FOOD SUBSIDY-

REVIEW OF
PROBLEMS

ROLL NO 30
 DECLARATION

I declare that the research project titled “Food subsidy- review of

problems” submitted by me for the degree of masters in Economics in
University of Pune is the record of the work carried out by me during
the period from Jan 2010 to 15 April 2010 at the department of
Economics, University of Pune under the guidance of Prof.
Dhanmanjiri Sathe. This has not formed the basis for the award of any
degree, diploma, associate ship, fellowship titles in this or any other
university or any other institution of higher learning.

I further declare that the material obtained from other sources has been
acknowledged in this project. In case it is found otherwise, I understand
that I stand be duly punished.

Place: Pune

Date: 15th April 2010

Signat
ure

2
 Index

Pg no
1. Introduction 4
2. Review of literature
a. producer subsidy 6
b. consumer subsidy 10
c. recommendations 17
3. research objectives & methodology 19
4. Findings
a. overall food subsidy 20
b. producer subsidy 24
c. consumer subsidy 29
5. Conclusion &
policy recommendations 32
6. References 33

3
INTRODUCTION-

Domestic subsidies can play an important role in achieving

redistributive justice if used efficiently. They are used to correct the
underconsumption arising from the pure market mechanism. Hence,
while talking about subsidies we are aware of the underconsumption &
we assume it will be corrected through providing subsidies. But
subsidies are different from transfer payments & providing subsidies
generally means subsidizing the items consumed by the people to
whom the subsidy is targeted.

In India, three domestic subsidies viz. food, fertilizer & petroleum

subsidies are the most important, both for the large no of beneficiaries
of them & for the huge fiscal burden they create. I am particularly
interested in food subsidy at this point for two reasons. The recent
episode of high food inflation has turned the attention towards the
issues of food security, structural bottlenecks & inefficiency in the food
management in the country & various solutions being suggested by
researchers, govt. committees & media on improving the overall food
management. So I am going to review broadly the mechanism of food
management in the country & particularly the role played by food
subsidy in this system & in achieving food security to the poor.

Food subsidy is generally given for three items, wheat, paddy, levy rice
& sugar, I m going to look at only rice & wheat in detail. Rice means
paddy & levy rice combined unless otherwise mentioned. Food
Corporation of India procures 15-20% of the production of these food
grains at the minimum support price (MSP) declared by the
government. It maintains the buffer stock of these food grains as
decided by the commission on agricultural cost & prices (CACP) &
also distributes these food grains to the states through the Public
Distribution System (PDS) for the sale in fair price shops (FPS) mainly
to the poor at a central issue price (CIP). Hence, govt. gives food
subsidy to FCI as a difference between economic costs of wheat & rice
(including procurement costs) & the receipts through sale of these food
grains at central issue price. Other components are carrying costs of
buffer stocks & on account of levy sugar, import of sugar etc.

As we can see there are three main components of this subsidy- 1.

Producer subsidy, through procurement of wheat & rice at a minimum
support price (which is directly given to farmers) 2. Consumer subsidy

4
(as consumers get these food grains at a price less than market price) 3.
Economic costs to the FCI for maintenance & distribution of food
grains.

There are many problem areas in this system which are not yet been
solved fully even after around 60 years of its implementation.

5
REVIEW OF LITERATURE

A report prepared by Ministry of Finance on central government

subsidies (2004) gives an overall picture of subsidies in India. Total
central government subsidies accounted for 4.18 in 2003-04, in which
explicit government subsidies which are accounted in the budget
documents were only 1.7 in 2003-04. Another very important measure
of calculating subsidies is its share in net revenue receipts & fiscal
deficit. For 2003-04, subsidies were 44% of revenue receipts &
accounted for 87.68% of fiscal deficit. Interestingly, recovery rate of
non merit subsidies was 47.25% while that of merit subsidies (in which
food subsidy is included) only 1%. The share of food subsidies in GDP
also grew to 0.93% in 2003-04 as against 0.43% in 1991. According to
planning commission working paper (2002), the share of food subsidy
in total government expenditure has gone up from 2.33% in 1990-91 to
5.17% in 2002-03.

As we know, there are two main issues in the food subsidy or food
management system. One is of higher MSP, procurement system &
resulting higher market prices. We will call it producer subsidy system.
The other issue is that of PDS & consumer welfare, we will call it
consumer subsidy system.

A. PRODUCER SUBSIDY
Let’s take the issue of producer subsidy first. Central government
subsidies report has pointed out many negative fallouts of higher MSP.
It admits that higher MSP puts the pressure on central issue prices.
Further, with large part of marketed surplus with FCI, it reduces the
supply to open market & puts an upward pressure on market prices.
Everyone except those farmers with marketable surpluses of foodgrains
are affected adversely. The high MSP combined with open ended
purchases by FCI has created a negative incentive for vibrant wholesale
trade which actually has lower incidental & storage costs of food
grains.
According to planning commission working paper (2002), while higher
MSP does provide incentive to farmers to produce more, it has raised
the market prices & has reduced demand for cereals. It refers to the
study conducted at the National Council of Applied Economic Research
(Sharma: 2001) which shows that fixing of procurement prices above
the level recommended by the Commission on Agricultural Prices
(CACP) has resulted in additional procurement of 12.8 million tonnes
of wheat and 3.4 million tonnes of rice. It thus recommends that the the

6
recommendations of CACP should be strictly adhered while
procurement prices are fixed.
Balakrishnan & Ramaswami (2000) say that there is no explicit
mechanism for stock operations in India. Hence it becomes difficult to
decide if the government policy is stabilizing or inflationary. They
propose the following model to decide the exact nature of policy.

Here D1 demand curve & P1 is the price in the absence of procurement

& public distribution system. With PDS, open market demand will fall
to D2. Now if govt. sets the procurement price at P3 it will have
stabilizing effect as it is below P1 but above P2. But if it sets the price
at P4 which is above P1 also, it will be inflationary. Hence, determining
procurement price is the key variable.
They also point out another important aspect of speculation. If futures
market are allowed & function well, the speculative activity in the
market will be more informed, it will obtain inter temporal allocation of
supplies & thus reduce the need for market intervention to that extent.
Kirit Pareikh, Ganesh Kumar & Darbha (2003) have found out that the
increase in MSP of rice & wheat by 10%, with an applied general
equilibrium model for India, leads to decline in overall GDP, increase
in aggregate price index &reduction in investments. Even the increase
in agricultural GDP reduces rapidly & only a miniscule impact on
agricultural GDP remains after the end of third year. More importantly,
in terms of welfare the bottom 80% of rural & urban population is
worse off due increased market prices.

