labels: economy - general, agriculture, governance
Food subsidies: Scarcity amidst plentynews
Swati Lodh Kundu
04 June 2005

Food subsidies end up benefiting the grower, the trader and the not-so-poor; only about 12 paise out of every rupee spent on the PDS actually reaches the poor

A major component of the central government's subsidies in India go towards explicit subsidy, mainly on petroleum products, food and fertilisers. These account for 38 per cent of the total government subsidies. A look at the food subsidy (which accounts for more than 60 per cent of the government's explicit subsidy bill) shows clearly how subsidies fail to achieve their objectives.

Food subsidy has grown rapidly from Rs24.50 billion in 1990-91 to Rs265.90 billion in 2005-06 (estimated; the budget estimate of 2004-05 was lower at Rs244.38 billion). This increase is attributable to the 'economic cost' of foodgrains, which includes the minimum support prices (MSP) paid to farmers for procuring foodgrains.

Subsidy is given in two forms - subsidy to farmers through the MSP and by selling foodgrains at a subsidised price through the public distribution system (PDS). The MSPs, specified by the government to the Food Corporation of India (FCI), are based on the recommendation of the Commission on Agricultural Costs and Prices (CACP). However, over the last few years, MSPs have been rising above the price recommended by the CACP, encouraging farmers to sell their produce to the FCI rather than to the market. This has more to do with political compulsions, as the strong farmers' lobby (which political parties can ignore only at their own peril) forces the government to hike the MSPs year after year.

Higher procurement prices means higher issue prices for the PDS. Also, the rising surplus with the FCI leads to shortages in open market availability, thereby further pushing up the open market price. This results in low off-take, since the rising issue price goes beyond the purchasing power of the below poverty line (BPL) consumers. Consequently, the food subsidy, supposedly aimed at the grassroots level, is actually inclined more towards the producers than the consumers.

Minimum Support / Procurement Price of Wheat and Paddy
(Rs/quintal)

Crop Year

Wheat

Paddy

MSP

% change

MSP

% change

1995-96

380

5.6

360

5.9

1996-97

475

25.0

380

5.6

1997-98

510

7.4

415

9.2

1998-99

550

7.8

440

6.0

1999-00

580

5.5

490

11.4

2000-01

610

5.2

510

4.1

2001-02

620

1.6

530

3.9

2002-03

*620

--

*530

--

2003-04

630

1.6

550

3.8

2004-05

640

1.6

560

1.8

*A one-time special drought relief of Rs10 and Rs20 per quintal of wheat and paddy was given over and above the MSP
Source: Economic Survey, 2004-05

Not only this. Overflowing FCI godowns and lack of scientific storage results in a substantial amount of foodgrains being wasted. In fact, estimated losses of foodgrains, according to the Ministry of Food and Civil Supplies, are about 10 per cent of the total production, or about 20 million tonnes a year. To put things in perspective, the loss suffered is about as much as what all of Australia produces. This also pushes up the economic cost of the FCI.

The economic cost of foodgrains to the FCI is of strategic importance, as it influences the food subsidy bill. The FCI is reimbursed the difference between the economic cost of foodgrains and the issue price. Because of the large increase in the economic cost of the FCI, the amount of subsidy paid by the government to the FCI on its sale of its foodgrains had risen from Rs28.50 billion in 1991-92 to Rs241.76 billion in 2002-03. The revised estimate for 2003-04 shows this amount rising to Rs258 billion.

The available data shows that the mere carrying cost of foodgrains accounts for about a quarter of the food subsidy. Clearly, as inefficiency creeps into the system, the subsidy bill gets bloated. This means that rather than being used to ameliorate the lot of the poor, a large chunk of the subsidy bill goes toward paying for the inefficiency of the FCI, as well as pandering to the strong farmers' lobby by hiking the MSP.

In fact, things have reached such ridiculous levels that to reduce the storage costs of the FCI, the government has had to resort to exporting foodgrains by subsidising the exporters! In effect, the government is first subsidising the farmers by increasing the MSP (leading to a larger-than-required collection of foodgrains), and subsequently subsiding exporters to clear off the stockpile of foodgrains, to reduce the storage cost. The BPL consumers, incapable of purchasing at increased prices, have no choice but to stand and stare at their share of grain flying out of their country. The bloated subsidy bill bloats the pain of the target consumers.

On the distribution front, the situation is worse. First, dual pricing creates a two-fold problem. First, raised issue prices leave BPL consumers (who have low purchasing power) incapacitated. Second, APL (above poverty line) consumers shift to BPL ration cards to avail the PDS price. Last, some APL consumers switch to better quality foodgrains available at lower prices in the open market.

The public distribution system (PDS) has always had its justification in providing 'food security' to the poor, but a 1994 survey of rural households carried out by the National Council of Applied Economic Research (NCAER) reveals some disturbing facts. About 40 per cent of the PDS offtake is in the cities. Less than a third of the rural households, in 1994, used the PDS, and these got less than a quarter of their requirements of foodgrains from it.

More shocking are the results of the NCAER study, which found that the poorer households actually use the PDS less than households above the poverty line! Specifically, 30 per cent of the households in the 'lower segment below the poverty line', 29.5 per cent of the 'upper segment below the poverty line', 37.1 per cent of the 'lower segment above the poverty line' and 30.6 per cent of the 'upper segment above the poverty line' use the PDS. This clearly shows how wrong the targeting has been.

According to Dr Kirit Parikh, director of the Indira Gandhi Institute for Development Research, only about 12 paise of every rupee spent on the PDS actually reaches the poor in the form of food; the rest goes to wastage and bureaucratic expenses.

In such a scenario, especially following the NIPFP report, no one could be blamed for expecting some concrete statement to come out during the recent budget, which would have shown the government's intention to ensure that the stupendous amount of money that is spent as subsidies actually achieves its desired target. Unfortunately, nothing is evident. One can only hope that such eye-opening reports are acted upon and not frittered away, as has happened in the past.

also see : Politics dictates priorities
Fertiliser subsidies: breeding inefficiency

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Food subsidies: Scarcity amidst plenty