Food subsidy – reining in bogus claims alone is not reform

According to the medium-term expenditure framework [MTEF] statement recently released by the finance ministry, the food subsidy bill of the union government is projected to increase from Rs 145,000 crore during the current year to Rs 175,000 crores during 2018-19 and further to Rs 200,000 crores during 2019-20.

This comes as a big disappointment to all those who have been anxiously looking forward to Modi – government deliver on its reforms agenda especially in regard to food subsidy which is a big resource guzzler – next only to interest payments and pension. Considering that such an assessment [steep increase] is being made less than two years before its term comes to an end implies that no reform is in the offing till 2019.

What has gone wrong? Has the government made moves in this direction? Have things gone haywire on ground zero?

The maladies afflicting India’s food sector can be broadly categorized in four heads: (i) a good chunk of food subsidy is appropriated by corrupt bureaucrats, politicians and dubious traders; (ii) subsidy on each kg of food sold under National Food Security Act [NFSA] is unusually high; (iii) a large number of rich/better-off households continue to be the beneficiaries of subsidy; (iv) extant system of procurement, handling, storage and distribution led by Food Corporation of India [FCI] is riddled with monumental inefficiencies and high cost.

The government’s attention thus far has been focused on (i). Under a nation-wide program of monitoring transactions at fair price shops [FPSs], electronic point of sale (ePoS) machines are being installed at these shops and Aadhaar-seeding of ration cards made mandatory. While, former helps maintain digital records thereby preventing manipulation of purchase and sale and in turn, diversion of grains to the open market, latter ensures that the beneficiary is genuine.

The program is yielding good results. For instance, in Haryana after all 9,500 FPSs were brought under the scheme, out of a total of 12.4 million people covered under NFSA, around 3 million have been identified as bogus/non-existent beneficiaries. Likewise, in Rajasthan after the state’s 25,000 odd FPSs were e PoS-enabled in September last year, number beneficiaries have declined by about 20%. Other states who have come under its fold are Madhya Pradesh, Tamil Nadu, Andhra Pradesh and Chhattisgarh.

When, e-PoS machines are installed in all states and Aadhaar gets seeded on ration cards of all beneficiaries, the government estimates a saving of about Rs 14,500 crores or 10% in the total food subsidy bill of Rs 145,000 crores [2017-18]. Seen in isolation and considering that no previous government ever bothered to look in to this, the amount is substantial but it is still small in the overall subsidy.

Sadly, the government has not yet attended to the other three maladies which contribute in large measure to galloping subsidy. As regards (ii), under NFSA, food is sold at throwaway price of Rs 1/2/3 per kg for coarse cereals, wheat and rice. The cost of making these available to consumers [minimum support price plus handling, storage and distribution cost] is at least 10 times more. The entire difference is reimbursed as subsidy by union government.

The sale price close to almost zero is surest invitation to skyrocketing subsidy. This apart, a much bigger problem waits in the wings and there is an element of inevitability about it. When, the price of reasonable quality rice in the market place is minimum Rs 50 per kg and supplies for sale from public distribution system [PDS] under NFSA are available at a mere Rs 3 per kg, there exists a strong incentive for dubious operators to divert and sell in the open market.

A well orchestrated system involving all key stakeholders viz. bureaucrat, politicians, officials of state agencies is bound to emerge and fully utilize this arbitrage opportunity and sharing of the bonanza. Such networks operate at the highest level. While, one can plug leakages at the level of FPS by installing e-PoS, but it may not be possible to prevent it at the higher level especially in view of huge money involved. For instance, last year there were reports of disappearance of stocks worth Rs 20,000 crores in Punjab!

As regards (iii), under NFSA, about 2/3rd of the population [75% in rural areas and 50% in urban] is entitled to subsidized food. Taking current population 1300 million, the coverage comes to a whopping 867 million. Surely, this cannot be number of poor in India who alone should qualify for the benefit of subsidized food. Such a large number which includes millions of better-off/higher income persons will only increase the burden of food subsidy.

With respect to (iv), under existing arrangements, FCI and other state agencies are compensated for cost of handling, storage and distribution on ‘actual’ basis. This acts as a convenient cover for ‘inefficiencies’ in operations besides incentivizing cost padding. It opens up a Pandora box for nepotism and corruption. One could think of reimbursing these agencies on the basis of ‘norms’ but that seems to be far from government’s radar.

The three areas cry for major overhauling, yet these have not received the requisite attention. In early 2016, a committee headed by Shanta Kumar, senior BJP leader had recommended reduction in coverage under NFSA from existing 2/3rd to 40% and restricting the eligibility of subsidized food viz. Rs 1/2/3 per kg only to the poorest of poor households included under the Antyodaya Anna Yojna [AAY] [the rest would pay 50% of MSP paid to farmers]. The committee had also mooted participation of private sector in procurement, handling and distribution. Unfortunately, none of these recommendations have been taken on board.

An ideal regime would require dismantling of extant system of procurement, handling and distribution by state agencies to make way for competitive markets involving participation of private sector and direct benefit transfer [DBT] of subsidy. The amount of subsidy – to be restricted only to the poor i.e. 25-30% of population – should be credited to the account of beneficiary who must have freedom to buy from a shop/outlet of his/her choice.

While, it may not be possible to immediately latch on to this regime, the government could make a beginning by implementing the Shanta Kumar committee package. This will bring about significant savings in subsidy and its better targeting.

But, ALAS! even this does not seem to be in the offing. The subsidy projections for 2019-20 in MTEF say it all.

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