7
Shikha Jha& P V Srinivasan (2000) show that mean producer revenue
increases in the absence of procurement policy. This result is very
important as it blows the very rationale behind the procurement policy.
It also shows that in the presence of govt price stabilization, removal of
procurement policy decreases price variability.
It will be interesting to know Amartya Sen’s view at this point. He
bitterly attacks the whole system calling it “food politics”. In a speech
made in 2003, Sen clearly points out that the subsidy is mainly geared
up to keep the food prices high for the sellers of the food rather than to
make prices of the food low for buyers of the food. Sen also attacks the
pro poor argument for subsidies in the following words, ‘the slightly
muddied picture of benefiting some farm-based poor encourages the
confused belief that high food prices constitute a pro-poor stance, when
in overall effect it is very far from that.’ According to Sen, the regime
of high prices in general expands procurement but decreases the
affordability of food. That is the reason why we have worst of
undernourishment in the world & the largest unused food stocks at the
same time. As the system only encourages producing more & more
rather than selling more at a lower price, it only leads to more income
for farmers (that to very limited no in few states). The overall net effect
of these subsidies is regressive in distribution.

Another important issue in producer subsidy is the continuous piling up

of the stocks with FCI. Central govt subsidy report shows that in 2002
January the actual stocks were 32.4 million tons as against the buffer
norms of 8.4 million tons. The excess as a % of minimum norm is as
high as 285.7%.. The stocks were piling up to such an extent, that
exporters had to be provided with food grains at a near BPL price.
Practically food grains were “resubsidiesed” for exports. Swati Kundu
(2005) points out that while poor consumers were unable to purchase
the food at high prices, exporters were being subsidized. She also points
out, that overflowing FCI godowns and lack of scientific storage
resulted in a substantial amount of food grains being wasted. In fact,
estimated losses of food grains were about 10 per cent of the total
production, or about 20 million tonnes a year. To put things in
perspective, the loss suffered was about as much as what all of
Australia produces. This also pushed up the economic cost of the FCI.
In this light, Shikha Jha& P V Srinivasan (2000) show that the retail
margins of private traders are much lower than post procurement costs
incurred by the FCI. That means there are clearly net losses for the
economy. Central govt subsidy report points out the reason behind it.
Since all costs of FCI are automatically reimbursed in the extant
system, there is little incentive to raise efficiency and reduce costs for

8
FCI. One more point related to stocks & its relation with food inflation
is brought out by business standard in its article. It points out that,

Recent food inflation has also been created by govt policies to some extent.
Business standard article (11 Feb. 2010) points out that, while prior to 2004,
public agencies used to mop up only around 50 per cent of the post-harvest
mandi arrivals, leaving the rest in the market to maintain year-round supplies,
now over 90 per cent of the arrivals are cornered by government agencies,
starving the market of supplies. It has definitely contributed to the food
inflation.Rajiv kumar, pankaj vashisht & gunjit kalita (March 2010) show
that govt did not effectively used open market operations for stabilising
wheat prices recently. With stock of 23.1 mt in January & next procuring
season starting in April, govt. conducted open market sale of just 0.5 mt
of rice & wheat together.

Central govt subsidy report, states that the concentration of FCI

purchases in just two food grains and a few States has facilitated tax
exportation by some of these States. Punjab and Haryana have imposed
taxes such as mandi fees on the purchases of food grains. With FCI
paying such taxes, the tax gets exported to consumers in other States. It
also raises the costs to FCI. Moreover the exclusive attention to wheat
and rice has distorted the cropping pattern of farmers in favor of these
two food grains alone. The higher water and fertilizer intensity of these
two crops in turn has had adverse environmental impacts.

B. CONSUMER SUBSIDY

9
Now we take the issues related to consumer subsidy. First we will
discuss the broad framework of PDS. According to economic survey
2009-10, allocations of food grains for BPL and AAY categories are
made at the rate of 35 kg per family per month for all accepted 6.52
crore families in the country. The total BPL and AAY allocations made
during 2009-10 were 276.77 lakh tonnes comprising 181.05 lakh tonnes
of rice and 95.72 lakh tonnes of wheat. Allocations under the APL
category are made depending upon the availability of stocks of food
grains in the Central Pool and past offtake. Presently, these allocations
range between 10 kg and 35 kg per family per month in different
States/UTs. During 2009-10, 197.17 lakh tonnes of food grains has
been allocated to States/UTs under the APL category as against 112
lakh tonnes during 2008-09. Central issue prices are as follows-

CIPs of wheat

Effective from BPL APL AAY

1.7.2002 to till 415 610 200
date (w.e.f.
25.12.2000)

CIPs of Rice

Effective from BPL APL AAY

1.7.2002 to till 565 830 300
date (w.e.f.
25.12.2000)
Source- dept of food & public distribution

According to a blog posted on India affairs website, whether a

particular household will be eligible for a BPL card or not depends on
two different processes. Firstly, the numbers of BPL households are
determined based on the Planning Commission estimates of poverty
(from NSS consumption-expenditure surveys) superimposed on the
number of households from census data. Secondly, an independent
exercise of identification is conducted based on a household census
using criteria (proxy indicators) determined by the Ministry of Rural
Development (MoRD), with the restriction that the number of poor to
be identified by this process should be within the number estimated by
the Planning Commission.
There are many identification problems in the PDS system. The data
from the 61st round of the NSS shows that only 44% of the households

10
 in the poorest quintile have BPL cards, while 17% of the households in
the richest quintile also possess BPL cards. The exclusion errors are
lower in states that have a higher coverage of the PDS. Currently govt
uses 13 point criteria to identify poor. It has proxy indicators like
ownership of house, land, toilets etc. but this method has proved to be
problematic so far.
The NCAER study found the PDS rarely meets the full requirement
of cereals of the poor households. They have to depend on market for
remaining supplies. As a result, these households spend around 60 per
cent of their income on food items. It means that for achieving food
security market price stabilization is also important & mere PDS reform
will not be sufficient.

