TPDS led to the exclusion of a massive section of the poor from the PDS. There were major mismatches between households classified as APL and their actual standard of living.

Inefficiency' is policy-induced

Thus, the poor efficiency of the PDS under the neoliberal regime was a policy-induced phenomenon. The critical problem with the PDS today is that it remains narrowly targeted. Needless to say, Aadhaar cannot address this problem; it is a non sequitur.

The draft National Food Security Bill, released in September 2011, does not seek a return to a universal PDS. Instead, it disingenuously renames BPL households as Priority households and splits APL households into two: (a) General households; and (b) the rest, who are totally excluded from the PDS. Five features of the Bill are notable.

First, the share of Priority and General households will continue to be based on the Tendulkar poverty lines, which were at the centre of the recent controversy over poverty lines. Second, General households will be entitled to a smaller quantity of foodgrains than the Priority households, at higher prices. Third, the strength of the entitlement right for General households will be weaker than for Priority households. Fourth, no more than 75 per cent of the rural households, and 50 per cent of the urban households can come under the ambit of the PDS. Fifth, schemes such as cash transfers and food coupons are allowed to replace foodgrain entitlements, if the government so wishes.

Clearly, the first four features keep the proposed system substantially close to the existing TPDS. The fifth feature is intended to undermine the PDS and replace it with food coupons or cash transfers.

Scholarly opinion in India today is significantly in favour of a return to universal PDS. However, a powerful lobby of the ruling elite and a section of economists are resisting it. Aadhaar is a tool in the hands of this lobby to ensure that universal PDS is never reinstated.

The official thinking on PDS reforms is already available in Economic Survey 2009-10. The official thinking on the use of Aadhaar in the PDS is available in a working paper of the Unique Identification Authority of India (UIDAI). It claims that there are massive leakages in the PDS caused by the widespread circulation of bogus ration cards. It claims that Aadhaar can eliminate bogus ration cards.

Indeed, such an inversion of the problems in the PDS an exaggerated focus on leakages and fake ration cards is a necessary self-justification for the government and the UIDAI. The government wants to establish that the existing PDS is inefficient and needs phasing out. The UIDAI wants to establish that fake ration cards are the biggest challenge to the PDS and that any PDS reform has to leverage Aadhaar.

Indeed, fake ration cards exist in most States and eliminating them is a major challenge. However, two important points need to be noted. First, the proportion of fake ration cards across the States is small, ranging from 2 to 13 per cent.

Secondly, many States have already identified fake ration cards and eliminated them even before the introduction of Aadhaar. The annual report for 2010-11 of the Department of Food and Civil Supplies notes that 208.57 lakh fake ration cards were eliminated across 26 States, as of December 2010. In many of these States, the issue of new ration cards and PDS operations are at advanced levels of computerisation. Some States have successfully introduced hologram-enabled technologies to eliminate duplicate ration cards. Further, the frailties of biometrics in proving identity beyond doubt raises major questions about such claims regarding Aadhaar.

The exaggerated focus on fake ration cards can be challenged from another angle. In the operation of the PDS, there are two major sources of leakage. First, there are leakages after foodgrains leave the godown and before they reach the fair price shop. Secondly, there are leakages between the FPS and the customers. Any observer of the PDS knows that the major proportion of leakages belong to the former category, and the latter accounts for only a small proportion.

PDS reforms and Aadhaar

Many States have already begun reforming their PDS networks using GPS-monitored and coloured trucks that carry grains from godowns to fair price shops. SMS alerts are sent to village residents over stock movements at their FPS, thus empowering them with information. In all these efforts, the priority focus was on leakages before the grain reached the fair price shop. Aadhaar has no role here. Yet, the government persists with the use of Aadhaar as a necessary premise for PDS reform. This is where the plan to dismantle the PDS using Aadhaar unfurls.

According to the UIDAI working paper, the government needs to liberalise the allocation of fair price shops to reduce PDS leakages and beneficiaries should be given freedom to choose the best fair price shop. The paper argues that two aspects of the Aadhaar-enabled system linking grain allocation to authenticated off-take, and choice of FPS for the beneficiary would enable a significant shift from the present approach, where foodgrain allocations within the PDS are static, supply-led and divorced from beneficiary demand and choice. The Aadhaar-enabled approach would instead help create a demand-led, dynamic system.

