Flickr / Calamur
Flickr / Calamur

In cash or in kind?

A universal Public Distribution System would do better than direct cash transfers in solving India’s food-policy conundrum

On 1 January 2013, the Government of India started an ambitious direct cash transfer experiment in 20 districts spread across 16 states, countrywide. As part of this scheme, the government transfers cash into the bank accounts of beneficiaries of a number of welfare schemes, including educational scholarships for marginalised groups and pensions for widows. Subsidies on food, fertilisers, diesel and kerosene have been kept outside this experiment's ambit for the time being. However, there are proposals from influential quarters that cash transfers substitute the present in-kind payments in the Public Distribution System (PDS), which covers food grains and other items essential for survival. But what are the reasons for and implications of replacing food subsidies with direct cash transfers?

This move towards targeted direct cash transfers is part of a worldwide trend. Since the 1980s, developing countries have seen a shift away from universal and unconditional government-supported welfare schemes. Governments in many Latin American countries, in consultation with multilateral lending institutions like the World Bank, introduced Targeted and Conditional Cash Transfer Programmes (TCCTP) as part of larger poverty alleviation schemes. In India, the first major change in providing welfare was introduced in 1997, when households benefitting from the PDS were split into two groups – those living above the poverty line (APL), and those living below it (BPL). This was the beginning of India's targeted PDS.

With this move, APL households received fewer entitlements and faced a higher issue price (the price at which items could be purchased from the countrywide network of fair-price PDS shops). In subsequent years, however, the issue price of goods often rose above the market price. In these circumstances, APL households did not, quite naturally, use the PDS. Therefore, the post-1997 system primarily catered to BPL households, except in a handful of economically backward districts where PDS remained universal and untargeted. For BPL households, issue prices always remain lower than relevant market prices, and each household can buy certain maximum amounts of grains and other crucial items, with the limits varying from state to state.

A universal, in-kind PDS recognises people as citizens who have inalienable rights, including that to food and a healthy life; a targeted cash transfer scheme does not

Recent government proposals, including the Expert Committee on National Food Security Bill that recommended a cash transfer scheme, seek to push the PDS ever closer to the TCCTP model. Instead of direct delivery of grains, for example, beneficiaries would get smart cards or food coupons that they could then use to buy food at subsidised prices from ordinary shops by swiping their cards or transferring coupons to the shopkeeper. Besides citing the success of such programmes in several Latin American countries, the government also argued that a targeted and conditional cash transfer model would improve fiscal discipline, bypass corruption in the present system, and resolve many difficulties that migrant labourers face in using the PDS.

These arguments have been tested in many studies, a review of which shows that the theoretical and empirical justification for the move towards a cash transfer scheme is weak. In fact, we believe that the debate over the cash transfer scheme touches on a deeper issue: it lies at the heart of how the state views its relationship with its citizens. A universal, in-kind PDS recognises people as citizens who have inalienable rights, including that to food and a healthy life; a targeted cash transfer scheme does not. But making a universal, in-kind PDS work for the poor requires more than just an expansion of government. It requires the creation of institutions that facilitate collective, grassroots-level action by the poor in order to make the government's political and administrative wings, including the welfare system, more accountable.

The demise of universal PDS

In 1951, faced with endemic poverty, the postcolonial Indian state put in place an elaborate Food Management System that had two distinct but interrelated aspects: procurement and distribution. In procurement, the government purchased grains from farmers at prices that would cover the costs of cultivation and also leave them with some surplus, protecting their incomes from any sharp falls. The price, stipulated for each of several grains and applied uniformly countrywide, was known as the minimum support price. At the distribution end, in principle all households were to be issued ration cards that entitled them to purchase pre-allocated amounts of grains and essential items at affordable prices from fair-price shops. The ration cards also served as a proof of citizenship, and were issued regardless of a household's income.

The universal Public Distribution System was meant to address at least two important issues: poverty, as manifest in under- or malnutrition of a large section of the population; and the stability of food prices. Of course, this system has always entailed substantial costs for the government: the difference between procurement and issue prices; the collection and maintenance of adequate stocks of goods; storage and distribution; maintaining a network of fair-price shops. According to an article by Devesh Kapur in the Economic and Political Weekly in May 2011, the government's total food subsidy in 2011 was around INR 60,000 crores, or 0.78 percent of the GDP. But if the system could provide significant benefits in terms of poverty reduction and price stability, these costs could be easily justified.