The performance evaluation of TPDS conducted by programme evaluation

organisation on the request of planning commission & ministry of consumer
affairs, food & public distribution is the most important document clearly
proving the very high inefficiencies in the TPDS & it states in plainly that
transition from universal PDS to TPDS has neither led to a reduction of
budgetary food subsidies, nor has it been able to benefit the large majority
of the food insecure households in the desired manner.

The main findings of the study are:

The implementation of TPDS is plagued by targeting errors, prevalence
of ghost cards and unidentified households;
Though the off-take per household has shown some improvement under
TPDS, High exclusion errors imply low coverage of the target group
(BPL households). Of the estimated 45.41 million BPL households
(March 2000), TPDS has extended coverage to only 57% BPL families.
Leakages and diversions of subsidized grains are large and only about
42% of subsidized grains issued from the Central Pool reach the target
group.

Table: total leakage

Abnormal Leakage Very High Leakage High Leakage Low Leakage
(More than 75%) (50%-75%) (25%-50%) (Less than 25%)
1 2 3 4
Bihar & Haryana, Assam, Gujarat, Andhra Pradesh,
Punjab Madhya Pradesh & Himachal Pradesh, Kerala, Orissa,
Uttar Pradesh Karnataka, Tamil Nadu &
Maharashtra & RajasthanWest Bengal

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 Table A: Leakage at FPS Level

Very High Leakage High Leakage Moderate Leakage Very Low Leakage
(+50%) (25%-50%) (10% to 25%) (Less than 10%)
1 2 3 4
Bihar, Haryana Rajasthan & Andhra Pradesh, Assam, Himachal
& Punjab Uttar Pradesh Gujarat, Karnataka, Pradesh, Madhya Pradesh,
Kerala & Orissa, Tamil Nadu &
Maharashtra West Bengal

Table 2-B: Leakage Through Ghost Cards

Very High Leakage High Leakage Moderate Leakage
(+30%) (10%-30%) (less than 10%)
1 2 3
Assam, Himachal Bihar, Gujarat, Karnataka,
Andhra Pradesh, Haryana,
Pradesh & Maharashtra, Orissa, Kerala, Punjab,
Madhya Pradesh Uttar Pradesh & West Rajasthan &
Bengal Tamil Nadu

The table shows that the states having abnormal leakage have the highest
leakage at the FPS level.
The cost of income transfer to the poor through PDS is much higher than
that through other modes.
Irregular delivery schedule of FPS quota is a persistent problem in most
States. This has contributed to low off-take by consumers and hence to
large diversion of subsidized grains to the open market.
The FPSs are generally not viable because of low annual turnover and
they remain in business through leakages and diversions of subsidised grains;
The off-take by BPL cardholders varied significantly across States.
A multivariate analysis suggests that the factors (supply and demand side)
contributing to this variation are: variation in BPL quota, facility of off-take
in installments, regularity in the availability of grains in FPSs, availability of
preferred cereals, seasonality in demand for PDS grains (wage in kind & low
prices in harvest seasons) and asset holding (particularly land and consumer
durables).
During 2003-04, out of an estimated budgetary consumer subsidy of Rs. 7258
crore (16 States), Rs. 4197 crore did not reach the BPL households. Around
Rs. 2640 crore of the Central subsidy never reached any consumer (BPL or
APL), but seems to have got siphoned off the supply chain of TPDS.
Except in Kerala, the Economic Cost (EC) is higher than the corresponding
local market prices. This implies that in general, market is a more efficient

12
mode of transferring income to the poor than the public agencies. These calls
for looking for ways and means of reducing the Cost of transferring grains
through PDS. Because of the very high cost in public transfer, the budgetary
subsidy of Rs. 3061 core in 2003-04 is worth only Rs. 1990 crore to the BPL
families. Taking into account all the inefficiencies in the PDS, it is found that
the GOI spends Rs. 3.65 through budgetary food subsidies to transfer Re 1 to
the poor.

Balance Sheet of Central Pool BPL Food grain

(Kg./BPL family/ annum)
Off -take by
Off-
States Food
State Govt. take grains
2003-04 by BPL Families
not
reaching
the poor
households
1 2 3 4
Andhra Pradesh 466.16 197.65 268.51
Assam 490.76 227.32 263.44
Bihar 138.13 12.24 125.89
Gujarat 320.24 169.47 150.77
Haryana 416.16 138.79 277.37
Himachal Pradesh492.22 266.14 226.08
Karnataka 480.80 139.91 340.89
Kerala 407.58 248.58 159.00
Madhya Pradesh 365.57 124.04 241.53
Maharashtra 347.29 227.27 120.02
Orissa 276.37 175.88 100.49
Punjab 364.24 38.25 326.00
Rajasthan 366.53 238.43 128.10
Tamil Nadu 525.95 181.14 344.81
Uttar Pradesh 285.16 92.73 192.43
West Bengal 336.78 246.19 90.59
16 States (Avg.) 380.00 160.25 219.75

Central Unit subsidy for BPL–State wise

(Rs./Kg.)

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Total Central Intended Subsidy Unintended Subsidy/
Subsidy for Off-take Additional State
By identified BPL Delivery Cost
1 2 3 1
13.75 5.83 7.92 Andhra Pradesh
12.59 5.83 6.76 Assam
50.98 4.52 46.46 Bihar
8.77 4.64 4.13 Gujarat
12.44 4.15 8.29 Haryana
9.19 4.97 4.32 Himachal Pradesh
18.78 5.46 13.31 Karnataka
9.56 5.83 3.73 Kerala
14.53 4.93 9.60 Madhya Pradesh
7.32 4.79 2.53 Maharashtra
9.16 5.83 3.33 Orissa
40.15 4.22 35.93 Punjab
6.39 4.16 2.23 Rajasthan
16.93 5.83 11.10 Tamil Nadu
14.13 4.60 9.54 Uttar Pradesh
6.63 4.84 1.79 West Bengal
12.24 5.16 7.08 16 States (Avg.)

