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Business News/ Opinion / Replacing food with cash

Replacing food with cash

The current government is ideologically opposed to large public spending for social welfare

Photo: Vipin Kumar/HTPremium
Photo: Vipin Kumar/HT

One ‘reform’ in India’s social welfare architecture to which the current government is deeply committed is to substitute subsidised wheat and rice supplied through the public distribution system (PDS) with direct cash transfers into bank accounts of targeted households. Without due publicity and transparency, the central government gazetted the Cash Transfer of Food Subsidy Rules on 21 August 2015.

The government had earlier commenced substituting PDS grain with cash in small pilots. But these rules open pathways for what can be the eventual phasing out or at least significant downsizing of PDS. Plans to dismantle what for generations has constituted a central instrument of household food security, even with its admitted flaws, should have been preceded with widespread public consultation. Instead, as with other aspects of the country’s social welfare architecture, we witness an erosion by what almost appears to be stealth.

This move has been passionately opposed by most food rights campaigners. What they oppose is not the principle of transferring cash to people, but the substitution of food transfers with cash. After all, many important social protection schemes involve cash transfers, including maternity benefits and old-age pensions, and they support these.

Cash transfers in lieu of PDS would involve the transfer of money directly into bank accounts of identified card holders; the amount transferred would be the difference between the market and subsidized price of the grain. Instead of going to their local ration shop to purchase subsidized grains, recipients would withdraw this money to buy the food of their choice from the market.

Proponents of substituting PDS grain transfers with cash argue that PDS is an inefficient mode of transfer of subsidies, prone to enormous leakages into the black market, and high waste in costs of transferring subsidies in the form of food transfers. They argue that replacing food with direct cash transfers would greatly reduce corruption and leakages. It would enable the poor to access goods currently denied them by a PDS beset by corruption. Further, it would enable people to buy better quality food of their choice from the open market and not be restricted to items sold in the PDS, which are often inferior in quality and limited in range.

Providing subsidies directly to the poor, it is further argued, would both bypass brokers as well as reduce the waste and holding costs of storing grains in government silos. The amount of grain actually required for India’s buffer stock needs could be held in better-quality warehouses, eliminating waste and rotting. Cash transfers would help reduce fiscal deficit by curbing expenditures earmarked for the PDS that are siphoned off through corruption, as well as avoiding substantially higher costs of transferring food rather than cash.

However, it is problematic to assume that cash transfers would in themselves bring about drastic reductions in corruption and leakages in welfare programmes, as there is nothing intrinsic to cash transfers which renders them less vulnerable to leakages. Irregularities are empirically found to be high in existing cash transfer programmes. Cash transfers of old-age pensions are at least as notorious for corruption and leakages as the PDS.

Studies confirm that many states have been able to reform PDS and significantly reduce leakages, as much as some states have reformed pension transfers. Clearly, the difference between the corruption or probity of delivery of welfare programmes is not dependent on whether cash or food is delivered, but on political and administrative will and capacities, and public vigilance and organization.

It is also possible for people to spend cash transfers not on more nutritious food, as proponents suggest, but instead on non-food items, which would decrease the amount of household money left for buying food. There are significant gendered differences of choice here. Research confirms that culturally decisions relating to cash in households tend to be made by men, who may or may not spend the money on food. Decisions relating to food are made by women in almost all cultures, and therefore food rather than cash in a household is more likely to end up as food in a child’s stomach.

There are also worries about how genuinely inclusive of people in remote rural regions is India’s banking system. Fair price shops exist in three of every four villages, and are therefore generally accessible. According to one survey, average distance to the nearest bank branch is between 6.5km to 10km. Distances would be much longer in remote regions, entailing high additional costs of transport and time.

Another advantage of PDS over cash transfers from the perspective of the poor is that PDS supplies rations at a constant price, irrespective of the fluctuations in market prices. This therefore provides a shield against inflation, a benefit that cash transfers cannot match.

Finally, it is a mistake to view PDS only as a means to transfer subsidies to poor households. PDS costs need to be measured against its other goals as well. PDS requires the government to procure food from farmers. The government builds up stocks of grains which are also useful for price stabilization. Indeed, the guarantee of minimum support price purchase by the government for wheat and rice is the most important instrument for the protection of farmers’ income in India, and this would become unfeasible if the government could not offload a lot of this grain back through the PDS. I fear that replacing this with cash transfers would, in effect, gradually erode and eventually dismantle this obligation of the government, with an adverse impact on an already precarious agriculture and farmer protection.

It is no secret that the current government is ideologically opposed to large public spending for social welfare, and has already introduced severe budget cuts in social spending. But ideology should not allow it to dismantle institutions like the PDS that have stood the test of time and which, despite many flaws that merit reform, are an essential component of the survival kit of India’s poor.

Harsh Mander is a former member of the National Advisory Council.

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Published: 20 Oct 2015, 09:49 PM IST
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