Themes > Current Issues
15.03.2000
PDS: A Demolition Job
Madhura Swaminathan
The first Budget of the 21st century fails miserably
to address the problems of mass poverty in India. The proposed reduction
in food subsidies and the accompanying changes in the system of public
distribution of food are likely to worsen food and nutritional deprivation
among a large mass of the population. The changes announced in the Budget
in respect of the issue price of foodgrains under the public distribution
system portend the end of the PDS and worsening food and nutrition security
for large sections of the population.
In 1997, the Government of India introduced the Targeted Public Distribution System. This was a system in which a distinction was proposed between Below Poverty Line (BPL) and Above Poverty Line (APL) households and a system of dual prices was introduced . Allocations to the APL families, it was announced, would be transitory. That targeting narrowly to a small section of the population was the first step in a process of excluding large numbers of vulnerable people from the PDS and in changing the character of the PDS is now confirmed by the changes proposed in the 2000-2001 Budget.
In his Budget speech, the Finance Minister has announced steep price increases for rice and wheat supplied through fair-price shops. Specifically, Central issue prices, that is, prices at which the Food Corporation of India (FCI) sells grain for the PDS to State governments, will be set at half the "economic cost" incurred by the FCI for BPL households and at the full "economic cost" for APL households. The economic cost comprises the procurement price of foodgrains, costs related to procurement (such as statutory taxes, labour costs, mandi fees, and so on) and costs of distribution (including freight, storage and administration). In effect, wheat will now be available at Rs.8.40 (against Rs.6.82) a kg and rice at Rs.11.70 (against Rs.9.05) a kg for APL families. BPL families will be charged Rs.4.20 (against Rs.2.50) a kg of wheat and Rs.5.85 (against Rs.3.50) per kg of rice.
These are the new Central issue prices, and the impact on consumers will depend on the retail prices set by State governments. Several State governments, including Andhra Pradesh, Kerala, Tamil Nadu and West Bengal, have already protested against the price hike. Some of the proposals may be modified or "rolled back" soon, given the concerted protest by the Bharatiya Janata Party's allies. Nevertheless, it is important to understand the implications and likely effects of the new policy for the welfare of the poor and the undernourished.
In the first place, the increase in the prices of basic foodgrains will reduce substantially the real incomes of millions of consumers. For BPL families, the prices of rice and wheat have been hiked by as much as 68 per cent. For APL families, the price of wheat has increased 23 per cent and that of rice 29 per cent. According to Professor M.H. Suryanarayana, the higher price of cereals could lead to a 35 per cent decline in cereal consumption among the poorest 10 per cent of the rural population.
Secondly, the new policy has introduced an in-built mechanism for raising prices. Every time procurement prices are raised, the issue prices of grain for the poor will be raised. It bears emphasis that procurement prices have risen regularly each year and in recent years the increases have actually been above those recommended by the Commission on Agricultural Costs and Prices. The inflationary effects of the new policy can hardly be overstated.
Thirdly, this measure, in effect, removes APL families from the PDS. A comparison of the economic costs of the FCI with wholesale prices and retail prices in different States shows a steady deterioration of the price advantage of the FCI in the 1990s com pared with the 1980s. In situations where the economic cost is higher than the market price, APL consumers will have to pay more for grain in the ration shop than in the open market. This applies especially to several North Indian States. The exclusion of APL households from the PDS has implications for the consumption and nutrition of a large part of the population, for the quality of the programme and for stocks of foodgrains, and, ironically, for the Central government's food subsidy bill.
Fourthly, for BPL families, allocations have been doubled. The increase in allocations for BPL households, from 10 to 20 kg per family per month is a long-overdue, though still inadequate, measure. To put matters in perspective, for a family of five persons, the proposed allocation works out to a monthly per capita entitlement of 4 kg or 35 per cent of the norm recommended by the Indian Council of Medical Research. However, as prices have been raised steeply, genuinely poor families will have to spend more now on acquiring the same quantity of grain. This will compound an existing hardship: in the PDS system as it works in many parts of the country, the BPL family is required to buy the monthly allocation, or at best half the month's allocation, on a take-it-or-leave-it basis. It cannot phase out its monthly PDS purchase on an ability-to-pay basis.
