Tuesday, 5 February 2013

Right hand, left hand

Indian Express, 5th February 2013

Government hasn't thought cash transfers through. Food security bill adds to the confusion

Does the UPA government believe that the public distribution system is broken and cash transfers are needed, or does it believe that the PDS works well and can serve a multiple of the numbers it is currently catering to?

In the budget session of Parliament, the government is expected to further push subsidy expenditure through cash transfers. In the same session, it is expected to table the food security bill. Surely, it is clear that there is a contradiction between the philosophy of the two. The strategy of cash transfers, when it means giving money to poor households to bring them above the poverty line, is based on the philosophy that households should be free to choose what they buy. Providing subsidised cereal to households is a policy that is based on the notion that it is best if the state decides what is good for the people and provides it. It is unlikely that in the mind of this government, that has not yet clearly articulated the full policy, cash transfers are designed to be like a negative income tax where freedom of choice is given to the individual and the family, which can buy what it chooses to. A badly designed cash transfer scheme would be one linked to consumption of specific items - food, education, kerosene, fertiliser, etc. Under this scheme, the choice of where to buy would lie with the household.

Currently, cash transfers are limited to a few small items like scholarships and pensions. They can be kept limited to these items and incrementally expanded to include a few more. Or, they could be expected to cover all subsidies, where an income subsidy amount is paid directly to the beneficiary, rather than through a price subsidy on particular items. If the logic of cash transfers was to be carried forward, each poor household would be given a sum to money to pull it above the poverty line. Like an income tax, which is paid by better-off households to the government, this would be a benefit or a "negative income tax" the government pays to households.

Giving poor households money is based on the belief that no one understands the needs and priorities of the household better than the individual and her family. If she chooses, a person below the poverty line could pay for the transport that takes her to a hospital instead of buying 10 kg of rice. Cash transfers are genuinely meaningful if they become the main plank of a government's anti-poverty programme. If it is one of many programmes, then it has a marginal impact on both efficiency and government expenditure.

Cash transfers in, say, scholarships or pensions, can only solve the problem of delay in payments. If combined with Aadhaar, there will be some additional saving for the government, as ghost and duplicate beneficiaries can be removed from the system. This might save as much as 10 to 15 per cent of the expenditure under that head. The big savings through cash transfers can come if, instead of paying a price subsidy, say on wheat, the government could transfer money directly to a family to buy a minimum consumption bundle to rise above the poverty line. That would enable the government to get rid of a large number of price subsidies, such as those on kerosene, LPG and food. Families would then buy these directly at market prices. The theft and wastage from the public distribution system would go away.

The food security bill, as proposed to be tabled, is based on a completely different philosophy. Not only does it assume that it is best for the poor in India to eat wheat and rice - instead of pulses, fish, vegetables, eggs or milk - it also assumes that the state will handle the purchase, storage and sale of this wheat and rice better than the market can. It assumes that this wheat and rice (often rotting, as it is stored in the open due to the shortage of warehouses with the Food Corporation of India) will be bought by the people. It assumes that people are not buying large quantities of wheat and rice because the price is too high, and that once it is supplied by the government at a low price, they are going to buy it.

Several assumptions about individual preferences are being made here. It is being assumed that the behaviour observed in household data that shows that diversity in food, and particularly the preference for protein such as dal, eggs, fish, chicken and meat, does not hold true or will not hold true as incomes rise. But the evidence suggests otherwise. In the last few years, there has been an increase in the price of proteins and some observers have linked the price rise to the increase in demand resulting from rural incomes going up. On the other hand, cereal prices have not been the fastest growing prices. The prices of non-cereal food items have grown the fastest, reflecting growing demand.

In addition to the issue of preferences is the problem of leakages from the PDS. The problem is well known and understood to be large. Many committees have suggested shutting the PDS down and replacing it with food vouchers. If the bill is passed, then for providing 67 per cent of the population some 50 million tons of cereals, the PDS will have to be expanded.

The answer to why the government is moving in two opposite directions does not appear to lie in the political beliefs or philosophy of the Congress. Maybe it lies in the strategy of providing goodies to voters in whatever way possible. If the strategy works and the Congress is voted back to power, the food security act will likely become one of the biggest headaches of the next government. Instead, the government should focus on fiscal consolidation and growth in this budget, and not promise more money down leaky pipes.

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