No panacea

The Report on Food Subsidy of the Expenditure Reforms Commission fails to come to grips with some crucial issues in India's food policy.

THE Report on Food Subsidy of the Expenditure Reforms Commission, set up by Finance Minister Yashwant Sinha and chaired by K. P. Geethakrishnan, has been submitted at what must be understood as a critical juncture in food policy. The Report was presented to the Government on July 10 and has, commendably, been put on the Internet (https://expenditurereforms.nic.in/vsexpenditurereforms/foodsubsidy.htm).

Although the Report makes some useful suggestions, it broadly endorses present policy and leaves some important questions unanswered.

The situation in India today with respect to food stocks is unprecedented, and policies of public procurement, storage and distribution of foodgrain have been subjects of urgent discussion over the last few months. The Food Corporation of India (FCI) has over 40 million tonnes of grain in its stocks. At the same time, offtake from the public distribution system (PDS) is slackening, and large amounts of grain are rotting and going waste. Government policy in respect of the PDS has raised the prices of fo odgrain and lowered the entitlements of poor households and has also excluded, on a very large scale, families from the category of BPL (below poverty line) from the reach of the PDS. Together, these policies have weakened the PDS and led to a decline in offtake. The rise in stocks means a rise in costs of storage - thus, the objective of reducing the food subsidy bill is not being achieved either. And all the while, of course, hundreds of millions of Indians remain hungry and malnourished. It does not take much wisdom to argue that present policies are inappropriate, and that major corrections in policy are needed.

THE Report begins by noting that food policies pursued since Independence have been successful and have led to a steady growth in production and procurement. "The reach of the PDS" has also, according to the Report, "improved". The offtake of foodgrain ( that is, rice and wheat) from the PDS is stated to be 25 million tonnes in 1997 and 19 million tonnes in 1998 (Annexure II). These numbers as well as those reported for 1999 are higher than those reported in other official documents and statements. Accor ding to the Economic Survey, for instance, the offtake of rice and wheat together from the PDS was 17.5 and 18.4 million tonnes in 1997 and 1998. According to data presented in the Lok Sabha, only 16.7 million tonnes of rice and wheat were "lifted" in 19 97-98 (S. Swaminathan, The Hindu Business Line, August 19, 2000), and offtake was 18.6 million tonnes in 1998-99 (C.P. Chandrasekhar and Jayati Ghosh, The Hindu Business Line, August 8, 2000). In short, contrary to the observed decline in o fftake from the PDS in the 1990s, and particularly in the last few years (as a response to the introduction of the Targeted PDS), the figures in the Report appear to suggest a rise in offtake from the PDS. The government should clarify the discrepancies in the different official sources of data on this issue.

The Report states that a large part of the budgetary food subsidy is actually a producer subsidy (that is, on account of the policy of price support for major agricultural crops) and not a consumer subsidy. This is an important point, one that has been w ritten about but was till now ignored in government announcements on the food subsidy.

On the consumer side, the two major policy changes of recent years are the targeting of the PDS to households below the official poverty line and indexing of the sale price of foodgrain in the PDS to the economic cost of the FCI. Economic cost here means the total cost incurred by the FCI in the purchase and distribution of grain.

On the issue of targeting, the Report endorses the policy of narrow income targeting initiated in 1997 and argues that subsidies must be targeted to "the poorest of the poor even if large sections of the population are to be considered to be poor." In ot her words, it admits that a large section of the Indian population is poor and malnourished but argues that only the poorest among them must be the target. This approach completely ignores the costs of excluding a large number of vulnerable households fr om the BPL category. For it is now well established in the literature that narrow targeting leads to a rise in the possibility of excluding genuinely poor or deserving households from the targeted programme. This exclusion comes at a high cost - the cost of malnutrition both to the individual (in terms of poor health), to society (in terms of low productivity) and to future generations. Malnourished women of today, for example, are more likely to deliver low birth-weight babies. The Report, in fact, arg ues that covering a larger section of the population is "definitely not a sustainable proposition even in the short term". This is a very surprising statement, given that the government has around 45 million tonnes of foodgrain in its stocks. Distributio n of available foodgrain among consumers through the PDS as well as through food-for-work type programmes would help not only in the alleviation of poverty and hunger but also reduce stocks, the costs of public storage and the budgetary food subsidy.

