Owner system

Why reforming the free food system is necessary

The publication of two new working papers, one from the World Bank and the other from the IMF, has revived the debate on poverty in India. Both articles claim that extreme poverty in the country, based on the international definition of $1.90 per capita per day (in purchasing power parity (PPP), has declined significantly (Figure 1). World Bank article uses the Consumer Pyramid Household Surveys (CPHS) to conclude that 10.2% of the country’s population was in extreme poverty in 2019.

The IMF paper calculates poverty using the NSO Consumer Expenditure Survey as a base and adjusts for the direct effect of the massive foodgrain subsidy provided under the National Food Security Act (NFSA , 2013) and Prime Minister Garib Kalyan Anna Yojana (PMGKAY) during the pandemic period. He claims that extreme poverty has almost disappeared – it was 0.77% in 2019 and 0.86% in 2020.

Another estimate of poverty by NITI Aayog, the Multidimensional Poverty Index (MPI), put India’s poverty at 25% in 2015 based on NFHS data. This MPI is calculated using twelve key components in areas such as health and nutrition, education and standard of living. By 2019-20, the MPI is expected to have declined further as access to health, education and other basic facilities has improved significantly among the poor, in especially after 2015.

One may wonder whether the poverty line at PPP$1.9 is too low and should be increased to PPP$3.2. The IMF document estimates that poverty on the basis of 3.2 PPP dollars – this includes food transfers – would represent 14.8% of the country’s population in 2019. The World Bank document estimates it at 44.9 %. Whether extreme poverty is less than 1%, 10% or 25%, and whether food transfers have played a positive role in reducing poverty, a crucial question remains: why is it still necessary to distribute food almost for free? to 800 million people in the name of food security? Is the policy of gifts for votes a prudent policy?

The grain take under the NFSA in FY20 was 56.1 million metric tonnes (MMT). Following the Covid-19 epidemic, the government launched the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) as a special relief program in April 2020 to distribute 25 kg of cereals per family per month in addition to food transfers under the NFSA. The program was justified to help migrant workers. This catapulted the offtake to 87.5 MMT (under PMGKAY and NFSA) in FY21. The program continued in FY22 and grain offtake reached 93.2 million tonnes . In FY23, after the pandemic subsided and the economy generally rebounded, further extension of free food on top of NFSA allowances was not warranted. This will weigh on the tax system, reduce public investment and hamper potential job creation. The public grain management system is crying out for reform, and now is the right time for the Narendra Modi government to address it.

A look at the size of food gifts will help to understand the seriousness of this problem. As of April 1, the Food Corporation of India’s wheat and rice stocks stood at 74 MMT against a buffer stock norm of 21 MMT – so there is an “excess stock” of 53 MMT. The economic cost of rice as quoted by FCI is Rs 3,7267.6/ton and that of wheat is Rs 2,6838.4/ton (2020/21). The value of “excess stocks”, beyond the buffer norm, is therefore Rs 1.85 lakh crore – this despite a total of 72.2 MMT grains distributed free of charge under the PMGKAY in FY21 and 22. This only speaks of a very inefficient grain management system.

All of this translates into a booming food subsidy – in FY21 it reached over Rs 5.41 lakh crore because the FCI arrears were cleared. In FY22, it went down to Rs 2.86 lakh crore and now in the Union budget for FY23, it is provisioned at Rs 2.06 lakh crore. But this amount is likely to go beyond Rs 2.8 lakh crore with the continuation of the free food distribution under the PMGKAY. This would represent more than 10% of the Centre’s net tax revenue (after deduction of the States’ share).

Given the level of giveaways on a single item, the important question that arises is: can this be a sustainable path to poverty reduction? Strategic economic policy thinking tells us that it is better to teach someone to catch a fish than to give them a free fish every day. Giving crumbs cannot inspire a society to grow. It is all the more important to change the current policy of free food given the massive leaks in the PDS. According to FCI’s High Level Committee on Restructuring, leakage was over 40% based on NSSO data from 2011. Field reports suggest that leakage is hovering around around 30% today.

In reforming this free food system, the wisdom is to go back to the vision of former Prime Minister Atal Bihari Vajpayee. Vajpayee introduced the Antyodaya Anna Yojana (AAY), in which “antyodaya” households (the poorest category) receive more rations (35 kg per household) at a higher subsidy (rice, for example, at Rs 3/kg and wheat at Rs2/kg). For other families below the poverty line (BPL), the asking price was 50% of the purchase price and for families above the poverty line (APL), it was 90% of the purchase price. purchase.

There could be problems in identifying the poor. However, technology can help overcome this difficulty. This will make the PDS more targeted and lead to cost savings. This measure should be combined with giving people the option of receiving cash instead of providing grain to targeted beneficiaries. The savings thus generated by this reform can be reinvested in the form of investments in agricultural R&D, rural infrastructure (irrigation, roads, markets) and innovations that will help create more jobs and reduce poverty in a sustainable way. Can the Modi government bite the bullet and emulate the Vajpayee government by using scarce resources more wisely? Only time will tell.

This column first appeared in the April 25, 2022 print edition under the title “Poverty and the Politics of Gifts.” Gulati is a professor holding the Infosys chair and Juneja is a consultant at ICRIER