January 6, 2012

Designing a food security scheme


An Act to ensure food security was promised in the Congress Manifesto for the 2009 General Elections, and reiterated in the President’s Address to Parliament in 2009, 2010 and 2011. These promised that 25kg of rice or wheat at Rs 3/kg would be provided to each family below the poverty line. This issue has seen divergence of opinion within the government and its think tanks such as the national advisory council and the prime minister’s economic advisory council.

There are several dimensions on which Parliament will need to take a view: the target population and the amount of subsidy (both quantum of food and its price); the delivery mechanism; and the demarcation of responsibilities between the various governments.

There are differing opinions on who should be the beneficiaries of a scheme that guarantees food at a subsidised price. One argument is that the subsidies should be targeted at the people who are poor. This raises two questions: where does one draw the poverty line (what are the parameters to judge whether a person or household is poor; and how does) one identify such persons or households? A related issue with any hard line is that there would be some people who just fail to qualify for the benefits; the economic position of such persons would not be very different similar to those who just manage to qualify. Another complication is that such a system creates incentives for leakages. Those who are relatively richer would also likely wield more influence in the society, and could manipulate any targeting list to benefit themselves. Consequently, the intended beneficiaries get left out. Indeed, the NC Saxena Committee had found that about 61percent of the eligible population was excluded from the Below Poverty Line lists while 25percent of non-poor households were included in the lists.

A possible way to address this issue is to universalise the benefits. That is, everyone, regardless of their income or wealth would be eligible to get subsidised food. The issue here would be the total cost of such a scheme. If every person was to receive the same amount as subsidy that a poor person needs, then the overall subsidy bill could be very high. This would have an adverse impact on government finances and the development budget, and would have negative consequences for economic growth and price inflation. Yet another factor would be the amount of food that needs to be procured for the system. If this requirement is a significant proportion of the overall food output, the amount of supply in the free market would be correspondingly smaller. Then the free market would become amenable to price manipulation.

One solution is to make everyone eligible to get benefits but there could be segmentation based on income levels. That is, those who are very poor get a larger amount of food at a lower price; those who are richer get smaller quantities at a higher price (lower subsidy). This solution, however, has the same issues of drawing a poverty line, and identifying the beneficiaries in the different segments.

Photo: Neil Palmer/CIAT

Yet another proposal is to universalise the scheme with some features that help self-selection. The MNREGA provides a good analogy: everyone in a rural area is eligible but only the very poor are likely to do the hard manual labour that the scheme provides. A similar food security scheme would provide food such as coarse grains that are nutritious but are not preferred by the richer sections of society. Those who are close to starvation are likely to take advantage of such a scheme. However, it is not clear whether the large segment which is undernourished (but not starving) will overcome cultural habits and change their diet preferences to benefit from this scheme.

Then there is the question of delivery systems. There are three broad proposals for delivering the subsidy: continue with the public distribution system (PDS), food coupons that can be exchanged for food in grocery stores (or PDS outlets), and direct cash transfers to bank accounts. The PDS system has been prone to leakages – some studies suggest that over 40percent of the subsidy does not reach the intended beneficiaries. Whereas coupons and cash transfers solve this problem, they would still need to address the issues of identifying the beneficiaries (unless they are given to everyone, with the consequent burden on government finances).

The price at which the grain is provided can also have adverse consequences on food production. Take the case of a subsistence farmer. He grows the grain, consumes a part of it, and sells the remaining in his neighbourhood market (the government’s food procurement system works well in only a few states, and may not be a practical option for many farmers.) If the retail price at the PDS outlet is lower than the production cost, the rational behaviour would be to stop growing grain (as both the farmer and his potential customers have a cheaper supplier). Indeed, this year, we have seen farmers in Andhra Pradesh declare a “crop holiday” as a consequence of negative returns from farming.

The division of responsibility between the central and state governments will also need to be addressed. Currently, the centre procures the grain while the states are responsible for distribution. The centre bears the subsidy to the extent of poor people in any state identified by the planning commission. States bear the residual subsidy cost. Any change in the scheme will have implications on both the implementation roles and the financial responsibility.

Our discussion illustrates the complexity of the problem of providing food security. The challenge before the government and Parliament is to design a system that balances various objectives: flexibility to permit fine tuning at various levels (including by states), eliminate hunger, maintain fiscal stability, minimise distortion of functioning of the free market, and maintain economic viability of farming. And, the scheme design should have inbuilt incentive structures to deter leakages and deliver food to the intended beneficiaries. This is a tough task indeed.

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