Fifthly, the method of targeting chosen for the PDS has already led to the exclusion from the BPL category of millions of undernourished people and people at risk of undernourishment. The reason for this is that the use of a very low absolute level of income (the poverty line) has already excluded a large number of undernourished persons and households from the category of BPL. According to the Expert Group on Poverty, around 35 per cent of the Indian population in 1993-94 was below the official poverty line. This was the population considered eligible for the BPL category. Data on nutritional outcomes, however, indicate that 50 per cent of India's population is malnourished. Further, about 56 per cent of the people are unable to meet their minimum daily energy requirements and 74 per cent are unable to meet their minimum daily protein requirements. Another indicator of poverty is the food share: 90 per cent of rural households spend more than 60 per cent of their total expenditure on food.
What is worse, practical problems of identification have further whittled down the BPL population. In a country with a large agricultural and informal economy, measuring income poverty is tricky, and, in practice, a large number of the "income poor" have been deliberately excluded from the BPL category. An extraordinary example of such exclusion comes from Mumbai: in Dharavi, Asia's largest slum settlement, which has a population of half a million, merely 151 families have been given BPL cards! In short, millions of undernourished persons and persons vulnerable to undernutrition have been excluded from the BPL category. And under the proposed dispensation, the excluded population no longer has even the limited benefits available to it as a possible part of the APL category.
Finally, by restricting the PDS to BPL households, the new scheme is likely to leave the FCI with even larger stocks of grain than at present. Stocks of rice and wheat with the FCI have been growing steadily in recent years, and amounted to 31.5 million tonnes in January 2000. Current BPL allocations are around 7.2 million tonnes. Let us assume that the allocation is doubled now to 14.4 million tonnes. If 90 per cent of the allocation is purchased by the States - this is an ambitious target - the offtake from the PDS will be around 13 million tonnes. After the BPL offtake, the FCI will be left with 18.5 million tonnes.
If the APL offtake falls sharply, as is likely given the new prices, the Central government will be left holding huge stocks. If the southern States of Andhra Pradesh, Tamil Nadu, Kerala and Karnataka (which accounted for 45 per cent of APL offtake in 1998), continue to purchase the same APL quantity as before from the FCI, then another four to five million tonnes will be distributed. It is irrational that stocks are amassed by the Central government while millions go to bed hungry. Are these stocks going to rot in the warehouses? Or are they going to be exported at prices below the economic cost? The point here is that the offtake from the PDS is likely to decline sharply and the FCI will be left holding even larger stocks.
Such a course will defeat the stated objective of the new policy - reducing the food subsidy bill. As the FCI is responsible for buffer stock operations, the total food subsidy includes the costs associated with maintaining buffer stocks (such as handling costs, costs of storage, interest payments and administration) as well as the costs of distribution (through the PDS). FCI performance budgets show that the subsidy incurred on carrying costs and on holding stocks for buffer stocking operations has risen steadily and rapidly in absolute and relative terms in the 1990s. In the mid-1990s, the costs associated with maintaining buffer stocks accounted for nearly 45 per cent of the total subsidy bill. In its eagerness to dismantle the PDS, the Central government has ignored the simple truth that any rise in stocks will imply a rise in carrying costs and a rise in the subsidy bill.
Not surprisingly, the States where the PDS provides some nutritional support to households, where the quantities distributed per capita are relatively large, and where the delivery system functions, although with problems, have all opposed the new move. Thus, Tamil Nadu Chief Minister M. Karunanidhi has announced that the price of rice in the PDS would remain at the old level of Rs.3.50 a kg; this will add Rs.300 crores to the State's food subsidy bill. Andhra Pradesh Chief Minister N. Chandrababu Naidu has also expressed unhappiness over the new policy. For his State, keeping PDS prices unchanged will mean a Rs.570-crore increase in the food subsidy, which will now be of the order of Rs.1,700 crores. In Left-ruled Kerala, the State with the most effective PDS, the Legislative Assembly has unanimously adopted a resolution that warns that the decision to raise the price of rice will "lead to runaway prices for rice in the open market and wreck the existing public distribution system."
The Central government is abdicating its responsibility with respect to the provision of a minimum quantity of low-cost food to consumers in all parts of the country. It has, cynically, decided to transfer the cost of the food subsidy to State governments. Of course, the current policy affects different States differentially, but it targets and penalises States that have performed better. State governments that have shown some commitment to the PDS in the past and wish to continue to provide a sufficient quantity of foodgrains to vulnerable sections of the population at low prices will now have to pay the bill themselves. On the other hand, in States such as Bihar, where the delivery network and administration are already weak and fail notoriously to reach the poor, the new scheme is likely to increase the incentives and scope for diverting grain meant for BPL households to the open market.
India is a country where poverty and nutritional deprivation exist on a large scale. In fact, India leads the world by far in the number of income-poor, food-insecure and malnourished people. Under the BJP-led Central Government, the attack on the PDS begun in the early 1990s has turned into a demolition job. The changes announced in the Budget for 2000-2001 portend the end of the PDS in India and worsening food and nutrition security for the mass of its population.
