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“THE poor are a gold mine,” wrote economist Thomas Sowell two decades ago, arguing that often anti-poverty programmes benefit those who administer them rather than those for whom they are administered. Sowell went on to suggest that the US spending on anti-poverty programmes at the time was three times that needed “to lift every man, woman, and child in America above the poverty line by simply sending money to the poor.”
Considering Sowell’s impeccable credentials as a conservative economist, it is tempting to dismiss this assessment as reflective of the general hostility of conservatives towards government interventions. But the current state of India’s food procurement, storage and distribution system lends such unequivocal support to his position that even die-hard liberals must take him seriously.
Much of the food subsidy in India today pays for sustaining the 400,000 strong bureaucracy of the Food Corporation of India (FCI) and “aiding” the relatively well to do farmers of Punjab and Haryana. In 2000-01, the latest year for which data are available, FCI sold approximately 0.3 crore tonnes of wheat to the below-poverty-line (BPL) households. Per tonne wheat subsidy being Rs 415, this resulted in a total transfer of Rs 124.50 crore to BPL families.
A similar calculation for rice, based on the sales of 0.31 crore tonnes to the BPL households and a subsidy of Rs 565 per tonne, yields a transfer of additional Rs 175.15 crore. The sum of the two subsidies is, thus, Rs 300 crore or a tiny 2.5 per cent of the total food subsidy of Rs 12,010 crore in 2000-01.
This calculation slightly understates the benefit to the poor since the element of subsidy was higher in the grain sold under the Antodaya Anna Yojana (AAY). But even after we apply the higher AAY rates of Rs 630 per tonne for wheat and Rs 830 per tonne for rice to all of the BPL purchases, the subsidy to the poor rises to only Rs 445 crore or 3.7 per cent of the total budgeted subsidy. The picture emerging for 2001-02 is similar.
Some may dispute these calculations on the ground that they exclude the benefit to poor farmers from the high procurement prices paid by FCI. But this factor turns out inconsequential since the bulk of the procurement takes place in the relatively rich states. According to the Economic Survey 2001-02, Punjab and Haryana account for over 80 per cent of the wheat procurement and Punjab and Andhra Pradesh for more than 70 per cent of the rice procurement. The proportion of the poor in the total population in Punjab, Haryana and Andhra Pradesh is only 6.16, 8.74 and 15.77 per cent, respectively, against the national average of 26.10 per cent.
Therefore, the inescapable conclusion is that our Targeted Public Distribution System is missing the poor by miles delivering them only Rs 3.70 out of every Rs 100 it spends!
The government’s immediate problem is to dispose of the food mountain before much of it becomes inedible. It should do so by exporting as well as selling at home aggressively at whatever prices they will fetch. But in the longer run, it must replace the FCI operations by private ones as I argued last month (ET, March 26). In turn, the poor should be aided through cash transfers or food stamps that each BPL family collects periodically from a designated government office upon presentation of the BPL card.
There are three key reasons why food stamps (or cash transfers) are the superior instrument of transferring purchasing power to the poor. First, given that all states have now identified the BPL families, they can place the money directly into the hands of the poor. To appreciate the effectiveness of this policy, we only need note that the budgeted food subsidy of Rs 21,200 crore for the year 2002-03 can place a handsome Rs 3,250 annually in the hands of each of the 6.52 crore BPL families. This is sufficient to buy approximately half of the family’s ration for the entire year.
Second, by empowering the poor rather than the owner of the Fair Price Shop, food stamps can help curb corruption. Currently, the Fair Price Shop owner sells a part of his supply in the open market and officially claims to have sold it to the BPL families, pocketing the subsidy in the process. This abuse will be eliminated by food stamps since the shopkeeper will have to deliver the stamps to the appropriate authorities to make his claim for cash. And to get the stamps, he will have to sell the grain to the holder of the stamps.
Finally, cash subsides are transparent and therefore more amenable to public scrutiny. It is easier for taxpayers to rally against explicit subsidies in the face of declining poverty rather than a government bureaucracy that employs hundreds of thousands of workers and supposedly serves the poor.
A common argument against food stamps is that they can be sold for cash with the money spent on other goods. This is a silly criticism for two reasons. First, even the grain bought at BPL prices can be sold for cash. Second, such flexibility is a virtue, not defect. If a family member happens to be sick, most of us would welcome the flexibility to spend the subsidy on medicine in lieu of an evening’s meal.
A related criticism is that when the subsidy is in cash, the rich will find ways of qualifying as poor to benefit from it. But this is possible under any system. Such abuse could surface even if the subsidy is on a product that the rich do not consume, such as coarse grain. For, once acquired, the entitlement for coarse grain can be sold for cash or exchanged for a service rendered by a household servant, gardener or driver.
(Economic Times, April 24, 2002)