Is India ready for choice-based PDS?

SOCIAL NET Introducing choice in the PDS bets too much on technology, and can’t side-step the need for procurement reform

The 2019 budget has sparked debate on the increasing centrality of cash transfers and direct income support in India’s welfare and social protection architecture. The Pradhan Mantri Kisan Samman Nidhi (PM-KSN) has been announced, expected to cover 120 million small and marginal farmers with a total annual budget outlay of nearly $10.7 billion. Yet, the income support scheme is dwarfed by the $26.1 billion allocation for food subsidies, as per 20192020 budget estimates.

In fact, India’s food subsidy programme continues to be one of the largest safety nets in the world: the Public Distribution System (PDS) provides for nearly 800 million people, receiving nearly 1% of GDP consistently in the past decade.

What role does the PDS play in India’s social protection system? The PDS is a core aspect of social protection measures in the country. According to data from the National Sample Survey, Indian households spend 45% of their income on food. Poor households, in particular, rely on government subsidized grains.

Thus, programmes to mitigate losses from food price shocks are an important part of India’s social protection system. What’s more, the PDS has witnessed a large scale “turn-around”, especially in poor states. The numbers tell the story. In 2004-05, just 22.4% of Indian households reported buying food grains from fair price shops. This doubled to 44.5% in 2011-12, the highest since 1997, when the targeted PDS— expanded and reoriented to target the poor was introduced. By 2012 nearly six out of 10 poor households purchased grains from the PDS. While country-wide decline in leakage has been moderate — from 58% in 2004-05 to 43% in 2012 — the breakthrough was particularly strong, in low income states with historically weak administrative capabilities such as Bihar Odisha, Jharkhand and Chhattisgarh. Following the implementation of the National Food Security Act in 2016, coverage has further expanded. Administrative data for 2016 shows that 74% of Indian households possess ration cards.

Micro-surveys in select low income states conducted in 2016 and 2017 found that citizens received nearly 90% of the subsidized grains to which they were entitled. These improvements protected poor households from food price increases and alleviated poverty during times of drought and high food inflation.

However, challenges remain. Critics highlight that the in-kind delivery of food subsidies is far too costly and distortionary . Cash transfers are suggested as an alternative.

Where markets function well, cash assistance would ignite demand-based approaches that could help uphold consumer sovereignty, spark efficiency gains, and ignite competition among retailers. Another proposal to reform the PDS includes the suggestion that beneficiaries must choose for themselves — cash, in-kind food or even vouchers.

However, we observe two key constraints in rolling out a choice-based PDS.

For one, a cash-or-kind system would place a large bet on technology: at any point in time, the system needs to be able to provide people what they want, anywhere. Whether the current system can accommodate the simultaneous, multiple and real-time demand of nearly 800 million is an open question. Delivery of cash instead of food remains far more complex than is often imagined, even in urban areas. So much so, that Puducherry, which experimented with cash delivery in the PDS starting 2015, has decided to revert to in-kind delivery. Activists have also highlighted how technology like electronic point of sale devices and biometrics may trigger delays and exclusion in food delivery, thereby eroding gains made in the recent past.

These may be challenges of transition and resolvable in the long run, but that is precisely what a learning-based reform has to address. Bolstering the capacity of local governments to adapt, test and use technology effectively maybe more important than complex changes in the PDS delivery chain.

Second, and more fundamentally, a choice-based approach cannot sidestep the intricate political economy question facing procurement reform in the PDS. Allowing beneficiaries to choose food or cash only kicks the can down the line and doesn’t fully address the inherent tension in the PDS — that is, its dual objectives of protecting families from price rise and at the same time, stabilizing farmer incomes. As we all know, grains procured through the Minimum Support Price (MSP) policy are distributed and sold through the PDS. Even if citizens choose cash, this begs the question of how the government would release procured grains under current policies into the market without simultaneously dismantling the MSP and procurement system. Even the PMKSN scheme is not enough to replace the need for MSP given that the benefit amount is a minor share of household income. In addition, it only targets a subset of farmers.

An enhanced farmer support scheme can ideally create a roadmap for reducing government involvement in procurement and farmer price support. But these are challenging and complex reforms which require careful study and sequencing as the social protection system is linked with agricultural policies.

Moving forward, the National Food Security Act, which came into force in 2013, empowers states to decide the modality of delivering food subsidies — in cash or kind. Urbanized Union Territories are testing the use of cash in place of grains. States like Madhya Pradesh have tested price-differential schemes to compensate for the gap between market prices and MSP. Farmer income support schemes can serve as impetus for further national procurement reforms. In the meantime, each state government can be assisted in making more informed decisions on how best to protect farmers and consumers from food price shocks based on diagnostics and feedback loops. This is a gradual and sequenced path for PDS reform, based on learning and local requirements.

At the national level, reform will need to be underpinned by a clear understanding of how food transfers coordinate and interact with other schemes such as farmer income support in the social protection system. “Choice” is not an immediate antidote for the tough political and administrative challenges facing PDS reforms.

AN ENHANCED FARMER SUPPORT SCHEME

CAN IDEALLY CREATE A ROADMAP FOR REDUCING GOVERNMENT INVOLVEMENT IN PROCUREMENT AND FARMER PRICE SUPPORT