Food Policy Reforms: A Rapid Tour of Possibilities

Bharat RamaswamiIGIDR Silver Jubilee International Conference

December 1-3, 2012

Collaborators

• Milind Murugkar• Ashok Kotwal• Pulapre Balakrishnan

A Rare Moment?• Food policy institutions have enjoyed stability and continuity for

decades – despite changes in scale and objectives• The public distribution system (PDS): origins in WW II rationing

systems.• The Food Corporation of India (FCI) – the Central government

agency responsible for procurement and storage was set up in the mid-60s.

• Practice of offering support prices to rice and wheat also dates from that period.

• At this moment, though, India’s food policy is in a state of flux.• Real possibility that India’s food policy institutions may look quite

different in a decade.

Pressures on Food Policy

• Stunning GDP growth but only modest dent in poverty.

• Contradiction hard to ignore politically • The National Food Security Bill at the Central level• Several food policy reforms at the State

government level.• Civil Society activism – among other things they

have demanded and obtained judicial oversight of the State’s food intervention.

The neo-classical economics case for food policy interventions

• Price supports and procurement– Absent risk markets, price supports can be Pareto

improving. Producers gain from insurance against low price outcomes. Consumers gain too: the supply response to price insurance lowers food prices (Innes, QJE, 1990)

• Subsidised food distribution to the poor– Traditionally, justified with reference to equity objective.– A small literature now on growth impacts of safety nets

(Alderman and Yemetsov, 2012)

Other instruments: open market sales, public stocks?

• In the Indian context, it can be argued that these are the outcomes of price supports and subsidized food distribution.

• Open market sales occur fitfully and almost always to dispose off excess stocks. There is no announced protocol for these sales.

• Although there are announced norms for public stocks, these are driven mostly by the needs of the public distribution rather than market stabilization.

Price supports in Practice

• Price supports supplanted by administered prices and procurement. – The farm lobby and its hold– Counter-moves by the government to reduce the cost

of procurement by restrictions on exports and other private sector activity

– Has bolstered the profitability of the grain sector distorting crop choice and diversification

– Unsustainable environmentally (e.g., paddy production in Punjab)

Subsidised food distribution in practice

• Identifying the poor has been difficult– Drawing a line in the sand!

• Massive exclusion of the poor – both exogenous and endogenous.

• Illegal arbitrage between the PDS and the market – Rent seeking and political patronage of PDS dealers

• Unviable government marketing chain (PDS) – volumes insufficient to justify the costs.

• This has encouraged illegal diversion, limited and unpredictable service timings and customer unfriendly practices.

Facts are never enough!

• Practically no disagreement about how procurement and subsidized food distribution work in practice.

• But there are very different views about what to do next.

The Tower of Babel: what do we do next?

• Policy advise from “economists”, multi-lateral institutions: target subsidies, make state agencies open to competition, include private sector

• Pressure from “activists”, NGOs: Make subsidies universal, no private sector, empower communities and enact laws to make the state accountable.

• Government speaks in many voices: axe of fiscal consolidation, social justice, farmer rights, consumer interests

The imbalance in the practice of food policy (Peter Timmer, 2008)

• When “politics is in command”, which seems to be the normal state of affairs for most developing countries, how do efficiency issues stay on the agenda?

• When “markets are in command”, which seems to be the main policy advice from the donor community in poor countries, how do distributional and welfare issues stay on the agenda?

• Can we have only one or the other?

PDS Forever? (Kotwal, Murugkar and Ramaswami, 2011)

• Balance between “politics” and “markets”.• Food subsidies ought to be near universal. Targeting

is hard to do when there are so many just above the poverty line. Exclusion errors bound to happen.

• Therefore, tolerate the leakage of resources to the non-poor.

• Among other things, use markets in the form of cash transfers to reduce diversions and other waste.

• No reason to tolerate such leakage of resources.

In the remainder of this talk….

• Will not pursue further the issues of balance between politics and markets with respect to the grand design of food policy.

• Use this perspective to assess the prospects of `incremental reform’ in (a) storage and procurement and (b) distribution.

Storage

• Since 2010, the problem of insufficient storage capacity has attracted both political and media attention.

• Article1-578444.aspx.htm• 142399.html• 31386742_1_lakh-tonnes-fci-and-state-central

-pool.htm• So how bad is the shortfall in capacity?

