The broad contours of the proposed Food Security Act (FSA) that are now emerging suggest that the government is considering offering 35kg of rice or wheat for people living below the poverty line (BPL) at the promised price of Rs3 per kg. For those above the poverty line (APL), the entitlement will be lower at 15-25kg at a price that’s closer to existing APL prices.
If indeed this is the government’s plan, it is nothing but a revamp of the existing Public Distribution System (PDS) with all its attendant inefficiencies. Against the backdrop of the Economic Survey’s emphasis on the micro-foundations of economic policy, the proposed FSA neither makes economic sense nor does it recognize reality. After all, the survey also points out that when crafting policy, there is a need to be realistic about the system within which we work.
To begin with, the proposed FSA does not recognize the fact that there can never be two prices for the same product in a free market economy. The only way this can be managed is by physically segregating two markets differentiated by prices. And if this is managed, there are ways to subvert it through smuggling. In the case of PDS, this diversion would be dubbed a leakage or wastage. So any price differential forced by regulation can be successful only if enforcement is guaranteed. It is precisely this simple economic tenet that the proposed FSA ignores.
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In any market where the same product of the same quality is sold at two different prices, it will generate a black market. The only way this can be prevented is by an enforcement mechanism that will prevent the transfer of goods from one market to another.
It is obvious that the enforcement mechanism in the case of distribution of foodgrains through PDS is weak. Unlike kerosene, where the product for BPL and APL households are of different colours, no such mechanism exists to separate the foodgrains sold at different prices to BPL and APL households. The only way out then is to sell the same product to all the households at the same price.
In other words, universalization of PDS: same price and entitlement for everybody.
But wait, won’t the same logic apply if the product sold through PDS is priced lower than the market price? Won’t it create a black market with the lower-priced product being sold at a higher but lower than market price? Technically yes, but in practice, the likelihood of such an eventuality is not there as long as the quantity distributed through PDS is sizeable and covers a large part of household consumption.
It is obvious that per-household allocation of 35kg is sufficient to prevent the emergence of a black market. So if everybody gets this entitlement at the same price, there is very little incentive for a consumer to buy the same product at a higher price through the black market. In such circumstances, it is also not viable for the black market operator as the risks or costs far outweigh the benefits.
This will not, as some may argue, lead to government control of the foodgrains market. This is because the market for foodgrains will be differentiated by quality. In reality, the foodgrains distributed through PDS are often of the lowest quality. Those who are used to better quality and can afford to consume better quality foodgrains will continue to do so. The choice will largely be guided by quality differentials and not price differentials.
Even in Tamil Nadu, where foodgrains sold through PDS are the cheapest, of reasonably good quality and are available to everybody, only 67% of the population reported purchasing from PDS.
The only reason leakage will happen is because PDS does not function at all, which happens in many of the poorest states such as Bihar and Jharkhand. But even here, economic logic suggests that universal PDS, together with a revamped distribution system, will go a long way in improving access, particularly for the poor.
Himanshu is an assistant professor at Jawaharlal Nehru University and a visiting fellow at Centre de Sciences Humaines, New Delhi. Farm Truths takes a fortnightly look at issues in agriculture. Respond to this column at firstname.lastname@example.org