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Madhura Swaminathan is a Professor at the Indian Statistical Institute, Calcutta.
In 1997, the Government of India introduced the Targeted Public Distribution System. This was a system in which a distinction was proposed between Below Poverty Line (BPL) and Above Poverty Line (APL) households and a system of dual prices was introduced . Allocations to the APL families, it was announced, would be transitory. That targeting narrowly to a small section of the population was the first step in a process of excluding large numbers of vulnerable people from the PDS and in changing the character of the PDS is now confirmed by the changes proposed in the 2000-2001 Budget.
In his Budget speech, the Finance Minister has announced steep price increases for rice and wheat supplied through fair-price shops. Specifically, Central issue prices, that is, prices at which the Food Corporation of India (FCI) sells grain for the PDS to State governments, will be set at half the "economic cost" incurred by the FCI for BPL households and at the full "economic cost" for APL households. The economic cost comprises the procurement price of foodgrains, costs related to procurement (such as statutory taxes, labour costs, mandi fees, and so on) and costs of distribution (including freight, storage and administration). In effect, wheat will now be available at Rs.8.40 (against Rs.6.82) a kg and rice at Rs.11.70 (against Rs.9.05) a kg for APL families. BPL families will be charged Rs.4.20 (against Rs.2.50) a kg of wheat and Rs.5.85 (against Rs.3.50) per kg of rice.
These are the new Central issue prices, and the impact on consumers will depend on the retail prices set by State governments. Several State governments, including Andhra Pradesh, Kerala, Tamil Nadu and West Bengal, have already protested against the price hike. Some of the proposals may be modified or "rolled back" soon, given the concerted protest by the Bharatiya Janata Party's allies. Nevertheless, it is important to understand the implications and likely effects of the new policy for the welfare of the poor and the undernourished.
In the first place, the increase in the prices of basic foodgrains will reduce substantially the real incomes of millions of consumers. For BPL families, the prices of rice and wheat have been hiked by as much as 68 per cent. For APL families, the price of wheat has increased 23 per cent and that of rice 29 per cent. According to Professor M.H. Suryanarayana, the higher price of cereals could lead to a 35 per cent decline in cereal consumption among the poorest 10 per cent of the rural population.
Secondly, the new policy has introduced an in-built mechanism for raising prices. Every time procurement prices are raised, the issue prices of grain for the poor will be raised. It bears emphasis that procurement prices have risen regularly each year and in recent years the increases have actually been above those recommended by the Commission on Agricultural Costs and Prices. The inflationary effects of the new policy can hardly be overstated.
Thirdly, this measure, in effect, removes APL families from the PDS. A comparison of the economic costs of the FCI with wholesale prices and retail prices in different States shows a steady deterioration of the price advantage of the FCI in the 1990s com pared with the 1980s. In situations where the economic cost is higher than the market price, APL consumers will have to pay more for grain in the ration shop than in the open market. This applies especially to several North Indian States. The exclusion of APL households from the PDS has implications for the consumption and nutrition of a large part of the population, for the quality of the programme and for stocks of foodgrains, and, ironically, for the Central government's food subsidy bill.
Fourthly, for BPL families, allocations have been doubled. The increase in allocations for BPL households, from 10 to 20 kg per family per month is a long-overdue, though still inadequate, measure. To put matters in perspective, for a family of five persons, the proposed allocation works out to a monthly per capita entitlement of 4 kg or 35 per cent of the norm recommended by the Indian Council of Medical Research. However, as prices have been raised steeply, genuinely poor families will have to spend more now on acquiring the same quantity of grain. This will compound an existing hardship: in the PDS system as it works in many parts of the country, the BPL family is required to buy the monthly allocation, or at best half the month's allocation, on a take-it-or-leave-it basis. It cannot phase out its monthly PDS purchase on an ability-to-pay basis.
Fifthly, the method of targeting chosen for the PDS has already led to the exclusion from the BPL category of millions of undernourished people and people at risk of undernourishment. The reason for this is that the use of a very low absolute level of income (the poverty line) has already excluded a large number of undernourished persons and households from the category of BPL. According to the Expert Group on Poverty, around 35 per cent of the Indian population in 1993-94 was below the official poverty line. This was the population considered eligible for the BPL category. Data on nutritional outcomes, however, indicate that 50 per cent of India's population is malnourished. Further, about 56 per cent of the people are unable to meet their minimum daily energy requirements and 74 per cent are unable to meet their minimum daily protein requirements. Another indicator of poverty is the food share: 90 per cent of rural households spend more than 60 per cent of their total expenditure on food.
