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Microfoundations of food coupons

Microfoundations of food coupons
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First Published: Tue, May 11 2010. 10 42 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Tue, May 11 2010. 10 42 PM IST
A key issue the National Food Security Act will have to resolve is reducing leakages from the Public Distribution System (PDS) without compromising basic food entitlements, at least to the poor. An alternative offered in this regard in this year’s Economic Survey is to introduce food coupons instead of foodgrains. A compelling argument, but is it workable?
Illustration: Jayachandran / Mint
To begin with, it must be recognized that the effectiveness of the food coupon system depends on the correct identification of the poor, as does PDS or a cash transfer programme. Let’s assume that the ongoing efforts of the ministry of rural development to redesign the methodology for identification of the poor manages to come up with criteria that accurately identify the poor. Unfortunately, the reality at the village level is not guided by the microfoundations of policy, but by the macrofoundations of the social structure, which are heavily biased against the poor. Therefore, what matters is not only a foolproof design, but also flawless implementation. Failure to do so will imply that leakages prevalent in PDS would manifest in the case of food coupons too.
Even if the poor are correctly identified, will they actually get the benefit of the food coupons? Can the government ensure that the poor families will actually get the 35kg of foodgrains that has been assured to them? Theoretically, yes, but practically, no. In reality, the government will have no control over the prices charged by the retailer. The retailer may actually give less than 35kg on the pretext that market prices are much higher than the prices that the government has assumed. And there is no way the government can fight the retailer (millions of them, unregulated). Ultimately, the retailer would benefit at the expense of the consumer.
What if the government decides to give the food coupons that are denominated in terms of grains and not a monetary value? The retailer will again be the beneficiary, simply because he will end up supplying the lowest quality foodgrains to the poor while actually charging the government the normal quality price. Who will verify the quality? Definitely not the government. Nor will the government be in a position to contest the retailers’ claims, and thus will end up paying subsidies that will only benefit retailers. In all cases, the quality as well as price is determined by the retailer and the government has no way to verify his claims.
Replacing PDS with food coupons runs the risk of the subsidy being mostly appropriated by the retailers. The only way the government can ensure that this does not happen, and the entire subsidy is only accessed by the poor, is if it specifies the quantity as well as prices. If that is the case, no retailer will participate unless hefty commissions are paid to them. But won’t it then be similar to PDS?
Similarly, will the food coupons reduce other expenses associated with subsidizing the poor? Not likely. First, it will be expensive if food coupons are to be printed and delivered to each family. There is also the possibility of them being counterfeited (remember the fake stamps and currency scandals). It is anybody’s guess as to what will happen to food coupons.
The other option is to use smart cards. Interesting solution, but again, it will require huge additional expenditure to equip even the remotest retailer in tribal areas with card reading machines. But even with all that, there will be an additional expenditure of at least 3-5% that will have to be paid as commission if we want the retailers to accept smart cards or food coupons. That will be an additional burden of Rs2,000-3,000 crore.
If the value of the food coupons is set at the value of the subsidy, that will be spent on each poor family if they are given 35kg of foodgrains per month at Rs3 per kg, as is being proposed, then each month a household will receive food coupons worth Rs525 (with the economic cost at around Rs18, less the issue price at Rs3, the effective cost to government is Rs15 per kg). Giving these food coupons to 81 million families (the current Planning Commission estimate for the National Food Security Bill) would amount around Rs51,000 crore. Together with the administration cost, the food subsidy would not be much different from what it is currently.
On the contrary, the current PDS, if properly implemented, has the potential to ensure that food reaches the household, farmers get a fair price and overall prices are kept stable. Moreover, the current PDS reaches out to not only the below poverty line households, but even those that are above it and are precluded from food coupons.
Further, food coupons are fungible and can be exchanged for food as well as undesirables such as alcohol, tobacco, gambling and so on.
Clearly, the policy prescription, while sound in its microfoundations, is not in tune with the macro-foundations of the rural economy.
Himanshu is an assistant professor at Jawaharlal Nehru University and a visiting fellow at Centre de Sciences style Humaines, New Delhi.
Comments are welcome at theirview@livemint.com
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First Published: Tue, May 11 2010. 10 42 PM IST