Unfortunately, the system did not work very well: actual access to the PDS was rather limited, even after efforts to focus it on the poorest households. According to a 2011 article by economists Himanshu and Abhijit Sen, only around 26 percent of eligible households made PDS purchases in 1993-4, although this low figure might be an aberration since the issue price was above the minimum support price paid to farmers that particular year, making it cheaper for consumers to bypass the fair-price system. Additionally, a long chain of agents – from fair-price shop owners all the way to powerful politicians in state capitals – diverted grain away from the PDS to sell it on the black market for huge profits.

By all accounts, the move to targeted PDS after 1997 was a disaster. The process of identifying and classifying BPL and APL households was plagued with problems; even as a large section of poor households was left out, sizeable numbers of wealthy households now received benefits. While the targeted system increased general access to benefits only marginally, it greatly increased 'leakage' – the euphemistic term for diverting PDS goods to the black market. In 2004-05, leakage of rice had increased to 40 percent from 19 percent in 1993-94, while leakage of wheat had increased to 73 percent from 41 percent in 1993-4. Further analysis by the national Planning Commission confirmed that leakage had doubled since the introduction of targeting. Food prices were generally higher and more volatile under the revised regime, which was clearly not equipped to ensure price stability or address malnutrition and poverty. A government-appointed High Level Committee on Long-term Grain Policy recommended a return to universal PDS in 2002, yet the government ignored this advice and continued with the in-kind, targeted PDS.

In October 2010, the National Advisory Council (NAC), a policy group headed by Congress President Sonia Gandhi, presented a set of recommendations to the prime minister in the form of a draft National Food Security Bill. With universal PDS off the table, the draft bill recommended a large expansion of targeted PDS coverage to deal with malnutrition. It suggested a revamped PDS that would cover 75 percent of the population, with a 'priority' group of core beneficiaries who would receive food grains at a nominal price – between INR 1 and 3 per kilogram. The prime minister set up an 'expert committee' to study the draft bill and make concrete recommendations, headed by economist C Rangarajan, who now heads the prime minister's Economic Advisory Council. Rangarajan rejected virtually the entire NAC proposal, which was itself a watered-down version of a universal PDS. Instead, the Rangarajan Committee argued for a continuation of the targeted PDS, but with even lower prices for a slightly expanded set of BPL households, and new measures to exclude around 60 percent of the population from the PDS. Furthermore, it recommended comprehensive computerisation of the system, and the introduction of smart cards, which would serve for both identification and payment purposes, for beneficiaries. The Food Security Bill that was recently passed by the Union Cabinet and introduced in the parliament stands somewhere between the recommendations of the NAC draft and the Rangarajan Committee, pegging coverage at 67 percent.

Since then, there have been two broad approaches to 'reforming' the targeted PDS. The first approach, building on the recommendations of the Rangarajan Committee, urges replacing the targeted PDS with a cash transfer scheme. Proponents of this approach include the central government, sections of Congress, the vast majority of pro-reform economists, policymakers and commentators, and even some progressive economists and analysts. The alternative approach argues for a return to a universal or semi-universal PDS. This second option is championed by various progressive peoples' movements, the mainstream leftist parties, civil-society groups advocating a rights-based approach to public policy, and – quite paradoxically – state governments run by the rightwing Bharatiya Janata Party. While the first approach argues for a targeted scheme in which entitlements will be disbursed in cash, the second approach advocates disbursing entitlements in the form of physical commodities. The National Food Security Bill unsurprisingly toes the Rangarajan Committee's line, and prescribes reforming the PDS by "introducing schemes such as cash transfer, food coupons or other schemes to the targeted beneficiaries in lieu of their foodgrain entitlements."

Let them eat cash

The differentiated cash transfer scheme proposed by economist Peter Svedberg comes across as the strongest and best informed of the many types of cash transfer programmes being discussed in India today. Svedberg's proposal would include as beneficiaries just three types of households: all Scheduled Caste and Scheduled Tribe households, all households with no literate adult, and all casual labour households where the head of the household relies on labour to earn a living but is not permanently employed. This, however, would automatically include about two-thirds of all households in the country. While this is lower than the 75 percent coverage proposed by the NAC, it does still include a large section of India's poor. Svedberg's criteria limit the scope of errors of exclusion, and obviate the need to estimate poverty lines and household incomes, including or excluding beneficiaries accordingly, as is done with current BPL lists. Svedberg's proposed scheme would also greatly increase transfers to the poorest of the poor as compared to what they receive under the current targeted PDS. Since it would entail a transfer of funds from the rich to the poor, Svedberg's proposal would also have a progressive impact on income distribution. The nature of the direct cash transfers would limit the possibility of corruption and fraud, and also reduce the amount of grain that needs to be transported and stored by government agencies, both of which would reduce operational costs substantially and allow the overall budget for the scheme to be maintained at same level as that of the current PDS. In contrast, the budget for even a semi-universal PDS would be much higher. Svedberg's proposal is also strengthened by evidence from Mexico and Brazil – detailed in the 2010 book Just Give Money to the Poor: The development revolution from the Global South – that conditional cash transfer schemes have had positive overall impacts on poverty reduction.

