Note4Student:

Government is likely to scrap public distribution scheme (PDS) system and transfer money directly to the accounts of poor beneficiaries after getting encouraging results from Haryana and Puducherry. This move has been supported as well as criticized by many economists.

 

What is PDS?

Under the PDS, central public sector undertaking Food Corporation of India (FCI) sells food grains, including wheat, rice and sugar, and kerosene through fair price shops in states and union territories. 

 

Arguments in Favour of substituting PDS grain transfers with cash?

1.PDS Prone to corruption and leakage: Proponents of substituting PDS grain transfers with cash argue that PDS is an inefficient mode of transfer of subsidies, prone to enormous leakages into the black market, and high waste in costs of transferring subsidies in the form of food transfers. They argue that replacing food with direct cash transfers would greatly reduce corruption and leakages.

2.Better targeting: It would enable the poor to access goods currently denied them by a PDS beset by corruption.

3.More Choice for consumers: It would enable people to buy better quality food of their choice from the open market and not be restricted to items sold in the PDS, which are often inferior in quality and limited in range.

4.Will Reduce wastage: Providing subsidies directly to the poor, it is further argued, would both bypass brokers as well as reduce the waste and holding costs of storing grains in government silos. The amount of grain actually required for India’s buffer stock needs could be held in better-quality warehouses, eliminating waste and rotting.

5.Will reduce fiscal deficit: Cash transfers would help reduce fiscal deficit by curbing expenditures earmarked for the PDS that are siphoned off through corruption, as well as avoiding substantially higher costs of transferring food rather than cash.

 

Arguments against Arguments in Favour of substituting PDS grain transfers with cash?

Not leakage proof: it is problematic to assume that cash transfers would in themselves bring about drastic reductions in corruption and leakages in welfare programmes, as there is nothing intrinsic to cash transfers which renders them less vulnerable to leakages. Irregularities are empirically found to be high in existing cash transfer programmes. Cash transfers of old-age pensions are at least as notorious for corruption and leakages as the PDS.

PDS performing better: Studies confirm that many states have been able to reform PDS and significantly reduce leakages, as much as some states have reformed pension transfers. Clearly, the difference between the corruption or probity of delivery of welfare programmes is not dependent on whether cash or food is delivered, but on political and administrative will and capacities, and public vigilance and organization.

Misuse of Cash: It is also possible for people to spend cash transfers not on more nutritious food, as proponents suggest, but instead on non-food items, which would decrease the amount of household money left for buying food. There are significant gendered differences of choice here. Research confirms that culturally decisions relating to cash in households tend to be made by men, who may or may not spend the money on food. Decisions relating to food are made by women in almost all cultures, and therefore food rather than cash in a household is more likely to end up as food in a child’s stomach.

Weak Banking Infrastructure: There are also worries about how genuinely inclusive of people in remote rural regions is India’s banking system. Fair price shops exist in three of every four villages, and are therefore generally accessible. According to one survey, average distance to the nearest bank branch is between 6.5km to 10km. Distances would be much longer in remote regions, entailing high additional costs of transport and time.

PDS a shield against Inflation: Another advantage of PDS over cash transfers from the perspective of the poor is that PDS supplies rations at a constant price, irrespective of the fluctuations in market prices. This therefore provides a shield against inflation, a benefit that cash transfers cannot match.

PDS ensures stable income for Farmer’s:  it is a mistake to view PDS only as a means to transfer subsidies to poor households. PDS costs need to be measured against its other goals as well. PDS requires the government to procure food from farmers. The government builds up stocks of grains which are also useful for price stabilization. Indeed, the guarantee of minimum support price purchase by the government for wheat and rice is the most important instrument for the protection of farmers’ income in India, and this would become unfeasible if the government could not offload a lot of this grain back through the PDS.

Cash Transfer leading to exclusion: In areas where pilot programme has been launched There were issues in transfers, as results show as high as 50 per cent of those entitled did not receive the full or part cash transfer, especially due to issues in linking of bank accounts with Aadhaar and ration cards. 

 

Way Forward:

1. Certainly, DBT is a novel idea and it could certainly reduce leakages and corruption of PDS system has proven its record in LPG case where Government saved rs 14000 crore due to better targeting and elimination of ghost beneficiaries
2. However, DBT in food subsidy is an idea which has many flaws as mentioned above. PDS system itself is flawed and it needs to be eliminated.
3. Therefore, instead of cash transfer Government should give food coupons as this will solve the problem of misuse of cash for buying non-food things and it will also give poor people choice to buy food from the retailer of their choice. Food coupon amount should be periodically revised so that it takes into account the current inflation. Thus what we require is a system which is somewhere in between the present inefficient PDS system and the proposed DBT system.

 

Questions:

(Q) Should PDS scheme be replaced by Direct benefit transfer in Food Subsidy. Give Pros and cons.

(Q.) Replacing PDS with cash transfers would, in effect, gradually erode and eventually dismantle this obligation of the government, with an adverse impact on an already precarious agriculture and farmer protection. Critically comment