On August 15, 2014 the prime minister had announced government’s intent to trifurcate Food Corporation of India (FCI) in to three entities each devoted to procurement, handling and distribution. Being a cosmetic exercise and far from making a dent on maladies afflicting the sector, the announcement failed to enthuse analysts.
In a (pleasant) surprise turn of events, a committee constituted up under chairmanship of Mr Shanta Kumar – a senior leader of BJP and ex-minister in the NDA government under Vajpayee – has come up with recommendations which are out-of-the-box and hold a promise of bringing about a ‘paradigm shift’ in India’s food economy. It recommends:-
(i) drastic curtailment in the role of the state/government in addressing food needs of population by proposing reduction in coverage from 67 percent under Food Security Act (FSA) to 40 percent;
(ii) taking better care of the ‘very poor’ (as defined under Antyodaya scheme) by increasing their entitlement from extant 5 kg per person per month under FSA to 7 kg per person even while ensuring supply @ Rs 3/2/1 per kg for rice, wheat and coarse cereal;
(iii) restricting supplies for ‘all others’ to 5 kg per person per month and requiring them to pay @ 50% of minimum support price (MSP) given to farmers;
(iv) drastic curtailment in role of FCI in handling and storage by enticing private sector and state agencies and goading former to focus on procurement and distribution mainly in food deficit states in the east and north-east;
(v) granting freedom to FCI dispose off stocks in excess of the normative requirements of public distribution system (PDS) plus strategic buffer in the market even while increasing the norm;
(vi) implementation of direct cash transfer of food subsidy in cities with population of 1 million to begin with, cover food surplus states in the next phase and food deficit states in the third phase.
Modi’s directive to food ministry – immediately on submission of the report – to prepare a list of action points on committee’s recommendations for consideration by cabinet committee on economic affairs (CCEA) further heightened the mood of exuberance among stakeholders waiting for the long-pending reforms.
Yet, even before the thrill and excitement could fully sink in came a missive from Ram Vilas Paswan, the food minister with not-so-reformist credentials who being part of the old guard (also having changed his political affiliations too often) is more prone to maintaining status quo. Paswan refused to go ahead with the key recommendations of the committee.
Thus, he has categorically stated that there is absolutely no question of reducing the coverage which will be maintained at 67% as stipulated in the FSA. Nor is the ministry inclined to take away the benefit of highly subsidized price of Rs 3/2/1 per kg from those not in the ‘very poor’ category. Even so, he is inclined to consider increasing entitlement of ‘very poor’ to 7 kg per person.
The FSA enacted by erstwhile UPA suffered from a serious flaw by including some 800 million persons within the ambit of PDS even though the poor are only 250 million. The inclusion of a huge chunk of non-poor and that too for supply at heavily subsidized price of Rs 3/2/1 per kg is out of sync with Modi’s philosophy of using resources primarily for benefit of poor.
The committee addressed this flaw by reducing coverage to 500 million even as scope for further reduction was substantial. By retaining the coverage at 800 million and entitling them all access at throw away price, the minister could be giving a signal that Modi – dispensation is no different from UPA.
On account of reduction in coverage to 40%, the committee estimated reduction in food subsidy from Rs 130,000 crores to Rs 77,000 crores, fall Rs 53,000 crores. Given Paswan’s stance, government will not only forego this, there will be further increase to over Rs 150,000 crores due to increase in entitlement to 7 kg for very poor. This will give a serious jolt to fiscal consolidation.
What happens to the road map wherein finance minister, Arun Jaitely has already sought relaxation by one year to reach 3% fiscal deficit target by 2017-18 instead of earlier 2016-17 deadline? How will government garner funds for infrastructure and other development works if such largesse continues unabated?
Direct transfer of subsidy to bank accounts of beneficiaries is a revolutionary idea. But, the committee has stayed away from giving a definite road-map. Even so, having direct transfer in some areas/states/cities and subsidized sale of food in others – inevitable if committee’s proposal is accepted – is a dangerous idea.
Given that borders are porous, food selling at heavily subsidized rates Rs 3/2/1/ per kg in certain areas and full cost-based price of Rs 20 per kg plus in others (where consumers are receiving cash in their account) will lead to large-scale diversion and misuse. Any amount of policing can’t stop this. Therefore, direct transfer should be launched all over the country at the same time.
Like other key recommendations, here again, minister does not appear to be keen to seriously pursue the idea. For now, he has only thrown a hint of running the scheme on a pilot basis in a few union territories. However, what raises eyebrow is his apprehension ‘what would happen to PDS network?’ Does he fear it will collapse? Is this fear holding back launch of direct transfer?
PDS evolved and net-work expanded under a regime of food supply at subsidized price and the entire excess of cost (MSP plus handling & distribution) over this reimbursed on ‘actual’ basis. Under direct transfer of subsidy to consumers, fair price shops (FPS) will be forced to rein in their cost of running and margin etc. Their income from black marketing of food under extant PDS will also stop.
But, this is precisely the raison de atre of a direct transfer scheme. It is intended to cut cost, improve efficiency, eliminate leakages and restrict subsidy payments to the most deserving/poor. And, all this will result in substantial saving in subsidy. The money thus saved can be put to better use viz., irrigation, roads, research, extension and other development works.
All these gains will accrue without impacting the businesses of all those involved in food supply chain – including the network of FPSs – as they all are needed for reaching supplies to the consumers. As long as, they are doing business honestly and making deliveries in an efficient and cost effective manner, there is no reason to worry. Mr Paswan’s apprehension is without basis.
The ministry may be inclined to accept the recommendations for involving private sector and state agencies in handling and storage, limiting FCI role in procurement and granting it autonomy to dispose off stocks. These will no doubt make a dent on unabated increase in cost and subsidy germane to extant system of unlimited procurement – un-related to needs – and storing for unlimited period.
However, by sweeping under the carpet core recommendations (i), (iii) and (vi) that deal with reducing coverage, denying to non-poor the benefit of heavily subsidized price and direct cash transfer, the ministry has virtually taken away the soul of the package offered by the committee. Such half-hearted approach to reforms will not help putting the food sector on a sustainable footing.
The hiccups are solely due to political considerations and in particular, impending elections in Bihar later this year. The food minister who hails from Bihar and is a coalition partner with BJP in central government, is well aware of these sensitivities and therefore, may not be willing to take risk at this juncture. Yet, the million dollar question remains!
Should Modi allow reforms to be sacrificed on the altar of political expediency? Last year, we had elections in Maharashtra, Haryana, Jharkhand. This year, we have elections in Bihar. In the following years, states like West Bengal and UP will go to the polls. In this backdrop, will the government keep on deferring reforms in this critical sector? On same logic, will it also defer reforms in fertilizers which is also afflicted by similar problems as in food?
In sync with his reformist credentials, Modi will have to rise above political considerations and set the ball rolling right now by implementing the Shanta Kumar committee package in toto. Getting numbers in Rajya Sabha where BJP is in minority is not doubt a problem but it is small when compared to huge loss country is incurring year-after-year due to persistence with flawed and leakage prone systems.
Eventually, the government will have to prepare for restricting its intervention in the food sector only to direct transfer of cash to bank accounts of the poor (these need to be meticulously identified and their bank accounts earmarked duly authenticated by Aadhaar cards) and leave the physical task of procurement, handling and distribution to all agencies – public, private & state – who will operate under market based environments and compete with each other to deliver best prices and quality to consumers.