Cash transfer of PDS benefits would mean limiting MSP operations Sayantan Bera
If it is successful, the move could ensure better targeting of food subsidies and greater transparency in subsidy payouts. Photo: Ramesh Pathania/Mint
New Delhi: Undeterred by the humiliating defeat inflicted on it by the populist Aam Aadmi Party (AAP) in the Delhi state assembly polls, the Bharatiya Janata Party-led (BJP-led) government is pressing ahead with efforts to reduce its bill on food subsidies. The government is initiating a pilot project in all Union territories and select districts in states under which consumers will be selected on the basis of their Aadhaar unique identification numbers and state administrations can choose to deliver benefits in the form of direct cash transfers or by supplying subsidized food through the public distribution system (PDS).
If successful, the move could ensure better targeting of food subsidies and bring greater transparency in subsidy payouts. At the same time, it opens the door for cash transfers—something that is already being undertaken in the case of the cooking gas subsidy.
The move follows the report of a government-appointed panel that said a large chunk of subsidized foodgrain wasn’t reaching intended beneficiaries of the PDS and instead suggested cash transfers, which it estimated could save the exchequer Rs.30,000 crore every year.
The BJP was routed in the February Delhi state elections, winning only three out of the 70 assembly seats. The AAP’s landslide victory in the elections on the promise of reduced water and electricity prices raised concerns that the BJP-led government at the centre may go slow on proposed reforms, including efforts to pare subsidies.
At the same time, the move to reduce the subsidy bill may be fraught with political risk and invite a potential rural backlash, one analyst said. “The decision could prove to be suicidal, more so at a time when rural India is badly hit. The ongoing protests on land ordinance amply shows that neither political parties nor farmers will pat it on its back for steamrolling reforms,” said Himanshu, an associate professor at Jawaharlal Nehru University and a Mint columnist.
The government’s decision to move to a direct cash transfer system for PDS was taken ahead of the budget to be presented on 28 February. In a letter to state governments on 10 February, Deepak Kumar, joint secretary in the food ministry, wrote that the centre was looking to implement direct benefit transfer (DBT) initially in Union territories and a few districts of the states on a pilot basis. A copy of the letter has been reviewed by Mint.
The ministry suggested three possible models that could be adopted after complete digitization of beneficiary data linked to Aadhaar.
Under the first model, the food subsidy will be transferred to the bank accounts of beneficiaries directly every month and households will have to purchase foodgrains from the market.
In the second model, fair-price shops (FPS) will be supplied foodgrains at minimum support prices (MSP) or near-market prices. Beneficiary households will purchase foodgrains from the FPS and all transactions will be recorded on a point-of-sale device.
The difference between the FPS price and central issue price (at which the beneficiary households are entitled to foodgrain, say, Rs.2 per kg rice) will be credited to beneficiary bank accounts against actual purchases.
In the third model, states could follow the existing mode of manual distribution of foodgrains, but aided by a digitized database linked to Aadhaar. Whichever model states may choose, the directive from the centre makes it clear that the food subsidy will be linked to the Aadhaar database.
The letter to states further urges them to be proactive in opening up of new bank accounts through the Pradhan Mantri Jan-Dhan Yojana, which seeks to ensure a bank account for all households in India.
The central government’s decision comes after a committee constituted by the Narendra Modi government recommended a complete overhaul of the 50-year-old Food Corporation of India (FCI) and its operations.
The panel, headed by former food minister Shanta Kumar, recommended the government change the national food security law to reduce the coverage from 67% of the population to 40% and gradually introduce cash transfers. The panel calculated that leakages in existing PDS is as high as 47%, meaning a large chunk of subsidized rations are not reaching intended beneficiaries, and cash transfers alone could save the government Rs.30,000 crore every year.
But an analysis by economists Jean Dreze and Reetika Khera, published in the Economic and Political Weekly this month, said the panel based its leakage estimates on erroneous calculations and in reality the leakages range between 32% and 42%. They argued that the FCI panel downplayed PDS reforms carried out in states such as Bihar, Chhattisgarh and Odisha, where leakages have declined substantially, to bolster the case for cash transfers.
On Tuesday, the food ministry, in a written reply, clarified in the Lok Sabha that it will not amend the National Food Security Act to reduce the population covered—the other major recommendation of the panel. However, a transition to a cash transfer system would mean the government would have to limit its procurement of foodgrain from farmers to strategic buffer stocks.
Once the government rolls out cash transfers, it will not require to procure so much grain—55-60 million tonnes a year now—because the food would no longer be physically distributed; it will have to cut procurement down to nearly a third for maintaining strategic buffer reserves of around 20-25 million tonnes. This could be another point of resistance for farmers’ groups.
Additionally, marking benefits under the food security law through Aadhaar could be tough for the government. The Supreme Court in March last year had said no citizen can be deprived of any entitled service for want of an Aadhaar number.
“Initiating cash transfers will completely destroy the PDS system, as procurement from farmers will eventually be cut down. Since biometric data cannot be collected for children under five, it may limit households’ entitlement if Aadhaar number is made mandatory,” said Dipa Sinha, a fellow at the Centre for Equity Studies, a Delhi-based research and advocacy non-profit group, and convenor of the steering committee of the Right To Food campaign.
“Moreover, banks are not accessible to poor households in rural areas but ration shops are. The cash transfer rollout will adversely affect the food security of such households,” Sinha cautioned.
