Why reforming the system of free food is necessary

The IMF paper calculates poverty by using the NSO Consumer Expenditure Survey as the base and adjusts it for the direct effect of the massive food grain subsidy given under the National Food Security Act (NFSA, 2013) and PM Garib Kalyan Anna Yojana (PMGKAY) during the pandemic period. It claims that extreme poverty has almost vanished – it was 0.77 per cent in 2019 and 0.86 per cent in 2020.

Another estimate of poverty by the NITI Aayog, the multi-dimensional poverty index (MPI), has put Indian poverty at 25 per cent in 2015 based on NFHS data. This MPI is calculated using twelve key components from areas such as health and nutrition, education and standard of living. By 2019-20, it is expected that MPI would have further declined as the access to health, education and other basic facilities has significantly improved amongst the poor, especially after 2015.

One may debate whether the poverty line at $1.9 PPP is too low and needs to be scaled up to $3.2 PPP. The IMF paper estimates that poverty based on $ 3.2 PPP — this includes food transfers — to be at 14.8 per cent of the country’s population in 2019. The World Bank paper estimates it to be 44.9 per cent. Irrespective of whether extreme poverty is below 1 per cent, or 10 per cent or 25 per cent, and whether food transfers played a positive role in reducing poverty, a critical question remains: Why is there still a need to distribute nearly free food to 800 million people in the name of food security? Does the politics of freebies for votes make for prudent policy?

The offtake of grains under NFSA in FY20 was 56.1 million metric tonnes (MMT). Following the outbreak of Covid-19, the government launched the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) as a special relief scheme in April 2020 to distribute 25 kg cereals per family per month in addition to food transfers under the NFSA. The scheme was justified to help migrant workers. That catapulted the offtake to 87.5 MMT (under PMGKAY and NFSA) in FY21. The scheme continued in FY22, and the grain offtake touched 93.2 MMT. In FY23, after the pandemic has ebbed and the economy has, by and large, bounced back, a further extension of free food on top of the NFSA allocations was uncalled for. This will strain the fisc, reduce public investments and hamper potential job creation. The public grain management system is crying out for reforms, and this is the right time for the Narendra Modi government to fix it.

A look at the size of food freebies will help understand the gravity of this problem. As of April 1, the Food Corporation of India’s wheat and rice stocks stood at 74 MMT against a buffer stock norm of 21 MMT – there is, therefore, an “excess stock” of 53 MMT. The economic cost of rice, as given by FCI, is Rs 3,7267.6/tonne and that of wheat is Rs 2,6838.4/tonne (2020/21). The value of “excess stocks”, beyond the buffer norm, is, therefore, Rs 1.85 lakh crore — this, despite a total of 72.2 MMT grains distributed for free under the PMGKAY in FY21 and FY22. This only speaks of a highly inefficient grain management system.

All this results in a ballooning food subsidy – in FY21, it spiked to more than Rs 5.41 lakh crore because FCI arrears were cleared. In FY22, it came down to Rs 2.86 lakh crore and now in the Union budget for FY 23, it is provisioned at Rs 2.06 lakh crore. But this amount is likely to go beyond Rs 2.8 lakh crore with the continuing distribution of free food under the PMGKAY. This would amount to more than 10 per cent of the Centre’s net tax revenue (after deducting the states’ share).

Given the level of freebies on just one item, the important question that arises is: Can this be a sustainable path towards poverty alleviation? Strategic thinking on economic policies tells us that it is better to teach a person how to catch a fish than to give him/her a free fish every day. Giving out crumbs cannot inspire a society to grow. It is all the more important to change the current policy of free food given the massive leakages in the PDS. As per the High-Level Committee on restructuring FCI, leakages were more than 40 per cent based on the NSSO data of 2011. Ground reports suggest that these leakages hover around 30 per cent or so today.

In reforming this system of free food, wisdom lies in going back to former PM Atal Bihari Vajpayee’s vision. Vajpayee introduced the Antyodaya Anna Yojana (AAY), wherein, the “antyodaya” households (the most poor category) get more rations (35 kg per household) at a higher subsidy (rice, for instance, at Rs 3/kg and wheat at Rs2/kg). For the remaining below poverty line (BPL) families, the price charged was 50 per cent of the procurement price and for above poverty line families (APL), it was 90 per cent of the procurement price.

There could be some problems in identifying the poor. However, technology can help overcome this difficulty. This will make PDS more targeted and lead to cost savings. This measure should be combined with giving people the option of receiving cash instead of providing grains to targeted beneficiaries. The savings so generated from this reform can be ploughed back as investments in agri-R&D, rural infrastructure (irrigation, roads, markets) and innovations that will help create more jobs and reduce poverty on a sustainable basis. Can the Modi government bite the bullet and emulate the Vajpayee government in using scarce resources more wisely? Only time will tell.

Gulati is Infosys Chair Professor and Juneja is Consultant at ICRIER