The average of 16 major states show that out of 380 kg/annum offtake for Bpl by state
govt only 160.25/kg actually reaches the poor, while more than that (about 219kg) get
leaked in the system.
Similarly, out of 12.24 rs/kg subsidy by central govt only 5.16rs/kg is an intended
subsidy, while 7.08 rs/kg is the additional delivery cost.
These findings reveal that the present situation of TPDS & ground reality, which calls
for some urgent corrections in the system.

There are many arguments to replace the system with either food stamps or universal
PDS. We take up both the alternatives one by one. World Bank discussion paper by
subbarao & radhakrishna (1997) had suggested the use of food stamps in urban & rural
areas & keeping Fair Price Shops in remote areas. Tenth five year plan has elaborately
given the mechanism required for the implementation of food stamps. It suggests that
state governments can issue a subsidy entitlement card (SEC) instead of ration cards.
SEC will show no of members in the family, their age & entitlement level for food
stamps. It suggests more entitlement to adults & less for children. Each family could
collect food stamps from prescribed distribution centers, on showing their SEC. they
could then use these food stamps at any food supply shop to buy food at a price below
the market price. The retailer will then be reimbursed by the govt. High level committee
report of Abhijeet Sen on PDS (2000) has also recommended the use of food coupons

14
to be discounted at the FPS, (but interestingly they favour universal PDS). The tenth
plan discusses in detail the possibility of issuing food credit/debit cards. It emphasizes
on the Andhra Pradesh experience of using food coupons. The leakage through FPS &
ghost cards has substantially reduced in Andhra Pradesh, saving 14.67 crore per month.
Recent justice Wadhawa committee (2009) suggested the use of biometric identification
of beneficiaries & use of electronic smart card. Chandigarh has launched a scheme to
introduce smart card on pilot basis. The smart card with a 32Kb capacity will have
biometric data of three family members of the card holder. The beneficiary will know
the ration allocation already done and also the remaining balance in his account. There
will be resubmission of the fingerprint of the beneficiary after the allocation. The
system can work in both online & offline mode. (News on wellsphere.com Jan 2009).
But there are many counter arguments regarding food stamps. Madhura Swaminathan
points out that there is problem of indexing or inflation adjustment of food stamps in
which case the real transfer to the poor might reduce. Second there can be
administrative problems in issuing food stamps & reimbursement. She also states that
when the income inequalities are high & needs are uniform direct rationing should be
preferred over income transfers. But keeping in mind the recent advances in technology
& success of Andhra Pradesh model for ten years, the food coupons, smart cards &
food credit/debit cards seem to be the future of PDS.

There is also a debate going on between targeted vs. universal PDS. Madhura
Swaminathan & Reetika Khera (2009) seem to favour universal PDS over Targeted
PDS being implemented. Firstly, there are large exclusion & inclusion errors in TPDS.
When the food insecurity is widely prevalent, the leakage from a universal programme
will be small and the benefits of targeting will be limited. Secondly, programme for the
poor tends to become programmes of poor quality, as Amartya Sen points out. Thirdly,
universal programme does not mean universal benefits. Swaminathan suggests that if
the target group is large it makes sense to provide benefits universally & then to claw
back benefits from rich through taxes. Khera (2009) also makes some important
arguments. Equity argument or universal entitlement to food is important in the light of
coming right to food act. (But the contradiction is that the govt. is deciding to reduce
the quota from 35kg/month to 25 kg/month.) Secondly, the whole BPL approach is very
divisive in contrast with programmes like NAREGA where all are eligible.
But universal PDS may not be feasible & not as necessary as it seems. Khera herself
has counted the cost of universal PDS which will be around rs 1, 15,000 crore which
will increase the fiscal deficit tremendously & there will be other repercussions of it on
the economy. Also, M H Suryanarayana (2008) has proved that already more than four
fifth of rural households & two third urban households are covered with PDS. But a
very small proportion actually makes purchases from rice & wheat. Hence issue is not
of universalisation but of improved functioning of PDS. Observation of TPDS
evaluation committee in this regard is important. The offtake by the poor under TPDS is
substantially higher than under earlier universal PDS. It implies that the poor are price
sensitive & the move towards targeted PDS was a right step.

15
C. RECOMMENDATIONS BY COMMITTEES
Now we will look very briefly at the recommendations of the various committees
appointed by the Govt till now & the World Bank report on PDS on the food subsidy
system as a whole.
1. World Bank report (1997) suggests doing away with the procurement operations,
making the grain markets free from restrictions & limiting the role of FCI as a holder of
strategic buffer stocks intervening only in case of national level food shortages.
2. Abhijeet Sen committee on PDS (2000) recommends the uniform CIP for all
consumers & additional subsidy to poor to be given in form of cash. FCI should
withdraw from states like Punjab & Haryana & operate mainly in states where distress
sale occurs.
3. Expenditure reforms commission (2001) recommends that FCI should procure all
the rice through a levy system. The national food security buffer stock of 10 millions
should be maintained all the times but the cost of buffer stocks held in excess of this
stock should be treated as producer subsidy.
4. Planning commission working paper (2002) discusses the alternative farm
income schemes suggested by Prof Naik of IIMA. In Direct payment scheme farmers
will be paid difference between actual market price & MSP. In income insurance
scheme average income levels are protected. But planning commission has found out
that there will be no saving in subsidy due to either of the schemes. Also it will be
difficult to implement in rural areas where people do not maintain proper records.
Regarding exports it recommends to renounce the use of export restrictions. Domestic
shortages should be met through imports & not export regulation. (Though the rationale
behind it is not explained in the paper, the recommendation is quite interesting). It also
recommends lifting the ban on futures trading & stocking of all agricultural
commodities.
5. Tenth five year plan (2002-2007) clearly states that the objective of the food
procurement policy should be food price stabilization rather than subsiding producers,
because PDS can fulfill the food requirements only partially. FCI should gradually hand
over it role of procurement to private traders.
6. Central government subsidy report (2004) recommends that the MSP of wheat
should immediately be rationalized & should adhere to the CACP determined C2 cost.
Purchase operations should not be open ended. A system of price insurance should be
introduced to those who do not benefit from the procurement operations. The
reimbursement to FCI should be based on the normative unit costs & actual quantity
involved instead of reimbursement on the actual basis. In PDS, purchases should be
allowed on weekly basis.
7. The performance evaluation committee on TPDS (2005) has suggested some
important things for the improvement in the mechanism of TPDS, such as doorstep
delivery of grains to retail outlets, weightage to local preferences in food grains,

16
observing the seasonal variability in offtake, allowing PDS shops to sale non PDS items
to increase their viability, finding easily observable qualitative criteria for identifying
BPL, preferring co-operatives & SHGs for giving FPS dealership.
8. CACPs report on kharip crops 2008-09 recommends that practice of providing ad
hoc bonus should be stopped, as it does not help farmers to get more income nor it
helps govt to procure more. Also procurement operations should reach unreached areas.
9. Justice Wadhawa committee (2009) has recommended computerization of PDS,
use of biometric cards, use of radio frequency identification service in delivery
mechanism, central monitoring system for tracking carriages to prevent leakage
& use of food stamps.

