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The terms of the debate

Print edition : Oct 18, 1997



There are two views in the United Front on reforming the PDS. The first, represented by the Finance Ministry, wants reform that will cut back subsidies. The second, represented by the Left, wants reform that will extend and deepen the welfare benefits of the PDS among the poor.


CONTROVERSIES within the United Front over the form and substance of a reformed public distribution system (PDS) point to fundamental differences of perspective. On the one side are those influenced by the Finance Ministry's argument that huge tax concessions have to be given to the upper income groups and the corporate sector to induce them to save and invest more in India's increasingly market-driven economy. Such concessions, the argument goes, have to be matched by tight controls on expenditures such as subsidies on food, in order to meet self-imposed fiscal deficit targets. On the other side are sections led by the Left parties, which have been arguing for an increase in the spread and coverage of the PDS in order to pursue the objective of food security for all and meet concerns about the worsening condition of India's poor.

Both sections were in favour of a reform of the PDS, which developed in the context of India's agrarian strategy of the mid-1960s. Under that strategy, uneven agricultural growth, engendered by historically given inter-regional variations on the one hand and the nature of the Green Revolution strategy itself on the other, resulted in yield increases and food surpluses being concentrated in a few States. The challenge before the Government was not merely that of moving food from surplus to deficit regions but of ensuring the effective demand needed to sustain rising agricultural production. This was met partly with a procurement system, in which the Government was willing to acquire any volume of foodgrain at a price that provided a reasonable margin above costs, and partly by a distribution system in which it sold a part of the acquired stock at lower, affordable prices. As a result, the Government had to provide a subsidy to cover the difference between the cost of acquiring foodgrain stocks and transporting them to deficit States and the lower price at which it offered foodgrain through the PDS to ensure adequate offtake.

Thus, the subsidy on the Government's budget was explained in part by the nature of the agricultural growth strategy and the cost of stockholding it involved. A report of the Comptroller and Auditor-General (CAG) submitted in 1995 estimated that the "subsidy" paid to cover the difference between the "economic cost" and the "sales realisation" of the Food Corporation of India (FCI) stood at Rs.3,175 crores in 1994-95. The economic cost included the following: Rs.1,027.43 crores in transportation cost, Rs.1245.43 crores in buffer-stocking cost and Rs.159 crores in cost on account of grain shortages or losses due to theft, fire, misappropriation and sub-standard purchases. The structure of costs suggested that lower PDS issue prices which allowed foodstocks to be quickly disposed of would, by reducing buffer-stocking costs, partly neutralise the higher subsidy involved.

This provided the basis for the argument of the Left that excess foodstocks offer an opportunity to increase the spread of the PDS so as to reach a minimum quantity of reasonably priced food to a majority of the population, as well as to launch a massive food-for-work programme that builds productive and social infrastructure, especially in rural India. This would reduce buffer-stocking levels and costs, increase employment and effective demand as well as help generate larger food surpluses in subsequent years.

However, those interested in reducing the food subsidy bill have pushed for a reduction in the quantum of foodgrain stocks held by the FCI through sale of much of the procured volumes at prices that cover the economic cost. This was to be achieved in two ways. First, "excess" stocks accumulated in periods when open market prices are depressed and the quantum of "procurement" consequently high were to be disposed of in the open market through private trade and through special allocations to exporters; secondly, the PDS was to be 'targeted' only at the "needy", thereby reducing allocations to a system that distributed government stocks at prices below the economic cost.

The specific form that the revised PDS took in the Common Minimum Programme (CMP) of the United Front reflected a compromise between those focussed on capping subsidies and those emphasising food security concerns. The final version of the scheme had two components to it. One involved a hike in the issue price of wheat by 12 per cent and of fine and superfine rice varieties by 5.3 and 15.7 per cent respectively.

The other involved providing an estimated 32.03 crore people below the poverty line (or 35.97 per cent of the population) access to wheat at Rs.2.50 a kg and common and fine varieties of rice at Rs.3.50 a kg, subject to a maximum of 10 kg of foodgrain per family per month. The prices involved a discount relative to normal issue prices of 54 per cent in the case of wheat and 46 per cent in the case of rice.

As was to be expected, an influential section of the media criticised even this move on the grounds that it substantially increased the subsidy burden in the budget to an estimated Rs.8,283 crores, from a projected Rs.5774 crores for 1996-97, aggravating the fiscal difficulties of the Central Government. Using this climate of opinion, the Government fashioned a scheme which while superficially corresponding with the commitment in the CMP, focussed attention on reining in food subsidy. The "Guidelines for the Targeted Public Distribution System", issued by the Ministry for Food and Civil Supplies in February, states that the new system was based on the following principles:

To provide for the issue, at specially subsidised prices, of 10 kg of foodgrain per family per month to all families with incomes below the poverty line. The foodgrain required for this purpose provided the minimum allocation which needed to be made to a State.

To allocate to each State an amount of foodgrain at least equal to its average allocation of food (termed "lifting" in thedocument) during the last 10 years so as to provide those above the poverty line who had been using the PDS in the past some access to the PDS at "normal" issue prices.

