Govt should distribute cash, not grains, under free food programme

The evaluation could, under the right circumstances, better inform subsidy policy design and help kickstart long-pending reforms. There’s enough evidence available already – such as from a similar evaluation undertaken in 2014-15 that showed significant pilferage. The main findings went on to become a part of the report the Shanta Kumar committee submitted to Prime Minister Narendra Modi in 2015. A key recommendation was that the government gradually stop distributing food grains and instead distribute cash with direct benefit transfers. The government has not yet implemented that recommendation.

A new leakage evaluation would truly serve its purpose only if it became the first step in switching from free food grains to cash transfers. For, as NITI Aayog has also pointed out, although India runs one of the largest public food safety nets in the world through the National Food Security Act (NFSA), enacted by the UPA government in 2013, the country still accounts for roughly 30% of global hunger. The gains in food security and nutritional outcomes are not commensurate with the increase in public expenditure the programme has imposed on the budget. (Together with the cooking gas subsidy, it costs the exchequer nearly ₹4 lakh crore a year.)

This is hardly surprising. Nutritional outcomes can only improve with adequate consumption of non-cereals such as pulses, vegetables, milk and so on, which the poor cannot afford to buy at market prices. For that to happen, the food subsidy will have to go beyond providing free cereals. Evidence supporting the need for this big-ticket reform has been piling up for a while now. Switching to cash transfers is the best way forward.

The available evidence suggests that leakages from the free food programme are rampant, as Mint reported recently. It shows that non-basmati rice exports in FY23 – when India became the world's largest exporter of rice, accounting for 40% of world exports – were at prices below the year's MSP. This, the study argues, suggests that rice from the free food programme has been leaking in large quantities into the export market.

The food safety net for people living below the poverty line started as a nearly universal public distribution system before it was replaced in 1997 by a targeted public distribution system (TPDS), which ran until 2012. The TPDS sold mainly rice and wheat from fair-price shops at significantly lower than market prices. It suffered from well-known deficiencies such as poor identification of the targeted beneficiaries, inefficient delivery and leakages. In 2000 the Antyodaya Anna Yojana (AAY) increased the TPDS focus on the poorest segments of the below-poverty-line (BPL) population.

In 2013 the NFSA paved the way to shift from the welfare approach of the TPDS programme to a rights-based approach for social protection. It legally entitled eligible beneficiaries to receive 5 kg of food grains at highly subsidised prices from the modified TPDS. During the pandemic, an additional 5 kg of grains per person per month was provided to more than 800 million beneficiaries of NFSA. This was discontinued after December 2022.

The evaluation of leakages conducted in 2014-15 focused on six states. Three of these — Bihar, Chhattisgarh and Karnataka — had already implemented the NFSA while Assam, Uttar Pradesh and West Bengal were still following the TPDS. A primary household survey was conducted between October 2014 and December 2014 in these states.

The main findings were that while the PDS was meeting a significant portion of the total demand for food grains from poor people – more than 90% BPL and AAY categories in six states used it – they did not always receive their full quota because of faulty delivery mechanisms. At times, beneficiaries also paid more than they were supposed to.

The gap between the entitled amount and the take-home amount varied across states. In Bihar, 42% of the poorest on average received 1.1 kg to 3kg less than their full entitlement. On average, BPL families received 6 kg and 7 kg less than their quota in Assam and Uttar Pradesh, respectively, and 1.6 kg less in West Bengal.

Political connections and caste were found to play a role in accessing the benefits. Chhattisgarh had the lowest exclusion at 2% of all households eligible for benefits, while Assam had the highest at 71%.

The evaluation study measured the diversion of food grains by estimating leakages. Leakages were found to be the lowest in Chhattisgarh (6.96%), followed by Bihar (16.28%) and Karnataka (17.34%). The average leakage for the BPL category in Assam, Uttar Pradesh and West Bengal was 36.76%, 32.87% and 28.19%, respectively.

The study found that, on average, one person needs 8 kg to 13 kg of food grains, including rice and wheat, a month. Even though poor people ended up paying some extra money to buy PDS grains, it was still many times lower than the market price.

Despite all its ills, the welfare benefits were found to be significant. The average amount of implicit subsidy through the PDS increased approximately threefold between 2004–05 and 2011–12. Implementation of the NFSA in 2013 resulted in a significant increase in the amount of subsidy, mainly for the BPL and AAY categories. Subsidies for the APL category decreased because the allocation for this group was either removed in some states or reduced significantly in others.

The amount of per-capita implicit subsidy per month (a sort of savings for the poor as they would have to spend on food grains with it) in the absence of the scheme for a BPL cardholder in Assam, Bihar, Chhattisgarh, Karnataka, Uttar Pradesh and West Bengal was found to be ₹92, ₹79, ₹141, ₹140, ₹73 and ₹66, respectively. The conclusion was that though the PDS had improved over time, there was considerable room for improvement. Poorly performing states lagged considerably behind the best-performing ones.

Legally, shifting from food grains to a cash transfer isn’t a difficult reform as the NFSA allows for giving cash instead of food grains. Karnataka has, in fact, recently started giving cash instead of food grains after the central government refused to release food grains to the state. The government has already moved several of its welfare schemes to cash, using direct benefit transfers.

Once beneficiaries start to spend this cash on non-cereals, the reform will make the food subsidy less distortionary. The government’s procurement of cereals will drop, letting farmers respond to growth in the market for non-cereals by cultivating them in larger quantities. The market prices of these tend to be more remunerative than the floor prices at which the government procures cereals. This would increase farmers’ incomes and raise consumption spending, boosting GDP growth.

The reform was not implemented in 2015 because of opposition from representatives of fair-price shops, which feared the closure of the PDS would affect their livelihoods. The fears are unfounded. The bulk of the cash transfers will likely be spent on food grains and non-cereals from these very shops. If anything, the losses to leakages and corruption would be replaced by a growing market for non-cereals.