RESEARCH OBJECTIVES-
After this extensive review of literature, I have decided my research objective as
follows-
1. to look at the food subsidy situation 2000 onwards- analyze the trends in MSP,
offtake & stocks & other parameters after 2000 with empirical data

17
2. to look at the food subsidy as a whole & analyze some problems not been
considered yet
3. to recommend policy changes required

METHODOLOGY-
I have used empirical data to establish all the arguments. Data from 2000 to 2010 is
essentially used to analyse latest trends in subsidy bill, MSP, offtake, Procurement,
stocks, consumption pattern, PDS offtake, BPL population. The main sources of data
are economic survey 2009-10, budget documents of various years, agricultural statistics
given by ministry of agriculture & NSSO 61st round. The whole analysis is divided into
3 parts as a overall subsidy, producer subsidy & consumer subsidy & problems in each
section are deal with separately, though there are obviously links between various
points in each section. At the end conclusion & policy recommendations are given.

FINDINGS

A) OVERALL FOOD SUBSIDY-

18
Food subsidy has become the single largest component of the total
government subsidy bill over the years. Following chart shows the
trend of food subsidy as % of total subsidy bill.

total subsidy in 2004-05 budget estimates

year total subsidy food subsidy % of total
In rs crore In rs crore
2000-01 28271 12060 42.66
2001-02 32722 17499 53.48
2002-03 45189 24176 53.50
2003-04 46869 25200 53.77
2004-05 46514.43 25800 55.47
2005-06 46874.12 23200 49.49
2006-07 53462.6 24203.92 45.27
2007-08 69742.06 31545.59 45.23
2008-09 129707.63 43751 33.73
2009-10R 131024.94 56002.01 42.74
2010-11E 116224.04 55578.18 47.82
Source- basic data from various budget documents

The data shows that food subsidy has started declining recently as a %
share of total subsidy after reaching peak of 55% in 2004-05. But in
2010-11 estimates, it has again started increasing & has been given
47% share in total subsidy bill. In the light of coming food security act
& pressure for universalisation of PDS, increased estimates of 7.5
crores of BPL population by Suresh Tendulakar committee (as against 6
crore BPL presently) we can expect further increase in food subsidy bill
if there are no special efforts to curb the bill.

Annual growth in food subsidy

Food Annual
subsidy growth
Rs crore) %
1999-2000 9,200.00 5.75
2000-01 12,010.00 30.54
2001-02 17,494.00 45.66
2002-03 24,176.45 38.2
2003-04 25,160.00 4.07
2004-05 25,746.45 2.33
2005-06 23,071.00 -10.39
2006-07 23,827.59 3.28
2007-08 31,259.68 31.19

19
2008-09 43,668.08 39.69
2009-10r 56,002.01 28.24
2010-11E 55,578.18
TGR 19.86909091

Source- basic data from economic survey 2009-10 & budget 2010-11

The above table shows that subsidy tends to “jump up” in some years &
it is “sticky downwards”. Hence, in overall effect the subsidy has risen
by targeted growth rate of 19.86%. If we compare the growth rates with
90s growth rate of 19.43%, the subsidy has grown slightly faster in this
decade, when actually we should expect it to shrink or at least grow
slower due to implementation of TPDS since 1997. But the huge
increase in MSPs after 2000 along with keeping the central issue price
constant after 2002 seem to have contributed to this rise in subsidy bill.

Share of food subsidy in total govt. expenditure (in rs crore)

Actuals of 2009-10R 2010-11E
2008-09
total 883956 1021546.53 1102749.24

food 52489.72 56002.01 55578.18

subsidy

% of 5.9380466 5.48208117 5.039965387

total 9 4
Source- various budget documents

One positive development is that the share of subsidy in total govt

expenditure is low compared to other developing countries & it has
started declining in the recent years.

But while large amount is being spent on food subsidy, there are hardly
any efforts to strengthen the PDS or increase the efficiency of FCI,
which all the committees have recommended. In 2009-10 only 40.40
crore were allocated to evaluation, monitoring & research in foodgrains
management & strengthening of PDS. The figures were revised to only
14.60 crore in budget of 2010-11. & 2010-11 estimates allocate only
29.69 crore (remaining of 40 crore?) towards strengthening of PDS.

Now let’s look at the trends in procurement, offtake & stocks after
2000.

20
 Public Distribution System – Procurement, Offtake and Stocks
(Million tonnes)
Year Procurement Off-take Stocks
Rice Wheat Total Rice Wheat Total Rice Wheat Total
1 2 3 4 5 6 7 8 9 10
2000-01 18.93 16.36 35.29 10.42 7.79 18.21 23.19 21.5 44.98
2001-02 21.12 20.63 41.75 15.32 15.99 31.3 24.91 26.04 51.02
2002-03 19 19.03 38.03 24.85 24.99 49.84 17.16 15.65 32.81
2003-04 20.78 15.8 36.58 25.04 24.29 49.33 13.07 6.93 20.65
2004-05 24.04 16.8 40.83 23.2 18.27 41.47 13.34 4.07 17.97
2005-06 26.69 14.79 41.48 25.08 17.17 42.25 13.68 2.01 16.62
2006-07 26.3 9.23 35.53 25.06 11.71 36.77 13.17 4.7 17.93
2007-08 26.29 11.13 37.42 25.23 12.2 37.44 13.84 5.8 19.75
2008-09 32.84 22.69 55.53 24.62 14.88 39.5 21.6 13.43 35.58
2009-10 4.1 24.4 28.5 . . . . . .
Source- economic survey 2009-10