Seasonal storage

• Crop harvests occur at finite discrete points (once or twice during a crop year) while consumption is continuous.

• Hence the crop needs to be carried from harvest to the other months when there is no harvest. This is the demand for seasonal storage.

No seasonal pattern in grain consumption

Quarter All grain Rice Wheat All grain Rice Wheat

 Per capita & per month,

KgIndex with July-September = 100

July-September 11.7 6 4.32 100 100 100

October-December 11.55 5.9 4.16 96.29 96.3 96.3

January-March 11.58 5.99 4.08 94.27 94.3 94.3

April-June 11.44 5.94 4.38 101.35 101 101

Seasonal demand for storage

• Principle: Grain must be equally allocated over time.

Application

1. Compute marketed surplus2. Assume that the portion consumed on-farm

does not require commercial storage3. No carry-overs of grain across marketing years

(only seasonal storage considered).4. In the harvest periods, consumption demand is

instantaneously met without any storage. Of course some temporary storage is required – but that could be in shops, transit or out in the open.

Quarter-wise demand for storageRice Wheat Total

July 1 12.5 30 42.5

Oct 1 0 20 20

Jan 1 38.5 10 48.5

April 1 25 0 25

• Marketed surplus of rice = 50 mill tons

• Marketed surplus of wheat = 40 mill tons

• Oct 1, Kharif marketing year: start with zero rice stocks

• Jan 1 = 3/4th of 50 = 38.5• April 1 = ½ of 50 = 25• July 1 = 1/4th of 50 = 12.5

Storage capacity

• Peak seasonal storage demand occurs on Jan 1 and this is the capacity that needs to be created = 50 million tons.

• Such a calculation can be worked out for any other estimate of production and marketed surplus.

• For e.g., projection for 2013/2014 – 53 m tons of rice and 43 m tons of wheat.

• Implies peak storage demand of (3/4*53+1/4*43)

Demand for Public Stocks under the National Food Security Bill

Scenarios Total

Procurement

Rice procurem

ent

Wheat procurem

ent

Rice storage on Jan 1

Wheat storage on Jan

1

Total storage on Jan

11 64 38.4 25.6 28.8 6.4 35.22 74 44.4 29.6 33.3 7.4 40.7

Implications

• Calculations suggest that peak seasonal storage demand is of the order of 41 million tons in the immediate future.

• As rice procurement takes place across both Oct-Dec and Jan-March quarter, above estimate is an upper demand.

• To this add, the emergency reserve requirement for annual storage = 47 million tons.

Supply-Demand gap

• Policies emphasize the urgency of creating more storage.

• The gap between supply (32 mt) and estimated demand (47 mt) is about 15 million tons.

• Yet even 47 mt is not sufficient today when peak stocks top 70 mt. So what is wrong with out calculations?

Supply-demand gap…II

• Our calculations assumed that procurement would match the PDS commitments to distribution.

• This may not happen: procurement may outstrip requirements as has been the case for nearly 2 decades.

Procurement larger than PDS sales

Why excess procurement?• Procurement larger than PDS sales. No stabilization• Why? Farm lobby and coalition politics??• Other reasons: Suppose the central government only wants

to buy enough to meet PDS requirements. Then the problem is: what is the right procurement price that elicits the required quantity?

• Politicians and bureaucrats fear the embarrassment of under-supplying the PDS but receive no penalty for excess stocks and high prices. Works to strengthen the farm price lobby.

• Bias in favour of higher than necessary procurement prices and therefore large procurement.

Mistakes endure…• Once stocks are large, private traders withdraw and

procurement continues to be high in successive years (even without high procurement prices)

• This cycle has only been broken by droughts, exports (often subsidised), and ad-hoc sales through the PDS and the market.

• An increase in scale of the PDS together with legal obligations to keep the PDS supplied will amplify the tendency to “play safe”.

• Under NFSB, a continuation of present procurement policies could result in excess stocks even higher than what is seen today.

What can be done?

• Open market sales• Basu (2010) proposed a mechanism of selling grain in

small batches to many traders and consumers to maximise the impact of open market sales on price.

• Basu’s proposal was made in the context of market stabilizing intervention where procurement varies according to available supplies.

• But as we have seen, Indian intervention has been systematically biased towards subtracting supplies.

