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Business News/ Politics / Policy/  Did FCI panel inflate leakage figures to bolster case for cash transfers?
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Did FCI panel inflate leakage figures to bolster case for cash transfers?

Experts say the panel's suggestions on public distribution system overlooked reforms undertaken by states

A file photo of a ration shop. The FCI panel has also recommended that coverage under the National Food Security Act be reduced from 67% of the population to 40%. Photo: Indranil Bhoumik/MintPremium
A file photo of a ration shop. The FCI panel has also recommended that coverage under the National Food Security Act be reduced from 67% of the population to 40%. Photo: Indranil Bhoumik/Mint

New Delhi: The high-level committee on restructuring of the Food Corporation of India (FCI), which suggested sweeping changes in the procurement and distribution of foodgrains, may have based its conclusions on inflated leakages in the public distribution system (PDS), experts say.

The panel recommended that coverage under the National Food Security Act (NFSA) be reduced from 67% of the population to 40%.

It suggested that the government begin direct cash transfers of food subsidy because the existing delivery mechanisms lead to a leakage of as much as 47%, meaning a large chunk of the subsidized grains does not reach intended beneficiaries.

The committee, headed by former food minister Shanta Kumar, was formed by National Democratic Alliance (NDA) government in August and submitted its report in January.

Experts have questioned the methodology used by the panel to arrive at the leakage number and recommend direct cash transfer.

A recent analysis by economists Jean Dreze and Reetika Khera says the high-level committee, or HLC, based its sweeping recommendations on erroneous calculations and downplayed PDS reforms carried out in states such as Bihar, Chhattisgarh and Odisha where leakages have declined substantially.

They, in turn, argue that leakages range between 32% and 42% and that the above poverty line (APL) quota is the likely source of mass leakages.

“The HLC used PDS leakages to justify phasing out the physical delivery of food grains. Even 30% leakage is high but there is growing evidence of leakages coming down substantially in states which undertook serious reforms. These reforms should be expanded across the country instead of suggesting a phase out," said Dreze, honorary professor at the Delhi School of Economics and former member of the National Advisory Council in the previous United Progressive Alliance (UPA) government.

The PDS reforms carried out by states include near universalization of PDS in select pockets, door-step delivery, computerization and replacing privately run ration shops with government-owned ones in Odisha, and introduction of tracking coupons and new list of ration cards based on simple exclusion criterion in Bihar.

Bar-coded tracking coupons are given to BPL households in Bihar to get foodgrains from ration shops.

The Hindu on Wednesday reported on the paper by Dreze and Khera to be published shortly in the Economic and Political Weekly.

HLC estimates

In the paper, Dreze and Khera argue that the HLC report based their estimate of PDS leakages by arriving at a faulty and lower estimate of total PDS purchases and inflating the offtake from the Food Corporation of India.

The HLC took the estimates from a 2015 working paper by Ashok Gulati and Shweta Saini published by New Delhi-based Indian Council for Research on International Economic Relations (ICRIER). Gulati is also a member of the HLC.

Statewise, the PDS purchases were arrived at by multiplying the average per capita PDS purchase by an independent estimate of the number of people with a ration card.

Since the average per capita purchase data from the National Sample Survey Organisation (NSSO) is for all households, and not just households with a ration card, the correct practice would be to multiply the average purchase with the total population. Further, the HLC took the offtake from FCI for four other welfare schemes (like the Integrated Child Development Services) on the understanding that NSSO-PDS purchases include these schemes.

However, Dreze and Khera argue that the 68th round NSSO report clearly states that PDS purchases do not include these schemes and other ad hoc allocations. These errors lead to an inflated estimate of 47% leakage instead of the actual 42%.

Statewise, incorrect estimates were used by the HLC report to argue that PDS reforms had no bearing on leakages, says Dreze. What’s more, the HLC estimate for states, which recently undertook PDS reforms, are at wide variance with estimates of Dreze and Khera.

Bihar, for instance, recorded a dramatic reduction in leakages from 91% in 2004-05 to 24% in 2011-12, according to Dreze and Khera. In comparison, HLC estimated that leakages fell from 91% to 59% over the same period. The variance in this decline is significant for all-India numbers—54% to 42%—over this period, according to Dreze and Khera, compared to 54% to 47% according to estimates used by the HLC.

Kerosene card

“The source of leakage is as important as the quantum of leakage. The APL (above poverty line) quota is a source of mass leakage as it was a dumping ground for excess food stocks during 2000s. Often APL households aren’t aware of their PDS allotments and corrupt dealers kept them in the dark. In states like Uttar Pradesh, the bulk of the APL quota went straight to the black market and APL families treated their ration card as a kerosene card," says Dreze. “Since the data used by HLC and us are from 2011-12, we expect states which undertook reforms have bettered their performance."

By using another data set, the Indian Human Development Survey (IHDS), Dreze and Khera further show that the decline in leakages was sharper, from 49% in 2004-05 to 32% in 2011-12 for the entire country. IHDS is a survey of 42,000 households across India conducted by the National Council for Applied Economic Research, Delhi, and the University of Maryland.

It is unlikely that the inflated leakage numbers are an oversight and seem more to be wilful on part of the HLC, according to Himanshu, an associate professor at Centre for Economic Studies and Planning with Jawaharlal Nehru University, Delhi, and a Mint columnist. “That leakages have come down is confirmed by successive NSSO reports and my own research (published in Economic and Political Weekly in 2013) that shows all India leakage of 35%. Among states, Gujarat with 67.5% leakage is the worst performer among all Indian states but this fact is conveniently ignored by the HLC."

“It’s disappointing that the present government is unable to implement the NFSA (National Food Security Act) nine months after the deadline and instead wants to weaken it in all possible ways," added Himanshu.

Ashok Gulati, member of the HLC and author of the paper that calculated the leakage numbers, argues that the issue at hand is more fundamental.

“Even 42% leakage is a huge wastage. The PDS system is trying to achieve equity through price policy (subsidized rations). Instead, the more efficient way to go about is through income transfers," says Gulati.

“In 18 states of the country, number of ration cards exceed the number of people. A move toward direct cash transfer could be a game changer in plugging these leakages."

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Updated: 06 Feb 2015, 01:30 AM IST
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