Neither food nor security

India is the second largest, fast growing, large economy in the world. It is also has the second largest population in the world. India is home to 1.2 billion (and counting) people. For the sake of comparison we can say that India hosts a bit more than the total population of Africa on little less than one tenth of its size. Catering to such a huge population is a daunting task, especially when it comes to feeding it. Fortunately India is blessed with large and fertile plains fed by perennial rivers and an annual cycle of monsoon.

The land of surplus

In the year 2011-12, India produced a total of 246.2 million tons of food grain (rice, wheat and coarse grains). The census of India carried out in 2011 is yet to throw up details regarding household numbers and the average household size. But according to the census carried out in 2001 India had a total of 191.96 million households and the average household size was 5.3. The 2011 census tells us that India got an additional 181.96 million people in the decade since last census. Assuming an average household size of five the additional households would number 36.4 million, bringing the current number of households to approximately 228.5 million. A simple math will tell us that 246.2 million tons of food grain and 228.5 million households will leave a little more than a ton of food grain per household per year. The national sample survey organization reports that per capita food grain consumption in 2009-10 was roughly 11 Kg per month. The average household will hence consume 660 Kg a year, significantly less than the available and hence leaving a surplus for storage/exports.

Who moved my grains?

The interesting fact however is that 42% of India’s children are malnourished and 58% are stunted. These are alarming numbers, especially when India is a food surplus country. One might ask where all the food is going. Well, much of it just rots in the extreme weather. India made huge progress in food production but failed to create enough storage facilities. A Reuters report from July 2012 quotes that as much as 6 – 19 million tons of food might perish due to lack of proper storage.

Did you work out the freebies?

But that’s just half of the story. India for many decades has a system of “Public Distribution System” (PDS). A system under which heavily subsidies food grains is sold through licensed shops. Eligible families get 35 Kg of food grains a month, rice at Rs. 5.6 (USD 0.093) per Kg and wheat at Rs. 4.1 (USD 0.068) per Kg. Unfortunately the PDS is one of the most corrupt institutions in India. In certain states less than a quarter of the eligible families get their fair share of food. The rest is siphoned off and sold in open market at a premium. An ugly nexus of bureaucrats and private shop owners play the game with impunity.

The ruling UPA government has recently introduced an ordinance (pending a vote when the parliament meets later in July 2103) providing food security to almost two thirds of India’s population. The food security bill will provide additional five kilograms of food grain at prices lower than the PDS price. The scheme will cost the exchequer INR 125,000 crore (USD 20 billion) a year. This is all good, especially since India is gearing up for the national elections early next year. But the irony is that the government plans to implement food security through the same corrupt and inefficient PDS network. There won’t be any surprises if the additional food grain ends up in open market to be sold at a higher price like the rest of the PDS grains.

One step forward three steps back

The government recently introduced a futuristic programme. Households will get the subsidy on cooking gas directly into their bank account once they pay the market price at the time of purchase. This was termed direct cash transfer. It was supposed to be extended to all kinds of subsidies. The next step for the government should have been to extend the subsidy to food grains and eliminate the corrupt nexus of PDS. Supply of more food grains in the open market would have reduced the prices and the poor could have afforded a better choice in the open market. But the government decided to load the PDS with more grains. It is anybody’s guess what will happen to the extra 62 million tons of grains which will be pumped into the PDS.

Successive governments at both centre and the states have created a society, which lives off the freebies. Free food, free electricity, free television sets, free laptops, etc. have won many elections for the politicians. None of the governments think of long term investments for the overall development of the society. Investments in public infrastructure, education and health care are hardly seen.

The poor will get the benefits of food security bill only if the PDS is eliminated and new infrastructure for proper storage of food grains is created. Pouring more into a corrupt system will not help address the needs of the poor, nor will it send a positive signal to the voters. 

Cash in my pockets

For the fiscal year 2011-12 India poured in a total of 2.16 lakh crore rupees (USD 39.7 billion) in subsidy. The three major heads under which this subsidy is rolled out are food, fertilizer and fuel. All three heads have equal share in the booty. The total cost of subsidy is three times the planned outlay for ministry of health and family welfare or just bit lower than the total planned outlay for defense at USD 40.44 billion. It’s not too difficult to get a perspective on how much money is spent on subsidy. Most of the subsidy under all the three categories either fails to reach the true beneficiary or is misused. The public distribution system (PDS) (barring in Madhya Pradesh and Chattisgarh) is highly corrupt and inefficient. Food grains are siphoned off and sold in the open market. Grains meant for PDS rots in open due to lack of proper storage. Cheap fertilizer has lead to indiscriminate usage and reduced soil quality and has made food unsafe. Free power and subsidised fuel has also done little benefit to the farmers. A report by Central Ground Water Board has indicated sharp decline in water table in Northern India. Most of the decline can be attributed to overdrawing of ground water due to free access to electricity and fuel. A big hole is burnt in the national budget with little benefit to show.

Cash or kind? 

The government has finally woken up to the fact and will roll out the first direct cash transfer scheme in the country. It will start in the New Year beginning 1^st January 2013. The idea is to transfer cash directly into the accounts of entitled families and selling the food grains in open market. The argument given by the government is that this will increase the supply in open market (food which was held back to be distributed through PDS will now enter the market) and hence bring the prices down marginally. People will have a choice to buy what they want and when they want. Corruption in the system will be put to an end. These arguments seem plausible, given that such schemes have benefited poor people in other countries as well. The move is also seen as a trump card by the central government for the general elections due in 2014. The scheme is intended to be fully operational by that time. Some states are however unhappy about the scheme. The chief minister of Chhattisgarh has written to the prime minister to withdraw direct cash transfer. He has a valid reason. The credit for good governance will no longer go to the local government, which streamlined the PDS system in Chhattisgarh.

Subsidies are bad for an economy and are worse the way they are handed out at the moment. The new step is indeed a much needed change. The government however should not make it easy for the beneficiaries to get the money. The idea of subsidy is to help the poor balance their budgets so that they can come out of poverty over a period of time. Handing out cash without any conditions will not bring about that change. Proven systems of conditional cash assistance exist in the developing world. The most effective and recognized being the “Bolsa Familia” of Brazil. It is aimed at reducing poverty by direct cash transfer. The aid is linked to the beneficiaries sending their children to school and getting them vaccinated as per the schedule. The cash assistance helps them to top up their limited incomes and schooling and timely vaccination of their children helps in creating a healthy and educated workforce for future.

The Indian system should learn from such schemes and implement some checks and balances. First step would be to set a limit to such assistance. People should not be given lifelong subsidies. Once they know it is unlimited the incentive to work towards it is gone. The benefit should be set to last a certain number of years and after that it will automatically cease. This will ensure that the beneficiaries will utilize the money judiciously. The benefit should also be tied to milestones like in the Brazilian system of children attending school or regular vaccination. Demographic measures like population control and balancing the sex ratio too can be incorporated in the system. Biometric identification (which will be linked to each bank account) of all family members should be used to verify the claims. There is a whole lot which can be done to pull millions out of poverty. The government should be judicious the way it uses public money and make its welfare schemes sustainable rather than populist.