The most important suggestion for reducing costs of maintaining buffer stocks is, of course, to reduce the size of the buffer stock. There is no denying that present stock levels are excessive and that they raise the costs of storage and hence the food s ubsidy bill. As the FCI does not have adequate storage capacity, stocks are rotting and grain is turning inedible. The question is not merely of the "norm" for buffer stocks but of understanding why stocks are so high today. Stocks have risen to this lev el because the government procured grain on the one hand while withdrawing its commitment to getting food to the people on the other.

An important technical suggestion in the Report is for the FCI to separate buffer stocks from stocks used for distribution in estimating the economic cost. In other words, the price charged to PDS consumers should, it is recommended, only be based on the economic costs of the stocks used for distribution. It is on account of this change that the economic cost for rice and wheat distributed in the PDS turns out to be slightly lower in the Report than earlier estimated, and has led to a small reduction in the PDS prices of rice and wheat for BPL households. (Note that the price for BPL consumers is set at one-half the economic cost.)

In the same paragraph, however, the Report suggests that excess stocks with the FCI be sold, for export or for domestic consumption, at prices below economic costs. In other words, while poor but so-called "APL" (above poverty line) consumers have to pay the economic cost, some traders (particularly those in the surplus States of north India) may be able to (and indeed have in the recent past) buy grain from the FCI at a price lower than the economic cost. There is no justification for large private tra ders in surplus regions of the country to get grain cheaper than consumers do throughout the country. The Report has thus endorsed the pro-trader bias of food policy as implemented by the Bharatiya Janata Party-led Government.

ANOTHER suggestion is to promote private sector investment in storage and trade. The Report suggests that in order to encourage the private sector, an assurance be given that any stated policy will be maintained for 15 years. If there is a sudden decline in availability because, for example, of crop failure, the Report recommends a reliance on imports rather than changing policy towards domestic traders. Such a policy clearly privileges traders over domestic consumers.

The Report suggests that private procurement or procurement by State governments (also a recommendation of the CACP, the Commission on Agricultural Costs and Prices) could reduce the costs of procurement of the FCI. The main assumption here is that the S tate will reduce the taxes and levies it charges to the FCI if the State itself has to make the purchases of grain. These "statutory charges" or State-level taxes are indeed an important component of the costs of the FCI, and State governments in the sur plus States are raising resources through FCI operations. While greater procurement by State governments is clearly desirable, the solution to the problem of statutory charges is rationalisation of such taxes throughout the country rather than greater pr ocurement by private traders. While some traders may manage to avoid the taxes, others may pass on these costs to consumers. This is an important issue and one that should be part of the discussion on tax reforms.

With the notable exception of Kerala, there are many leakages in the system of delivery of the PDS. The Report suggests that distribution be supervised by "Gram Sabhas and Non-Governmental Organisations" (NGOs) to improve the delivery system. Greater dec entralisation of various aspects of the PDS (ensuring the availability of grain, controlling quality, and so on) is clearly the right direction to go. There are grounds for much concern, however, when the Commission equates elected panchayats with NGOs, organisations that are in a different league with respect to democratic constitution and accountability, the sources of their funds, and commitment to the poor. This recommendation is very much in line with current thinking from the World Bank, which equ ates NGOs with "civil society" while downplaying, and seeking even to circumvent, the part played by elected local bodies in local-level development policy.

The Report recommends that procurement prices be fixed in accordance with the recommendations of the CACP. The procurement price announced by the Union Cabinet in the last few years has exceeded the price recommended by the CACP.

The Report is also right in pointing out that the costs of the FCI have risen over time because a higher proportion of rice is purchased as paddy rather than as rice from millers. It thus recommends a system of levy on millers. While this makes sense, a related suggestion that a single procurement price be offered for rice has unascertained implications for production. Cropping patterns and the allocation of land to different grades of rice can clearly be affected if a support price were to be announced for one "common" grade of rice.

In summing up, the Report endorses the decision of the Government of India to supply 20 kg of foodgrain per family to households below the official poverty line (as estimated by the Expert Group). The Report thus endorses the policy of narrow targeting o f the PDS to persons below the abysmally low official poverty line. It also supports the inequitable policy of fixing ration entitlements per family irrespective of family size. The Report is clear about the new agenda: limit procurement and control dist ribution through targeting. The implications of the new agenda for production as well as for consumer welfare are not even examined. Most important, the Report is silent on what can be done with the existing stocks of grain and on the cruel paradox of hu nger amidst plenty.