Discussion on ‘Food Subsidies’

• Purchases of the FCI are open-ended (i.e. it has to accept all the grains that are sold to it at the declared purchase price).
• Since the issue price and the purchase price are linked, higher purchase prices result in higher issue prices. With relative high MSPs, procurement has been high and off-take low resulting in a build-up of stocks, adding to the subsidy bill.
• With a large part of the marketed surplus in FCI warehouses, lower market supply exerts upward pressure on prices in the open market, neutralising much of the consumer benefits that subsidy provides.
• To run the excessive stocks down, foodgrains are often exported by providing exporters, foodgrains at near BPL prices.

• The MSP should correspond to the CACP-determined cost (in other words, reduce MSP)
• Purchase operations should not be open-ended. Before every sowing season, procurement targets should be fixed. FCI should suspend purchase operations once targets are achieved.
• A system of price insurance may be developed. The scheme should be self-financing and without any subsidy obligation. This can operate in conjunction with the purchase operations to benefit those farmers who miss out on the opportunity of selling their surplus at the support price because of the close-ended purchase operations.

• The suggestions to reduce MSP and make purchase operations close-ended will certainly reduce the subsidy bill. However, it would not ensure that the subsidy is targeted sharply at the truly needy i.e. small and marginal farmers.
• 
  Another way to reduce subsidy bill is by not using the same instrument to serve conflicting objectives. Presently, the food subsidy policy seeks to achieve through the MSP-PDS operations, the conflicting objectives of ensuring remunerative price to farmers and providing foodgrains to poor at affordable prices. By implication, this entails a huge gap between the purchase price and issue price, and consequently a larger subsidy bill.

• All costs of FCI are automatically reimbursed, and there is little incentive to raise efficiency and reduce costs.

• Reimbursement of costs to FCI should be based on normative unit costs and actual quantity involved, instead of reimbursement on actual basis.
• Some functions of the FCI can be outsourced.
• Move towards decentralisation of procurement to usher in greater efficiency in the purchase and distribution operations

• The role of the Food Corporation of India need to be clearly defined, particularly in the context of decentralisation of procurement.
• There is need to specify how individual state targets would be determined in the context of decentralisation of procurement.

• Concentration of FCI purchases in a few States facilitates tax exportation by some of these States. For instance, Punjab and Haryana impose mandi fees on the purchases of foodgrains. With FCI paying such taxes, the tax gets exported to consumers in other States.

• The tendency for tax exportation by some States needs to be curbed, by appropriate legislation. Since it is easy to identify the States that indulge in this practice, differential purchase prices can be worked out for individual States.

• There should be definite criteria for working out differential purchase prices for individual states, lest it would be subject to political exigencies, particularly in the present coalition era.

• FCI has been involved in price support operations for jowar, maize and bajra. The quantities are becoming larger each year and storage losses are heavy because of limited shelf life. It has proved to be difficult to sell these coarse grains through the PDS and the bulk of the procurement has been sold, at heavy loss, as cattle feed.

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• Coarse grains should not be included in PDS operations since their shelf life is limited and they are available at low prices to the poor.

• The
  targeted public distribution system (TDPS) has
  introduced a dual price system. The same shopkeeper
  sells the same grain to different classes of consumers
  at different prices. The system is thus open to
  corruption.

• Food
  coupons may be introduced to initially cover only
  the additional subsidy given to the below poverty
  line (BPL) families over and above that for above
  poverty line (APL), while continuing with the
  exclusive PDS outlets.
• The
  BPL families would then pay the PDS outlet the
  same price as the APL families, but partly with
  coupons and partly in cash.
• Gradually
  the system could be extended to any foodgrains
  seller even outside the fair price shops.

• While
  on one hand the suggestions seek to eliminate
  the dual system of prices in PDS, at the same
  time a dual system for distributing foodgrains
  is sought for BPL families – food coupons as well
  as ration cards. This may create distortions.
• Once
  the system is extended to foodgrains seller outside
  the fair price shops, no separate ration shops
  would be required.

• There
  are both inclusion and exclusion errors, and large-scale
  diversion of foodgrains from the PDS/TPDS network.
• According
  to a study by Tata Economic Consultancy Services,
  about a third of TDPS supplies were diverted and
  did not reach the intended beneficiaries.
• The
  NSS data on PDS consumption are generally lower
  than the official data on PDS supply. This may
  reflect leakages from the PDS.
• Bulk
  of the foodgrains is pilfered and sold in the
  market or damaged due to poor storage conditions.

• Self-targeting
  in PDS can be brought in by:
• Subsidising
  coarse grains consumed generally by poor alone
• 
  Locate PDS shops in areas where the poor live.
  
• Allow
  PDS grain purchase on a weekly basis rather than
  monthly basis.

• Measures
  suggested to plug leakages (food coupon system
  for BPL families) and improve targeting (self-targeting)
  would have very limited impact in addressing the
  various concerns.
• Food
  coupon system, as suggested, will not help solving
  the problem of foodgrains being sold in the black
  market.
• Coarse
  grains should not be included in PDS operations
  since their shelf life is limited and they are
  available at low prices to the poor. Though effective
  for better self-targeting, the suggestion is not
  worth implementing given the associated costs.

• The
  monitoring and vigilance system proposed in the
  TPDS guidelines, which were to involve local Panchayati
  Raj institutions (PRIs), has not become operational.
• A
  CAG beneficiary study found non-awareness of entitlements
  among consumers. The study reported the absence
  of grievance redressal systems.

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• PRIs/NGOs
  should be involved in design, implementation and
  monitoring of location-specific food distribution/security
  systems. They should be entrusted with the task
  of identifying the beneficiaries. They should
  be roped in to create awareness among consumers
  about their entitlements under the programme.
• Grievance
  redressal system should be established.
• NGOs
  should conduct social audit of the schemes, and
  report misuse of funds.

• There
  are wide disparities in PDS penetration in different
  States.

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• Food
  coupons in areas not adequately covered by fair
  price shops could be introduced

Concerns/Distortions

Suggestions
made in the report

Remarks

• FCI’s
  purchase operations are mainly confined to five
  states – Punjab, Haryana, Western UP, Andhra Pradesh,
  and Chhattisgarh. This has led to concentration
  of farmers’ subsidy to these States. In fact,
  a large percentage of farmers in these states
  are not poor.
• Exclusive
  attention to wheat and rice has distorted the
  cropping pattern of farmers in favour of these
  two foodgrains alone.

• 
  Move towards decentralisation of procurement to
  distribute the benefits of price support operations
  more evenly across the country.

• Though
  decentralisation of procurement would ensure that
  benefits are distributed more evenly across the
  country, but how will it ensure that these benefits
  are actually availed by small and marginal farmers
  and not cornered by rich farmers.
• There
  is a need to involve local level agencies such
  as PRIs/NGOs to ensure proper identification of
  beneficiaries and monitoring of the scheme.