What is worse, practical problems of identification have further whittled down the BPL population. In a country with a large agricultural and informal economy, measuring income poverty is tricky, and, in practice, a large number of the "income poor" have been deliberately excluded from the BPL category. An extraordinary example of such exclusion comes from Mumbai: in Dharavi, Asia's largest slum settlement, which has a population of half a million, merely 151 families have been given BPL cards! In short, millions of undernourished persons and persons vulnerable to undernutrition have been excluded from the BPL category. And under the proposed dispensation, the excluded population no longer has even the limited benefits available to it as a possible part of the APL category.
Finally, by restricting the PDS to BPL households, the new scheme is likely to leave the FCI with even larger stocks of grain than at present. Stocks of rice and wheat with the FCI have been growing steadily in recent years, and amounted to 31.5 million tonnes in January 2000. Current BPL allocations are around 7.2 million tonnes. Let us assume that the allocation is doubled now to 14.4 million tonnes. If 90 per cent of the allocation is purchased by the States - this is an ambitious target - the offtake from the PDS will be around 13 million tonnes. After the BPL offtake, the FCI will be left with 18.5 million tonnes.
If the APL offtake falls sharply, as is likely given the new prices, the Central government will be left holding huge stocks. If the southern States of Andhra Pradesh, Tamil Nadu, Kerala and Karnataka (which accounted for 45 per cent of APL offtake in 1998), continue to purchase the same APL quantity as before from the FCI, then another four to five million tonnes will be distributed. It is irrational that stocks are amassed by the Central government while millions go to bed hungry. Are these stocks going to rot in the warehouses? Or are they going to be exported at prices below the economic cost? The point here is that the offtake from the PDS is likely to decline sharply and the FCI will be left holding even larger stocks.
Such a course will defeat the stated objective of the new policy - reducing the food subsidy bill. As the FCI is responsible for buffer stock operations, the total food subsidy includes the costs associated with maintaining buffer stocks (such as handling costs, costs of storage, interest payments and administration) as well as the costs of distribution (through the PDS). FCI performance budgets show that the subsidy incurred on carrying costs and on holding stocks for buffer stocking operations has risen steadily and rapidly in absolute and relative terms in the 1990s. In the mid-1990s, the costs associated with maintaining buffer stocks accounted for nearly 45 per cent of the total subsidy bill. In its eagerness to dismantle the PDS, the Central government has ignored the simple truth that any rise in stocks will imply a rise in carrying costs and a rise in the subsidy bill.
Not surprisingly, the States where the PDS provides some nutritional support to households, where the quantities distributed per capita are relatively large, and where the delivery system functions, although with problems, have all opposed the new move. Thus, Tamil Nadu Chief Minister M. Karunanidhi has announced that the price of rice in the PDS would remain at the old level of Rs.3.50 a kg; this will add Rs.300 crores to the State's food subsidy bill. Andhra Pradesh Chief Minister N. Chandrababu Naidu has also expressed unhappiness over the new policy. For his State, keeping PDS prices unchanged will mean a Rs.570-crore increase in the food subsidy, which will now be of the order of Rs.1,700 crores. In Left-ruled Kerala, the State with the most effective PDS, the Legislative Assembly has unanimously adopted a resolution that warns that the decision to raise the price of rice will "lead to runaway prices for rice in the open market and wreck the existing public distribution system."
The Central government is abdicating its responsibility with respect to the provision of a minimum quantity of low-cost food to consumers in all parts of the country. It has, cynically, decided to transfer the cost of the food subsidy to State governments. Of course, the current policy affects different States differentially, but it targets and penalises States that have performed better. State governments that have shown some commitment to the PDS in the past and wish to continue to provide a sufficient quantity of foodgrains to vulnerable sections of the population at low prices will now have to pay the bill themselves. On the other hand, in States such as Bihar, where the delivery network and administration are already weak and fail notoriously to reach the poor, the new scheme is likely to increase the incentives and scope for diverting grain meant for BPL households to the open market.
India is a country where poverty and nutritional deprivation exist on a large scale. In fact, India leads the world by far in the number of income-poor, food-insecure and malnourished people. Under the BJP-led Central Government, the attack on the PDS begun in the early 1990s has turned into a demolition job. The changes announced in the Budget for 2000-2001 portend the end of the PDS in India and worsening food and nutrition security for the mass of its population.
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Madhura Swaminathan is a Professor at the Indian Statistical Institute, Calcutta.
© MACROSCAN 2000