Economist Ashok Kotwal has also argued for a cash transfer programme by highlighting that retailers would then receive the same price from PDS buyers as they would by diverting goods to the black market, removing the incentive for corruption and ‘leakage’. Like Svedberg, Kotwal also emphasises that cash transfers would slash government costs in procurement, transport and distribution of grain.

Critics of direct cash transfers, however, highlight serious problems. Many remain unconvinced that cash transfers will necessarily reduce corruption. Kotwal is correct that cash transfers would eliminate the incentive for sellers to divert grains to the black market, but there are other mechanisms that might intervene to reduce the volume of grain reaching intended beneficiaries. There is, for instance, no reason to believe that corruption will not occur in disbursing cash entitlements or coupons.

Actual access to the PDS was rather limited, even after efforts to focus it on the poorest households

The first complaint relates to the Unique Identification (UID) scheme necessary to implement a cash transfer programme. The UID project, initially conceived by the National Planning Commission as a means of providing identification to all Indian residents, would also be used for the “efficient delivery of welfare services”. As pointed out by development economist Jean Dreze and many others, the UID can easily be misused by the state to undermine civil liberties. In any case, given the massive scope of the project, UID coverage will not be widespread for many years to come, and even then there is still the possibility of large-scale exclusion.

Other critics warn that under cash transfer schemes, the money may be used irresponsibly – for instance to buy intoxicants or other non-essential items. In a more sophisticated argument along these lines, economist Amartya Sen has warned that substituting cash transfers for food subsidies may hurt children, and especially girls, in a milieu marked by biased social and familial priorities. Further, cash transfers will not address issues of food-price inflation. To resolve this problem, Kotwal and others have proposed that the government issue written assurance of action to tackle inflation, but this would be a highly unrealistic and ineffective measure given the government’s tendency to squeeze labourers’ incomes. For example, labourers’ wages under the National Rural Employment Guarantee Scheme have not been adequately indexed to inflation, sometimes even violating the minimum wage limits of individual states.

Economist Amartya Sen has warned that substituting cash transfers for food subsidies may hurt children, and especially girls, in a milieu marked by biased social and familial priorities

Unfortunately, many of these debates seem to ignore the opinions of intended beneficiaries. A 2011 study of the existing PDS by the economist Reetika Khera shows that nearly 67 percent of respondents prefer food over cash. This figure does, however, vary widely across states, with support for in-kind transfers higher in states where the PDS is currently functioning well. Elsewhere, in states like Bihar where PDS has a dismal record, support for cash transfers is strong. Additionally, support for cash transfers rises somewhat in line with the economic wellbeing of the household, but since any welfare scheme whether in cash or kind would be intended mainly for the poor, preference for in-kind transfers among poorer respondents is a prima facie case against the move towards cash transfers.

Respondents who preferred in-kind transfers in Khera’s study gave a variety of reasons for doing so. First, the in-kind PDS provides better food security, since households will receive a set amount of food irrespective of market prices and conditions. The hassle associated with receiving cash or coupons from banks and government offices, the wider prevalence of fair-price shops than banks in rural areas, widespread illiteracy and ignorance about legal and official procedures, and expected demands for ‘cuts’ from civil servants when money is disbursed all increased support for in-kind transfers. Finally, respondents also cited the lack of access to regular markets where they could purchase goods with cash or coupons. The network of fair-price shops has penetrated very deeply across India, and is often the only source of provisions for inhabitants of remote rural areas.

As previously stated, supporters of cash transfers often cite the examples of Latin American countries, especially Brazil and Mexico, to bolster their case. But close scrutiny of these cases suggests that they are not relevant to the Indian situation. Nearly 85 percent of the Brazilian population lives in cities, while in Mexico the corresponding figure is over 75 percent. A cash transfer scheme can operate well only when it is supported by a dense grid of banks and a well-connected network of markets, as well as good power, transport and information technology infrastructure.

These conditions are extremely unlikely to be satisfied in India where, as of 2011, 70 percent of the population lived in rural areas. Cash transfers in Latin American countries complement rather than substitute functioning education and healthcare systems. In other words, in these countries, large sections of the population have already been provided with essential amenities, and cash transfers help extend benefits to certain fringe communities, relatively small in size, which are otherwise excluded. Brazil flirted briefly with food stamps, but the scheme was rejected after severe criticism by academics, policymakers and the media. Cash transfer schemes in Latin America are also considerably smaller in scale than any countrywide scheme in India would be, making those schemes easier to implement. In India, the most conservative proposal – from the Rangarajan Committee – intends to cover 40 percent of the population, translating to nearly 500 million beneficiaries.