Procurement of wheat had shown a declining trend until 2007-08 which

was reversed only after declaring highest MSP of Rs10000 & Rs10800
for 2008-09 & 2009-10. Even though the wheat production has
increased over the years its growth rate is lower than that of rice &
more steps need to be taken to raise the production & procurement
rather than just increasing MSP. Merely increasing MSP & procuring
more, the open market supplies reduce which increases the market
price. It is evident in the ever increasing WPI of wheat. It has increased
from 179 in 2007-08 to 191 in 2008-09. Is it a coincidence that
procurement has doubled & stocks more than doubled in the same years
when production had increased just by 2 million tonnes? It thus clearly
establishes the relation between increasing procurement, stocks &
market prices. Offtake has shown a declining trend for wheat in this
decade even after keeping the issue price constant mainly due to
decreasing stocks. Hence, govt had to increase stocks to increase
availability of wheat for PDS. Both these explanations show that govt
has to draw a fine line between keeping enough stocks & not fuelling
market prices through rising stocks.

In case of rice, procurement has shown a consistently rising trend.

During 2005-06 to 2007-08 procurement, stocks & offtake are constant
& high. But in 2008-09 sudden rise in procurement due to high MSP of
8500/ ton has resulted in decreased off take in PDS (24 million ton) &
rise in WPI in open market.(from 216 to 225).

21
One point here can be noted, MSP thus seems to affect procurement
rather than production. And the link through stocks, offtake, open
market prices directly comes to net availability of food grains (apart
from population & aggregate demand affecting net availability). In
2008-09 the net availability of rice in gram per capita came down to
175 from 194 in 2007-08. Similar exercise for wheat shows that rise in
MSP has affected net availability in case of wheat also. It decreased
from 157gm/capita in 2007-08 to 145gm/capita in 2008-09.

B) PRODUCER SUBSIDY
Now we will look at some problems in producer subsidy. Due to open
ended procurement operations of FCI wheat & rice farmers are

22
benefited. But 69% of wheat procurement is done from 3 states alone
viz., Punjab, Haryana & Uttar Pradesh. In case of rice, 67% of rice is
procured from 3 states Punjab, Uttar Pradesh & Andhra Pradesh.
(Economic survey 2009-10) Hence, practically major portion of the
procurement benefit goes to farmers in these 4 states only. According to
finance ministry report, majority of these farmers are not even poor. If
we look at the no of farmers in these four states, it shows that out of
total 8 crore farmer households in India, only 2 crore or 30% farmers
are living in these four states. Even after making the assumption that all
these farmers produce either wheat or rice only & they all are able to
sell their produce to FCI, maximum 30% of farmers are covered by FCI
open ended procurement operations.

If we look at the costs of production in these states, it can be seen that

costs are much less than the MSP in these states. Hence these states
reap the maximum benefit of high MSP. The table below makes this
point clear.

Cost Estimates of Principal Crops

Crop/State Year Cost of msp/qtl
Production
C2
(Rs/qtl.)
1 2 3 5
PADDY
Andhra Pradesh 2003-04 488.83 550
2004-05 503.73 560
2005-06 540.96 570
Punjab 2003-04 442.56 550
2004-05 448.62 560
2005-06 487.28 570
Uttar Pradesh 2003-04 440.56 550
2004-05 570.7 560
2005-06 559.19 570
WHEAT
Haryana 2003-04 506.72 620
2004-05 522.87 630
2005-06 577.41 640
Punjab 2003-04 504.24 620
2004-05 494.35 630

23
 2005-06 556.27 640
Uttar Pradesh 2003-04 482.78 620
2004-05 597.81 630
2005-06 654.22 640
Source- ministry of agriculture, agriculture statistics
at a glance 2008 & economic survey 2009-10

Hence, rice farmers in these states are getting profit of Rs 61/quintal

while wheat farmers get benefit of Rs 85/quintal on an average
according to this table. As the MSP is always more than costs for these
states (due to economies of scale in these states, costs remain low) they
continue to reap highest benefit from FCI procurement operations.

One way out from this cycle seems to be introducing cap on maximum
procurement that can be done from one single farmer. If such a cap is
there, large farmers cannot sell their entire procurement & small
farmers will also have a chance to enter into the system. Hence small
farmers will be protected, FCI will have to expand their procurement
operations & the reach to farmers will increase. And even if large
farmers will need to depend on market, they are more capable of
competing in the market than small farmers. It might also increase the
availability of supplies to market & reduce unnecessary piling up of
stocks with FCI. The extra costs incurred by FCI in procuring from
large no of small farmers will be more than compensated if these
benefits are achieved.

Here we come to the question of rising stocks over the buffer stock
norms.

wheat Rice
as on minimum actual as on minimum Actual
buffer norms stocks buffer norms stocks
Apr-04 40 69.31 Apr-04 118 130.69
Jul-04 143 191.52 Oct-04 65 60.92
Apr-05 40 40.66 Apr-05 122 133.41
Jul-05 171 144.54 Oct-05 52 48.49
Apr-06 40 20.09 Apr-06 122 136.75
Jul-06 171 64.12 Oct-06 52 59.7
Apr-07 40 47.03 Apr-07 122 131.72
Jul-07 171 129.26 Oct-07 52 54.89
Apr-08 40 58.03 Apr-08 122 138.35
Jul-08 171 249.12 Oct-08 52 78.63

24
 Apr-09 40 134.29 Apr-09 122 216.04
Jul-09 171 329.22 Oct-09 52 153.49
Jan-10 82 230.92 Jan-10 118 243.53
Source- basic data from economic survey 2009-10 (figures in lakh tons)

In this table we are going to consider only two periods regarding stocks.
In case of wheat we are going to consider April (least buffer stock
requirement) & July (maximum buffer stock requirement). It shows that
barring the period from July 2005 to July 2007, the actual stocks are
higher than minimum buffer stocks and recently they have again started
piling up. In case of rice, we are going to consider stock positions on
April (maximum requirement) & October (minimum requirement). It
shows that barring only one exception of October 2004, the rice stocks
are also piling up over the years.