• So the first best policy is to reduce procurement.

Policy options• Reform procurement from being open-ended to closed-

ended. • This may be politically difficult.• Incremental reform proposal – create a new agency under

the CACP called the “Risk Management Agency” (RMA).• Let the FCI’s liability be limited to the grain purchased for

PDS.• Stocks in excess will be transferred to the books of RMA. • This will (a) make excess stocks visible and (b) force the office

of CACP to take this into account in recommending procurement prices!

Part II – Distribution Reforms

• The distribution of food subsidies happens within a federal structure.

• Central government: largely responsible for funding, procurement and transport of grain to the States

• States: responsible for implementation and delivery of food subsidies

• Distribution reforms have to be understood with reference to initiatives at the Centre as well as with the States.

• We report on some state-level reforms

Principal elements of distribution reforms

1. Computerizing the data base of beneficiaries2. New listing of beneficiaries3. Issue of new ration cards – incorporating bar-

coding and biometric id4. Authentication of transactions by smart cards

and/or biometric id.5. Recording of transactions in real time or

near-real time through IT systems.

Use of IT systems in recording data is a major distribution reform

• Automation of retail transactions leads to real time information on supply gaps at each retail outlet.

• Hence, it is possible to connect this module with a back-end module of inventory management system (stocks and grain movement between different storage depots) resulting in automated supply and movement.

• This reduces paperwork and increases the timeliness and predictability of supplies.

• This is the major reform of PDS in the state of Chhatisgarh

Authentication of transaction is a major distribution reform

• Illegal diversion of grain: arbitraged grain is recorded as sold at the issue price in government records.

• This is possible to do when the sales are to fictitious consumers. Multiple ration cards may be held by a single consumer or ration cards may be `bogus’.

• This can only be stopped if the retail transaction is authenticated in a fool-proof manner.

• This is the major distribution reform being attempted in Madhya Pradesh and Gujarat

Authentication by Smart cards• With or without biometric id (like bank cards with a numeric

code id).• Requires the use of smart card readers at the retail level

connected to a central server.• Connectivity at all FPS may be a problem.• Pilot project in Chandigarh where the infrastructure is

reasonable.• However, record is mixed because of failure of smart card

readers. • Smart card based authentication proposed for big urban

centres of Chhatisgarh.

Biometric ID

• If employed at the retail level, it is subject to the same limitations as smart cards (without biometrics) – namely – connectivity and the possibility of `engineered’ device failure.

• Intermediate system: Use biometric id at select offices to obtain food coupons which are then redeemed at the FPS.

• Connectivity is not required at all retail points.

Costs of distribution reform

• Reported costs are often incomplete because of `zero-price’ transactions between government agencies.

• MP model: all activities out-sourced to a private consortium for 5 years.

• Cost = Rs. 4611 million or Rs. 461 crores.

Individual State Experiences: Chhattisgarh

• Computerization of Procurement system under the decentralized procurement scheme.

• Timely management of supplies because of computerization and control over supplies (not dependent on FCI for grain movement to state).

• `Door-step’ delivery• No transaction authentication mechanism –

smart card based solution (without biometrics proposed for urban areas).

Chhattisgarh

• Extended coverage: 70% of population under BPL/AAY. Low exclusion errors.

• Lower BPL rates: Rs. 2 for rice and Rs 1 for AAY• State spends significant resources – over Rs.

1000 crores – in addition to Central subsidy• De-privatization of FPS: Shops are run by

community organizations: self-help groups, panchayats and coops. Such experiments have not worked elsewhere.

Chhattisgarh

• Low prices, extended coverage and well publicised timely supply have worked to create public consciousness about the right to receive PDS entitlements. This is claimed to have checked illegal diversions.

Chhattisgarh: Implications?

• Supporters claim that (near) universal coverage and de-privatization of FPS is responsible for success and can be replicated elsewhere.

• Several unique features– Willingness to spend out of its resources – high political

commitment– Bureaucracy is unusually pro-active in monitoring the supply

chain. This is essential because the incentives for arbitrage continue to be present.

– Neither can be taken for granted elsewhere because of entrenched interests in existing PDS

Gujarat

• Encompasses all 4 components of distribution reform.

• Pilot project of reform: one FPS in each taluka of 22 districts are participating.

