Should the PDS be restructured?

DEBATE

The government's decision to put on hold even limited cuts in ration shop entitlements spells trouble for any future attempts to target subsidies

SUBIR GOKARN,
Chief Economist, Crisil

"By tackling the problem of inefficient targeting in the PDS, the government was setting an excellent precedent, which would give it the room to deal with other subsidy schemes"

It would be reasonable to expect that a welfare scheme such as the Public Distribution System (PDS) would, over time, adapt to changed circumstances. In its original conceptualisation, it may certainly have been more than a narrowly focussed anti-poverty programme. Those were days when market prices for foodgrains and other essentials were relatively volatile. Even households that were not poor in the strict sense might have been vulnerable to price movements. In such conditions, it made sense to have a scheme that provided some access to these essentials at predictable prices to any household that wanted it.

However, over time, circumstances have clearly changed. The real disposable income of households has increased significantly over the last two and a half decades, reducing the share of "necessities" in the average household budget and, thereby, making it less vulnerable to price volatility. More importantly, the supply situation of many of these, particularly food items, has reduced the magnitude of price volatility considerably. When volatility appears, the government has adequate tools to deal with it.

Given this, it was quite logical to re-orient the PDS away from the wide-spectrum objectives of the past to a more narrowly focussed and precisely targeted scheme that directly addressed the specific needs of poor households. The differentiation between "above poverty line" and "below poverty line" households a few years ago was a start. The recent announcement by the government that it would raise the issue price of commodities to the former category and, while protecting price, reduce the entitlement for the latter, was another step in the direction of focus and targeting. Even though its immediate fiscal benefits may be limited, over time, as households crossed over the poverty line, the savings would escalate.

In any event, regardless of the immediate fiscal magnitudes, the principle that subsidies should be targeted as precisely as possible is critical to both good fiscal management and social welfare. By tackling the problem of inefficient targeting in the PDS, the government was setting an excellent precedent, which would give it the room to deal with other subsidy schemes, which suffered the same problem. It is sadly ironic that, for many commodities and services that are subsidised in theory, particularly those which are provided by the government, supply has decreased so dramatically that the targeted groups are actually paying high prices for private provision.

It is, therefore, a source of both regret and concern that the government backtracked on its decision. Apparently, the political establishment is yet to come to terms with the fact that economic conditions have changed for the better, from the perspective of both households and markets. This disconnect is usually a source of both bad economics and bad politics.

The views expressed are personal

ABANI ROY,
Member, Revolutionary Socialist Party

"By attempting to reduce the quantity, you are effectively dismantling the subsidy and shirking your responsibility. The only way out is to decentralise the PDS"

We are opposed to any dilution in the idea of food subsidy per se. So long as India is a socialist country "" and the last time I checked, it was still a socialist republic "" it is the state's responsibility to provide food for those who cannot afford to buy from the open market. Once upon a time, there was no dual pricing. Rice was given at Rs 6 a kg to all those who were poor. That was the measure of the state's responsibility. The poverty continues to exist. So how can the state divest itself of the responsibility of making food available to the poor?

Frankly, the cost difference between food given to above poverty line (APL) and below poverty line (BPL) families is marginal. The logic behind it is that some families, despite being eligible for the grain (or rice, as the case may be) are unable to buy their entire entitlement. This grain or rice is then marked up a little and sold to those families which can afford it. This itself should give you some idea of the purchasing power of those above and below the poverty line. They're still the poor.

There have been many suggestions from the rich on how to cut the subsidy bill. One suggestion has been to reduce the quantity of grain or rice. But when you fixed the quantum initially, you did so on the basis of an assessed need of a family for rice or grain. So by attempting to reduce the quantity, you are effectively dismantling the subsidy and shirking your responsibility. How can people eat less because you can't pay the bills any more on account of your altered priorities?

The only constructive way out of the food subsidy issue is to decentralise it and let the state government handle public distribution systems. That way, the state government will save on transportation cost, which can then underwrite the subsidy. Loading and unloading charges, transporting grain over long distances and so on are avoidable costs.

We want a strong public distribution system that works. We don't want it to be weakened. We want it to reach the poor. Food security without corruption, diversion and dilution is our ideal. This is what we will tell the agriculture minister when he calls us for discussions on rejigging food subsidy.

I think the government will find that it will save a lot of money if it simply intervenes in the public distribution system and plugs the leakages. There is no political formation on earth that will support denial of subsidised food to the poor. The problem with our system is that much of the subsidy never reaches the poor. It is diverted on the way and lines the pockets of vested interests. By simply making it efficient, the government can save a lot of money.