Now the question is why the government does not release these excess
stocks in the open market & help reduce the prices? There is certainly
not the question of farmers’ welfare here. Because once the
procurement of wheat is done in April (both by FCI & private traders)
& Procurement of rice is done in November, in the remaining year the
stocks are either with the FCI or private traders. Hence, there is no
harm in open market sales & pushing down the price for the benefit of
all the consumers. But govt does not seem to do that. High prices in
open market thus seem to be benefiting only private traders with FCI
incurring huge costs of carrying buffer stocks & consumers paying high
prices & govt incurring fiscal deficit.
Balakrishnan & Ramaswami (2000) say that the govt faces a dilemma.
Either it accommodates consumer valuations by keeping issue prices
sufficiently below market prices or it ignores these valuations but at the
cost of carrying larger stocks. Either way scope for reducing the food
subsidy is constrained by quality differentials between the grain
supplied through the PDS and in the open market. The question arises
here that, in the present situation govt. seems to loose on both the
fronts. Govt has kept the issue price low & fixed since 2002 & it is still
piling up buffer stocks due to high procurement in some years. Hence it
is increasing economic cost & with low issue price, the food subsidy is
increasing.

Now let’s look at some recent initiatives by the govt to improve the
system. They have got positive results. Decentralized procurement
scheme started in 1997, is working well in recent years. Under this
scheme state govt. themselves procure & distribute food grains, more
suitable to local tastes, more farmers are covered & transportation costs

25
are indeed reduced. Central govt. still gives the difference between
economic cost & CIP as a subsidy.

Procurement of Rice in DCP states (in lakh tons)

State KMS KMS KMS KMS KMS KMS KMS
2002- 2003- 2004- 2005- 2006- 2007- 2008-
03 04 05 06 07 08 09
Chhattisgarh 12.9 23.7 28.4 32.7 28.6 27.43 28.48
Karnataka - - 0.2 0.5 0.2 0.18 1.07
Kerala - - 0.3 0.9 1.5 1.7 2.37
Orissa 8.9 13.7 15.9 17.9 19.9 23.38 27.9
Tamil nadu 1.1 2.1 6.5 9.3 10.8 9.68 11.99
Uttar pradesh 13.6 25.5 29.7 31.5 25.5 28.91 36.87
Uttranchal 2.3 3.2 3.2 3.4 1.8 1.47 3.49
West bengal 1.3 9.3 9.4 12.8 6.4 15.08 16.67
A&N - Neg. Neg. - - 0 0
Total 40.1 77.5 93.6 109 94.7 107.8 128.84
3
Source- economic survey 2009-10

Procurement of rice in DCP states has shown a growing trend. Non

traditional states in procurement have started procuring more. Mainly
Chhattisgarh, Orissa & Tamil Nadu really seem to benefit from
decentralized procurement. In case of wheat also similar picture can be
seen. But Uttar Pradesh still seems to dominate the scene. The main
point here is that the positive effects of the scheme have started
reflecting in economic costs of FCI. In case of rice, for the 1st time
distribution costs have fallen by 16.63% & in case of wheat,
distribution costs have fallen by 19.94% in 2009-10. Hence the scheme
is benefiting more farmers plus it is helping to reduce the distribution
costs.
APMC act has been repealed from October 2006. In majority of the
states the reforms in the act have taken place as suggested. (Economic
survey 2009-10) The main feature of it is that farmers can now sell their
produce at any place in the country where there is higher price. Hence,
market forces will now ensure that there is demand-supply equilibrium.
The results of this step will be seen in coming years.

C) COSUMER SUBSIDY

26
According to official figures PDS is covering 6.5 crore families, out of
which 2.5 crore are Antyodya card holder (AAY). Each family BPL &
AAY family is entitled to 35 kg/ month of wheat & rice together, at a
differential rate. As we know there are lots of type 1 & type 2 errors in
the whole system of identification of BPL or AAY card holders. In
rural areas, 51% of people owning land below 0.01 hectors(least land)
possessed no BPL card, while in the top 5% people 11% held BPL card
(NSSO 61st round) that shows the skewed distribution of BPL cards. If
the BPL cards are not provided to most needy people they practically
remain outside the net of PDS. Then they can purchase in PDS only at
APL prices, which are comparatively high. That is the reason why APL
offtake is also considerably high and it should not been mistaken as
mistargeting as is generally perceived in the literature. According to my
view, APL offtake is generally by the people who are poor but do not
possess BPL or AAY card (that is not officially poor). The other
misconception is that the BPL offtake from PDS is low. It is indeed
very low compared to allocations but one more thing should also be
kept in mind, that BPL card is actually possessed by people in all types
of classes. NSSO revealed that 11-18% of people in each class possess
BPL card, who practically do not use PDS for food grain purchase.
(They might use it for kerosene or sugar or for taking benefit of other
govt schemes) hence to that extent the figures of offtake are
underestimated.

Now we turn to one widely discussed question of state wise penetration

of PDS. I want to present some observations in this regard.

Consumption of rice in rural areas

states poverty average qty no of
line consumed households
by reporting
BPL consumption
from from from pds/1000
pds other
sources
andhra 15.8 15.68 30.83 622
pradesh
aasam 17.6 15.83 44.96 90
bihar 41.4 0.693 35.953 10
chhatisgarh 40.9 14.97 49.197 217
gujrat 16.8 2.902 6.351 315
harayana 14 0 2.854 1

27
 jharkhand 40.2 2.767 47.124 44
karnataka 25.1 18.204 6.526 585
kerala 15 15.868 21.583 346
madhya 38.3 4.716 10.646 179
pradesh
maharashtra 30.7 6.974 7.53 275
orissa 46.4 8.731 54.328 215
punjab 8.4 0.023 4.336 1
rajasthan 22.1 0 1 0
tamil nadu 22.5 19.808 18.452 789
uttar 32.8 4.424 18.998 58
pradesh
west bengal 24.7 3.411 54.742 128
st
Source – NSSO 61 round & economic survey

The table shows the fact that in states like Tamil Nadu, Andhra
Pradesh, Karnataka, Kerala, the no of households reporting
consumption from PDS per 1000 is very high. All these states give
additional state subsidy to consumers. In these states purchase of rice
from other sources is comparable or less than purchase from PDS.
(Except AP which is rice surplus state) incidentally poverty line is low
in these states. Also, TPDS evaluation committee has reported low
leakage levels in these states. Hence, PDS seems to work well in these
states, reducing the incidence of poverty. On the other hand, states like
Bihar, Orissa, Madhya Pradesh, U.P., Jharkhand, Chhattisgarh where
poverty line is as high as 40-46%, consumption from PDS is very low
& people have to depend on other sources for consumption of rice &
very low % share of total rice consumption comes from PDS. Hence,
PDS does not seem to work where it is essential.

