The crux of the problem is not leakages, but unsold stocks.
The debate on the public distribution system is being increasingly overwhelmed by the issue of corruption. The pressures on the system are seen primarily, if not entirely, as one of leakages. This preoccupation with leakages has reached a point where the government appears set to throw up its hands and just hand over cash to families, irrespective of whether they spend it in a way that reduces malnutrition or not.
This excessive focus on just one dimension of the problem has ensured that the main economic challenge facing the PDS has gone largely unnoticed. And this could well result in malnutrition in India reaching levels that are even more shameful than the Prime Minister has now acknowledged they are.
At the heart of the crisis in the PDS is the fact that the basic economic conditions have changed fundamentally since the time the system was created, and worked quite well. The PDS was designed to meet twin objectives: Provide remunerative prices to farmers and subsidised food to those who needed it. It thus procured whatever rice and wheat farmers offered the procurement agencies and sold these grains in the PDS.
The subsidy burden
The magnitude of the subsidy was the difference between the amount spent in procuring, storing and transporting the grain to fair price shops, and the earnings from the sale of subsidised grain. As long as all that was procured could be sold, the government could fix the subsidy at levels it could afford.
As the economy grew, however, the offtake from the PDS no longer matched the levels of procurement. And the stocks the government had paid for, but could not sell, added to the subsidy burden. This part of the addition to the subsidy has not been created by increased leakages.
On the contrary, it may even be possible that an increase in leakages reduces the unsold stocks with the government and hence the subsidy.
The main point of pressure on the PDS is then one of unsold stocks. And many of the solutions being offered can in fact make this problem worse. If the shift to cash transfers takes place, there will be no more PDS outlets. Whatever is procured will have to be put into the open market.
If this depresses open market prices below the procurement prices, farmers will offer even more to the procurement agencies. The government will then be left with the task of buying at a higher price and selling at a lower one, thereby increasing the subsidy burden. The obvious way out is to stop procurement, but the government must then be honest with farmers and tell them that the shift to cash transfers will necessarily mark the end of procurement.
Problem of unsold stocks
A more meaningful response to the crisis in the PDS would be to address the problem of unsold stocks. This could be achieved if the production levels of individual foodgrains match the levels of demand in the market.
One way of ensuring this would be to offer procurement prices that are linked to futures markets. The procurement prices would then be announced before the sowing begins, based on what the futures markets are offering for the grain at harvest time. The Food Corporation of India would then only have to transfer the grain it procures into the delivery system in the futures markets.
Such a system where prices are determined in the futures market would not guarantee a remunerative price for a particular crop such as rice or wheat. But if procurement is expanded to cover a large number of crops, there is a reasonable chance that farmers will find some crop that they find remunerative. At the same time, the government could set a floor futures price for essential food items.
These prices will come into play when the prices in the futures markets fall below that level. This will ensure that the production of food does not fall to levels that endanger food security. The PDS would then be able to continue to play its role of guaranteeing the required availability of food, without carrying the risk of unsold stocks adding to the subsidy burden.
Predominance of futures
There will no doubt be some nervousness about providing such a prominent role for futures markets. These markets have tended to be so dominated by speculators that they have even distorted prices in the open market. But the excessive dominance of speculative interest in the futures markets has been caused by inadequate deliveries in these markets.
Once the FCI is in a position to deliver all that is contracted in these markets, the extreme control of speculators will necessarily decline. And regulators could step in to ensure that the market does not get into either a freefall or an irrational boom.
The working of the PDS must then be seen in the context of the rapidly-changing economic environment in which it works. As the ground reality changes, it will make obsolete some of the earlier mechanisms.
The response must then be to evolve new mechanisms that build on the existing strengths of the PDS, rather than simply throwing the baby out with the bathwater.
The author is Professor, School of Social Science, National Institute of Advanced Studies, Bangalore