To ensure that if a State exceeds the stipulated supply of foodgrain through the PDS based on the above criteria, it would make sure that "the additional required quantum of foodgrain and funds are made available from its own resources."

THERE are some obvious problems with the use of the previous 10 years' average offtake of foodgrain as the benchmark for future delivery. First, it implicitly reduces or restricts the total PDS supplies and therefore the extent of PDS coverage when compared to immediately preceding years, rather than greatly expanding them as the Left parties had originally envisaged. Official calculations and figures show that while the 10-year average "lifting" for all-India was 15.31 million tonnes a year and the Targeted PDS provision 16.49 million tonnes, the total actual offtake in 1996-97 stood at 19.4 million tonnes.

Secondly, it ignores current differences in the coverage of the public distribution system across States.

This latter aspect is problematic not only because it is negative from the point of view of distributive justice across States but also because the implication of offering a given quantum of foodgrain at a specially subsidised price while maintaining allocations to the PDS at historical levels would vary depending on the extent of development of the PDS. In a State where coverage is wide, offtake by the poor would earlier have been higher than the 10 kg being now offered at the specially subsidised price and the offtake by the non-poor would currently be higher than their average offtake over the past 10 years. Hence, keeping overall allocation to the PDS at historical levels would result in a decline in the availability of PDS foodgrain for both the poor at the special prices and the "non-poor" at normal prices.

THERE are of course many States where the public distribution is poorly developed and where overall offtake, particularly offtake by the poor, has been extremely small in the past. In these States the average annual offtake in the previous 10 years has been well below the level required to ensure that every household below the poverty line gets at least 10 kg a month or 0.12 tonnes per annum. Bihar, for example, has recorded an average annual lifting of 527.32 thousand tonnes, whereas its requirement for providing 0.12 tonnes to its "below poverty line", or BPL, households is 1,030.83 thousand tonnes. The figures in the case of Uttar Pradesh are 661.41 and 1,145.77 thousand tonnes respectively. These States therefore become eligible for an allocation much higher than the historical "lifting" rate, essentially because their PDS is not as well-developed as the PDS in some southern and northeastern States.

Implementing the Targeted PDS scheme in the context of such uneven development of the PDS has two consequences. First, States with a better developed distribution system find that allocations to them are inadequate to meet the demand, partly because the average for the last 10 years does not reflect the actual current demand on the PDS and partly because of the increased demand on the part of the really poor who now are eligible to buy part of their requirements (that is, 10 kg) at a specially subsidised price.

Secondly, States in which the PDS is poorly developed and which are eligible for larger allocations under the new Below Poverty Line household scheme would not lift these additional allocations since they would not be able to reach it to the poor, or for that matter to large sections of the non-poor, given the relatively poor institutional spread of the existing PDS.

In the event, the Finance Ministry, while going along with the special subsidy, may find that the subsidy bill is kept under control because of a fall in the overall quantum of lifting of central surpluses. Indeed, this may even be the intention, given the peculiar formulation of the scheme.

THIS is not the only negative consequence of a strict interpretation of the targeted scheme. If successfully implemented, the scheme would have ensured that families, whether poor or non-poor, who were earlier eligible to purchase around 25 kg of foodgrain a month from the PDS would have to turn elsewhere to meet their full or additional needs. As the guidelines document made it clear, this additional requirement would have to be met by the market which the PDS is expected only to supplement. The point to note is that this would be true not only of the non-poor but the poor as well, who are unlikely to get more than their monthly "special subsidy allocation" of 10 kg from the PDS. To the extent that increased dependence on the market in deficit States pushes up prices, these purchases by the poor would be at prices higher than they paid in the past, when they could perhaps get their full requirement at subsidised prices from the fair price shops. In the event, in the wake of the TPDS scheme, the average price they pay for their foodgrain requirement met in part by the PDS and in part by the market could in fact be higher than what they were paying in the past.

Fortunately, the strain that the new scheme places on those managing the PDS at the State level became clear within days of the launch of the TPDS scheme on June 1. State governments which went along with the scheme thinking that it would be formulated in a manner which would be an improvement on the earlier PDS immediately voiced their opposition to the way it was being implemented and demanded additional allocations for the PDS. The opposition from these and other States to the fall in allocation has necessitated an implicit abandonment of the scheme pending its "recasting".

It is in the course of the discussion on this recasting that the Left has been arguing for a hike in the allocation to provide for at least 20 kg per houshold below the poverty line at specially subsidised prices. Acceding to that demand would imply for the Finance Ministry not only a loss in terms of the failure of its elaborate scheme of paying lip-service to the poor while ensuring a major cut in subsidy, but also a substantial increase in the food subsidy that would have to be financed with higher taxes on the rich. While this may make sense from the point of view of distributive justice, it goes against the dubious strategy of pampering the rich and inducing them to invest sums adequate to raise rates of growth substantially. But so long as such differences in perspective exist within the U.F., the current stalemate is unlikely to be resolved.



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