Now I will try to build a model to calculate actual benefit to consumers

through food subsidy. MSP (which is floor price in market) is taken as
market price. So difference between Market price & issue price is the
subsidy to the consumer. Per consumer per ton subsidy is coming out to
be Rs 1831 (18.31/kg) for wheat & Rs 758 (7.58/kg) for rice in
2008-09.
The methodology is as follows- the offtake of rice & wheat in 2008-09
is calculated at both at MSP & CIP & the difference between it is
divided by total no of beneficiaries(6.5 crore) offtake figures are for
1000 tons. MSP- CIP figures are absolute figures.

28
 rice 2008-09
OFFTAKE
BPL AAY APL TOTAL

10,031.384 6,326.078 5,710.298 22,067.760

at CIP 5.67E+10 3.57E+10 4.74E+10 1.39815E+11

at 8.53E+10 5.38E+10 5.03E+10 1.89289E+11

MSP

msp- 49473915700
cip

per consumer per ton subsidy 758.802388

wheat 2008-09
OFFTAKE
BPL AAY APL TOTAL

5,624.399 3,198.559 3,710.086 12,533.044

at CIP 2.33E+10 1.33E+10 2.26E+10 59246800300

at 5.62E+10 3.2E+10 3.71E+10 1.2533E+11

MSP

msp- 66083639700
cip

per consumer per ton 1831.097089

subsidy
Source- as compiled by author

CONCLUSION –

29
The literature review & findings of the research suggest that there are
many problems in the food subsidy system as follows-
1. huge & inefficient FCI operations
2. political pressures for high MSP & thus inflationary nature of
MSPs
3. piling up of stocks
4. leakages in PDS, state wise different penetration in PDS, high
subsidy for consumers which in reality does not reach them
5. net loss of consumer welfare in the system
6. farmers welfare also concentrated in 4 states & reach only 30%
farmers
Hence, we come to the issue of food security of a nation sacrificed in
this huge, inefficient food management system which requires urgent
attention. There is a hope that coming food security bill will address all
these issues & introduce long awaited reforms & will not just do away
with some fancy schemes catering to their political needs.

POLICY RECOMMENDATIONS-
1. Strengthening of PDS requires urgent attention. More funds &
firm policy framework is required for that.
2. Increasing wheat & rice production is necessary in view of
increasing aggregate demand. But avoiding piling up of stocks is
also necessary to increase market supplies. The tendency to
increase stocks should be curtailed by open market sales at the
right time, consumers should benefit from increased production.
3. Cap on maximum procurement from one farmer should be
considered & policy in that direction needs to be worked out.
4. Decentralized procurement system should further be
implemented. States should be given all required assistance (both
financial & logistics) to implement DCP.
5. Special attention in PDS needs to be given to states with high
incidence of poverty & high leakage. Smart cards, biometric
cards & coming unique identification cards will prove helpful in
reducing the no of ghost cards & leakages.
6. in the long run, Andhra Pradesh model of food coupons needs to
be tested on a pilot basis & then implemented at all India level.

REFERENCES-

30
 1. Balakrishnan, Ramaswami, 2000, analyzing public intervention
in the foodgrains markets, in public support for food security,
edited by N. Krishnaji & T.N. Krishnan, Sage Publications, New
Delhi
2. Jha, Shikha &Shrinivasa, P.V., 2000, liberalization of foodgrain
markets: implications for food security & price stability, in
public support for food security, edited by N. Krishnaji & T.N.
Krishnan, Sage Publications, New Delhi
3. Khera, Reetika, 2009, right to food act: beyond cheap promises,
in Economic & political weekly, vol XLIV no 29, July 18, 2009
4. Kumar Rajiv,Vashisht pankaj, Kalita gunjit, 2010, food inflation:
contingent & structural factors, in Economic & political weekly,
vol XLV no 10, March 6 2010
5. Parikh, Kumar, Darbha, 2003, growth & welfare consequences of
rise in MSP, in Economic & political weekly, vol 38 no 9, 1
March 2003
6. Suryanarayana, M, 2008, Agflation & public distribution system,
in Economic & political weekly, vol 43 no 18, 03 May 2008
7. Swati Kundu,2005, news article Food subsidies: Scarcity
amongst Plenty
8. news article food prices & PDS, business standard, New Delhi,
11 February 2010
9. news article Rot in PDS: over 2 crore ghost cards, Times of
India, 22 dec 2007
10.blog what ails PDS on India current affairs website
11. Sen, Amarya, 2003, speech at a public hearing on hunger & the
right to food, Delhi university, transcript by right to food
campaign

Reports by various committees-

12.Radhakrishna, Subbarao, 1997, India’s public distribution
system national & international perspective, world bank
discussion paper no 380, Washington D.C. 1997
13. Abhijeet Sen, 2000, high level committee report on PDS,
prepared for ministry of consumer affairs, food & public
distribution
14.report of expenditure reform commission, 2000
15. Virmani arvind, PV Rajiv, 2001,excess food stocks, PDS &
procurement policy, planning commission working paper no
5/2002PC
16.central govt subsidies in India,2004, report by ministry of
finance, department of economic affairs

31
 17.performance evaluation of targeted public distribution
system(TPDS), 2005, report prepared for ministry of consumer
affairs, food & public distribution system
18.CACP kharip report for 2008-09
19.justice Wadhawa committee report, on computerization of PDS
operations,2010

Official sources
20.statistics at a glance 2008, ministry of agriculture
21.economic survey 2009-10
22.various budget documents
23.tenth five year plan
24.handbook of statistics, RBI
25. NSSO 61st round data

32
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