Published: The Hindu Business Line, August 05, 2005

By Pradeep S. Mehta & Manish Agarwal

The food subsidy bill, consisting largely of farmer and consumer subsidies and support to the Food Corporation of India, has spiralled in the last ten years. A combination of measures, including new marketing avenues through co-operatives, price insurance and competitive bidding, may ensure equal benefits to producers and consumers.

THE Finance Ministry is preparing a roadmap for a new focused subsidy regime targeted at the poor in accordance with the objectives set out in the National Common Minimum Programme.

This article proposes to analyse food subsidy ā€” the single largest component of the government’s subsidy bill. Over the past decade, there has been an almost ten-fold increase in the food subsidy bill.

The bill comprises subsidies to farmers through minimum support prices (MSPs), support to the Food Corporation of India (FCI), and consumer subsidies through the public distribution system (PDS).

Distortions and inefficiencies in the way these subsidies are delivered have led to mounting bills without commensurate benefits to the beneficiaries.

According to estimates, the cost of transferring a rupee to the poor through the PDS is Rs 6.68. The food subsidy policy through the MSP-PDS operations seems to be serving `conflicting’ objectives of ensuring remunerative prices to farmers on the one hand, and providing the procured foodgrainsto the poor at affordable prices, on the other. This results in a huge gap between the purchase and the issue prices, and consequently a large subsidy bill.

The situation is aggravated by the nature of purchases by the FCI; that of buying all kinds the grain at the declared price. This inflates the bill and results in a build-up of stock compounded by poor offtake. Thus to run the excessive stocks down, foodgrains are often exported at near PDS prices.

As for the support to farmers, purchase operations are confined to Punjab, Haryana, Western Uttar Pradesh, Andhra Pradesh, and Chhattisgarh, where the majority of farmers are anyway quite well off.

Distortions also exist in the marketing of agriculture products. A recent NGO study, “Towards a functional competition policy for India, 2005” revealed a huge gap between the price consumers pay and what farmers receive. This is because of the chain of intermediaries that do not always work in a competitive manner.

There are leakages and diversions in the PDS system. The study “Food stamps: A model for India” by the Centre for Civil Society, suggests that only 25 per cent of the grain actually reach the poor. A recent study by the Planning Commission, “Performance evaluation of the TPDS”, shows that leakages from the targeted PDS (TPDS) are higher than those under the PDS, which it was meant to replace. The TPDS introduced a dual price system. A shopkeeper sells the same grain to different classes of consumers at different prices. The system is thus open to distortion.

The procurement of foodgrains through MSP mechanism needs to be separated from the PDS operations. MSP operations should be confined to providing support to small and marginal farmers and to using the food grains so procured to create a buffer-stock.

The buffer-stock requirement should be determined well in advance. The FCI’s role should be limited to this aspect of procurement. Decentralisation of procurement will ensure that benefits are spread out evenly.

A system of price insurance could benefit small and marginal farmers who miss out on the opportunity of selling their surplus at the support price because of the close-ended purchase operations. Furthermore, alternative avenues for sale and purchase through cooperative marketing agencies should be developed to dilute the market power of private traders.

Innovative marketing mechanisms such as apni mandi and producer’s sales counters in consumer centres should be promoted to ensure benefits to producers and consumers.

Second, procurement of foodgrains for distribution through the PDS should be done through competitive bidding. Procurement for PDS operations should be entrusted to a State-level agency, say, the State Civil Supplies Corporation. The idea is to ensure that an agency is not entrusted with meeting conflicting objectives.

Alternatively, food coupons could be introduced. The system can be introduced in areas that are not adequately covered by the PDS on a pilot basis and gradually scaled up. This would allow beneficiaries to purchase approved food items from a regular approved shop in the market.

Panchayats and NGOs should be mobilised to participate in identifying target beneficiaries and be involved in design, implementation and monitoring of food distribution systems. They should be resourced to create awareness among consumers about what they are entitled to under the programme.

A grievance redress system should be established and NGOs should conduct social audits of the schemes. The list of beneficiaries should be made public.

The proposed system would ensure that subsidies are transparent, targeted, and designed for effective implementation without any leakages.