Providing for all

There is another suggestion: the introduction of a universal, equitable PDS, available to all as a matter of principle. This would solve problems associated with mistaken exclusion, but could also solve the problem of erroneous inclusion: it is likely that the rich would opt out of the scheme, either because of the lower quality of grains or because of status concerns. It would also involve a progressive redistribution of income.

Universalisation can increase the effectiveness of welfare schemes when accompanied by strong collective action and an accountable bureaucracy. Where targeted programmes create artificial divisions among the poor, universal schemes often increase solidarity across various and otherwise disparate groups. In turn, this makes collective action to address corruption and apathy much more likely. This is exactly in line with trends observed in inter-state data – that a universal system is generally associated with less corruption and a better functioning PDS. In addition, universalisation can eliminate the costs associated with identifying and focusing only on certain beneficiaries. A universal PDS can increase the financial viability of fair-prices shops and also reduce leakage, since the large number of beneficiaries incentivises popular social monitoring against corruption. And it can do this without excluding large sections of the population, as a cash transfer scheme would do.

All of the above raises an obvious question: if there are so many reasons to recommend a universal PDS, why did the pre-1997 universal system not succeed? The political and administrative establishment has a crucial role in making a welfare system work. States in India with satisfactory welfare systems did not simply decree a universal PDS, they planned thoughtfully and worked hard to make it work, facilitating collective grassroots action for accountability and creatively testing and applying new methods. For example, in Tamil Nadu, distribution has been de-privatised, with co-operatives taking over from private fair-price shops. Himachal Pradesh has expanded its PDS to provide more goods, such as pulses and edible oil. In Chhattisgarh and Tamil Nadu, meanwhile, the administration uses SMS to notify beneficiaries of the availability of provisions. Since the commissions received by fair-price shops are often too low for shop owners to care for the smooth running of the system, some states have increased the commissions. Such initiatives have refined the PDS without compromising on citizens’ universal right to food while trying to improve government administration instead of giving up on it.

These examples suggest that the introduction of a targeted PDS in 1997 had nothing to do with improving the old system. In fact, the states that boast significant improvements in PDS operations since 1997 are all either already providing universal benefits, or are moving towards such a system. Inter-state data also show that a well-functioning PDS is not the preserve of any political party. The left ruled West Bengal for a record number of years, and yet it remains one of the worst performers in terms of PDS; the other left state, Kerala, is one of the many states that have a well-functioning system. Still, in this respect it is far behind Tamil Nadu, Himachal Pradesh, and Chhattisgarh – evidently ‘non-left’ states.

Introducing cash transfers absolves the government of the responsibility of managing and providing food, especially to the poor

The Rangarajan Committee was apprehensive about the volume of grain required for a universal PDS to function, saying sufficient quantities might be impossible to procure, or if procured could severely distort open market prices. However, a recent article by Himanshu and Abhijit Sen demonstrates that this is largely a misplaced fear. They calculate that, even at the upper end of the estimated requirement, universal PDS would only require about 70 million tones of grain. This is less than the amount being supplied, though not all claimed by beneficiary households, under the existing PDS as recently as 2005-06. While it is true that a universal PDS would require higher government expenses, the supply of grains would not be a problem.

Many of the arguments in favour of a targeted cash transfer scheme do not stand up to close scrutiny, and its proponents, including the Congress, have not convincingly addressed any of the problems associated with such programmes. Whatever genuine concern for the poor there might be, it appears that the move towards targeted cash transfers is motivated at least as much by the twin imperatives of reducing the role of the government and increasing the role of private capital in the food management system. Implementing targeted cash transfers has three major implications. First, by truncating the set of beneficiaries, the government demonstrates that fiscal considerations trump any principled position on welfare. Second, providing food to citizens becomes a contingent arrangement which suggests that citizens have no inalienable right to food, and therefore to a dignified, healthy life. Finally, introducing cash transfers absolves the government of the responsibility of managing and providing food, especially to the poor. One can only wonder if this means that the interests of private capital – big and small, foreign and Indian – trump the government’s commitment to the welfare of the people.

Deepankar Basu is a professor at the Department of Economics at the University of Massachusetts, Amherst, USA.

Debarshi Das is an assistant professor at the Department of Humanities and Social Sciences, Indian Institute of Technology, Guwahati.

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