Saturday, May 09, 2015

Why cash transfers may not work for food subsidies

We have started off with cash transfers for cooking gas. Also, for pensions, maternity benefits, scholarships, etc. The big challenge is cash transfers in lieu of food subsidies. In a well-argued article in EPW, Dipa Sinha contends that this is a bad idea. It's useful to summarise her arguments because, unfortunately, those opposing cash transfers seldom lay out their arguments as well.

First, cash transfers would replace the Public Distribution System (PDS). PDS, as Sinha points out, exists both for procurement as well as distribution- it is meant to take care of both the farmer and the consumer. Cash transfers can't take care of the farmer. Sinha rightly asks what would happen to food procurement once PDS is closed down.

Secondly, the old argument about high leakages in PDS is not as strong today given that leakages have come down generally and are pretty low in many states. Experience shows that wider coverage and lower prices help reduce leakages- and that is precisely what is intended under the Food Security Act. It would indeed be an irony that the PDS were to be shut down precisely when we appear to be on the verge of effecting a significant improvement in it.

How does wider coverage help? Well, the problem with focusing only on the BPL category is that a large number who qualify get left out. Making the system universal takes care of this lot. Moreover, having two prices, one for BPL and another for APL, is what creates incentives for leakages. This may sound paradoxical but the wider the coverage, the lesser is the leakage- this is because wider coverage addresses dual pricing which is the source of the leakage.

Thirdly, despite Jan Dhan Yojana, access to the banking system is difficult. So how do the poor access the cash they need to buy food? It will take years to put in place the architecture for reliable and accessible cash transfers.

Fourthly, if PDS outlets are closed, where do people go for food? The local kirana store is not a reliable substitute and, given that store owner doubles as a money lender, it could push more of the poor into debt.

There are other advantages to having PDS that Sinha mentions: the money saved on buying cereals goes towards buying better foods such as pulses; it protects the poor from the vagaries of price fluctuations. It will be difficult to offer protection against price fluctuation with cash transfers whatever the attempt to link these to inflation.

Cash transfers for food subsidies can be contemplated once we are at a higher income level, nutrition levels have improved and poverty is less acute than it is today. Dismantling the PDS right now is fraught with huge risk.

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