Gujarat Model: A Food Coupon Model

• All households to re-register to obtain bar-coded ration cards. All household particulars digitised and biometrics recorded.

• Enrollment in this process requires an electoral photo ID.

• Using the bar-coded ration cards, beneficiary visits an E-kiosk (in gram panchayat during pilot).

Gujarat Model 2

• Computer operator uses a bar code reader to enter beneficiary details. On verification of biometrics, bar coded food coupons issued.

• Biometric verification requires real time connectivity.

• Beneficiary redeems coupons at designated FPS.• FPS retailer submits these coupons at E-Kiosk to

be read into an electronic sales register.

Gujarat Model 3

• Back-end inventory management system linked with distribution network is in the works.

• IT solutions developed by NIC and in-house team.

• Modest capital costs of Rs. 800 million and recurring costs of Rs. 250 million. However, this does not include NIC costs.

Gujarat model: Assessment

• Transaction authentication is the focus and the strength of the model.

• Weakness– Requires consumers to make 2 visits monthly – the E-kiosks

are often more distant. – Internet connectivity is not yet good enough – the two visits

could stretch to more– Problem could be less acute if coupons were issued annually

or bi-annually. – Requirement of electoral ID is bound to exclude some of the

poor.

MP Model

• Similar to Gujarat in intent and scope.• But different in terms of design and execution.• Further MP is not at a pilot-stage but at a roll-

out stage. • Biometric id is at the heart of the MP model.• Designed to be compliant with Aadhar, the

nation wide biometric id project.

MP Model 2

• Aadhar enrollment is a pre-requisite for PDS.• Camps organized in villages for Aadhar

enrollment. • Enrollment used to create a new computerized

data base of PDS beneficiaries and to the issue of new Aadhar based ration cards.

• Food coupons couriered annually to beneficiaries.

MP Model 3

• Biometric id verified on receipt with portable devicies using GPRS connectivity of cell phone networks.

• Beneficiary redeems coupons at FPS.• Redeemed coupons picked up and transported to a

central high speed scanning centre.• On coupon verification, electronic system generates a

report of transaction and sales which can be used for allotment, supplies and movement

Execution

• Execution outsourced to a private consortium.• No capital costs for government; pays Rs. 10.98 per

transaction.• Strengths of model– Transaction authentication– Avoided the smart card route which is demanding of

infrastructure and which is prone to sabotage.– Zero upfront costs for government – all risks of project

implementation with consortium.– Incentives of vendors aligned with customers.

Challenges to MP Model

• Will enrollment leave out many of the eligible?• And how easy will be for them to subsequently

enroll?• Reliance on Aadhar: Issue of ids is not keeping pace

with enrollment. • Will the real-time verification of Aadhar id work? • MP model does not yet include computerization of

procurement and storage (unlike Chhattisgarh).

MP and Gujarat model different from the Direct subsidy model

• Direct subsidy model championed by the Task Force on Direct transfers.

• Here the grain (or the subsidised commodity) flows through the government marketing chain at market prices.

• So no incentive for leakage.• Consumer buys from authorised retailer at market prices.• The retail transaction is subject to aadhar id verification and is linked

to a payments system.• This link transfers the subsidy directly to the beneficiary’s account.• The direct subsidy model requires devices to capture biometric id

and transaction at the retail level while the coupon model needs it only when the coupons are issued.

Summary Findings I

• We are short of storage capacity • Extent of shortfall would be less if

procurement were to be in line with distribution.

• While this might be difficult to implement straightaway, it should be possible to devise new institutional structures to make `excess stocks’ visible.

Summary Findings II

• Distribution reforms have enormous potential because most states are starting at a high level of inefficiency.

• While these reforms have wide support, the entreched interests in unreformed PDS are strong and political commitment in the States cannot be taken for granted even if it allows reforms to be initiated.

Summary Findings III

• Distribution reforms hold the promise of accountability and transparency.

• Computerizing the supply chain and digitising records are low-hanging fruit.

• Transaction authentication is more demanding but with higher payoffs too.

Summary Findings IV

• Smart card based systems are not practical at this point.• Intermediate systems such as food coupons based on

biometric id are more practical – perhaps even more so than the direct subsidy transfer model of the Central government.

• It is imperative therefore to allow and experiment with different models.

• The question is how to design them without imposing additional costs of access on poor consumers.