According to the paper, systemic efficiency can be improved by substituting fair price shops with food stamps or direct cash transfers. An identical view is expressed in the Report of the Task Force on an IT Strategy for PDS and an Implementable Solution for the Direct Transfer of Subsidy for Food and Kerosene (chaired, again, by Nandan Nilekani), submitted in October 2011. The arguments in Economic Survey 2009-10 and the UIDAI paper are repeated here; they include providing beneficiaries maximum choice and introducing token-agnostic technology solutions like direct cash transfers. .

The UIDAI paper further claims that Aadhaar can enable PDS to be portable. Thus, a migrant worker can buy his/her PDS quota from anywhere in India. The claim, of course, has a deceptive appeal. One would have to dig deeper to grasp the real intent.

Portable PDS?

At present, each fair price shop has a specified number of households registered with it and stores grain only for them. The shop owner would not know how many migrant workers might approach him and demand grain, and for what periods. Hence, for lack of stock, he would turn the migrants away. In other words, the proposed portability of the PDS is largely incompatible with static fair price shops. Even if these outlets were fully computerised, the nature of circular and seasonal migration would ensure that the system could not respond optimally.

If full portability of the PDS is insisted upon and this is what proponents of Aadhaar do there is only one way out: do away with the fair price shops, accredit grocery shops to sell grain against food stamps, and allow these shops to compete with one another. According to the government's plan, while food stamps are the medium-term solution, the long-term solution is a shift to direct cash transfers. Food stamps and cash transfers can be provided through Aadhaar numbers. Clearly, a shift to food stamps and cash transfers would mean an end to the fair price shop model.

In fact, if we consider a limited form of PDS portability as adequate, it could easily be implemented within the present system, using hologram-enabled cards or smart cards. However, nothing short of leveraging Aadhaar appears palatable to its proponents. Typically, food stamps are worth an amount that households can exchange to buy food from any seller. However, there are very few countries that have found success with food stamp schemes. A number of generic problems have plagued food stamp schemes across most countries (see Madhura Swaminathan, Targeted Food Stamps, The Hindu, August 3, 2004).

First, food stamps are rarely indexed for inflation. With a rise in inflation, the real value of the stamps falls. According to Kaushik Basu, Adviser to the Finance Minister, this can be addressed by adjusting the value of stamps annually, on the basis of an expected inflation rate for the next year. Basu should surely know that this would be no piece of cake.

Secondly, possession of food stamps does not always translate into physical access to food. In many countries, shops either did not stock the commodities linked to stamps or simply refused to sell commodities against stamps. Thirdly, food stamps are difficult to administer. There are always delays in issuing food stamps and reimbursing the shops. Stamps are also faked on a large scale.

For these reasons, replacing the PDS with food stamps not only would be impetuous, but also would inflict new burdens on the poor.

Direct cash transfers?

According to Basu, a system with directed cash transfers would, arguably, be better thanthe direct delivery of foodgrains to the poor throughration shops. In direct cash transfers, a specific amount of money is transferred to a household to meet a specific need. The argument is that giving cash can reduce transaction costs of the government and lead to faster delivery and expanded beneficiary choice.

Can direct cash transfers be an effective substitute to the PDS? Without judging the utility of direct cash transfers as a complementary effort to transfer resources to the poor, there are strong reasons why it cannot be an effective substitute to the PDS.

First, the emergence of the PDS in India was part of a national food policy that tried to address the interests of consumers and producers. It was an integrated system of food procurement and distribution. Any dismantling of the PDS would also mean an end to procurement, which forms an important institutional support to India's peasantry. Secondly, money is fungible. For any household, a cash transfer would by no means ensure an equivalent quantity of food purchase or calorie intake.

Thirdly, by definition, cash transfers are less self-selecting than the PDS. Self-selection means that households that do not want a particular provision voluntarily withdraw from accessing it. A classic example is the pre-1997 universal PDS in Kerala, where studies showed a tendency among richer households to withdraw from PDS purchases. However, when transfers are made in cash, the incentive to self-select declines significantly.

Finally, just as for food stamps, a rise in inflation would lead to a fall in the real value of cash transfers.

In sum, the promotion of the PDS as an Aadhaar application would fundamentally alter its form and character. Montek Singh Ahluwalia stated recently: We have to rework the system. If we simply introduce UID without re-engineering the system, it wouldn't work. What is clear is that this re-engineering would be nothing short of a virtual dismantling of the PDS.

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