of 55
8/11/2019 Food policy reforms
1/55
Food Policy Reforms: A Rapid
Tour of PossibilitiesBharat Ramaswami
IGIDR Silver Jubilee InternationalConference
December 1-3, 2012
8/11/2019 Food policy reforms
2/55
Collaborators
Milind Murugkar
Ashok Kotwal
Pulapre Balakrishnan
8/11/2019 Food policy reforms
3/55
A Rare Moment?
Food policy institutions have enjoyed stability and continuity fordecadesdespite changes in scale and objectives
The public distribution system (PDS): origins in WW II rationingsystems.
The Food Corporation of India (FCI)the Central government
agency responsible for procurement and storage was set up in themid-60s.
Practice of offering support prices to rice and wheat also dates fromthat period.
At this moment, though, Indias food policy is in a state of flux.
Real possibility that Indias food policy institutions may look quitedifferent in a decade.
8/11/2019 Food policy reforms
4/55
Pressures on Food Policy
Stunning GDP growth but only modest dent inpoverty.
Contradiction hard to ignore politically
The National Food Security Bill at the Centrallevel
Several food policy reforms at the Stategovernment level.
Civil Society activismamong other things theyhave demanded and obtained judicial oversightof the States food intervention.
8/11/2019 Food policy reforms
5/55
The neo-classical economics case for
food policy interventions
Price supports and procurement
Absent risk markets, price supports can be Paretoimproving. Producers gain from insurance against lowprice outcomes. Consumers gain too: the supplyresponse to price insurance lowers food prices (Innes,QJE, 1990)
Subsidised food distribution to the poor
Traditionally, justified with reference to equityobjective.
A small literature now on growth impacts of safetynets (Alderman and Yemetsov, 2012)
8/11/2019 Food policy reforms
6/55
Other instruments: open market sales,
public stocks?
In the Indian context, it can be argued that theseare the outcomes of price supports andsubsidized food distribution.
Open market sales occur fitfully and almostalways to dispose off excess stocks. There is noannounced protocol for these sales.
Although there are announced norms for public
stocks, these are driven mostly by the needs ofthe public distribution rather than marketstabilization.
8/11/2019 Food policy reforms
7/55
Price supports in Practice
Price supports supplanted by administeredprices and procurement.
The farm lobby and its hold
Counter-moves by the government to reduce thecost of procurement by restrictions on exportsand 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)
8/11/2019 Food policy reforms
8/55
Subsidised food distribution in practice
Identifying the poor has been difficult Drawing a line in the sand!
Massive exclusion of the poorboth exogenous andendogenous.
Illegal arbitrage between the PDS and the marketRent seeking and political patronage of PDS dealers
Unviable government marketing chain (PDS)volumesinsufficient to justify the costs.
This has encouraged illegal diversion, limited andunpredictable service timings and customer unfriendlypractices.
8/11/2019 Food policy reforms
9/55
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.
8/11/2019 Food policy reforms
10/55
The Tower of Babel: what do we do
next?
Policy advise from economists, multi-lateralinstitutions: target subsidies, make stateagencies open to competition, include privatesector
Pressure from activists, NGOs: Make subsidiesuniversal, no private sector, empowercommunities and enact laws to make the stateaccountable.
Government speaks in many voices: axe of fiscalconsolidation, social justice, farmer rights,consumer interests
8/11/2019 Food policy reforms
11/55
8/11/2019 Food policy reforms
12/55
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 errorsbound to happen.
Therefore, tolerate the leakage of resources tothe non-poor.
Among other things, use markets in the form ofcash transfers to reduce diversions and otherwaste.
No reason to tolerate such leakage of resources.
8/11/2019 Food policy reforms
13/55
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.
8/11/2019 Food policy reforms
14/55
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?
http://localhost/var/www/apps/conversion/tmp/scratch_8/Article1-578444.aspx.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/142399.htmlhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/31386742_1_lakh-tonnes-fci-and-state-central-pool.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/142399.htmlhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Article1-578444.aspx.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Article1-578444.aspx.htmhttp://localhost/var/www/apps/conversion/tmp/scratch_8/Article1-578444.aspx.htm8/11/2019 Food policy reforms
15/55
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.
8/11/2019 Food policy reforms
16/55
No seasonal pattern in grain
consumption
Quarter All grain Rice Wheat All grain Rice Wheat
Per capita & per month,Kg
Index 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
8/11/2019 Food policy reforms
17/55
Seasonal demand for storage
Principle: Grain must be equally allocated
over time.
8/11/2019 Food policy reforms
18/55
Application
1. Compute marketed surplus
2. Assume that the portion consumed on-farmdoes not require commercial storage
3. No carry-overs of grain across marketing years(only seasonal storage considered).
4. In the harvest periods, consumption demand isinstantaneously met without any storage. Ofcourse some temporary storage is requiredbutthat could be in shops, transit or out in theopen.
8/11/2019 Food policy reforms
19/55
Quarter-wise demand for storage
Rice 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 marketingyear: start with zero ricestocks
Jan 1 = 3/4th
of 50 = 38.5 April 1 = of 50 = 25
July 1 = 1/4thof 50 = 12.5
8/11/2019 Food policy reforms
20/55
8/11/2019 Food policy reforms
21/55
Demand for Public Stocks under the
National Food Security Bill
Scenari
os TotalProcurem
ent
Riceprocurem
ent
Wheatprocurem
ent
Ricestorage
on Jan 1
Wheat
storageon Jan
1
Total
storageon Jan
1
1 64 38.4 25.6 28.8 6.4 35.2
2 74 44.4 29.6 33.3 7.4 40.7
8/11/2019 Food policy reforms
22/55
Implications
Calculations suggest that peak seasonalstorage demand is of the order of 41 milliontons in the immediate future.
As rice procurement takes place across bothOct-Dec and Jan-March quarter, aboveestimate is an upper demand.
To this add, the emergency reserverequirement for annual storage = 47 milliontons.
8/11/2019 Food policy reforms
23/55
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?
8/11/2019 Food policy reforms
24/55
Supply-demand gapII
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.
8/11/2019 Food policy reforms
25/55
Procurement larger than PDS sales
8/11/2019 Food policy reforms
26/55
Why excess procurement?
Procurement larger than PDS sales. No stabilization
Why? Farm lobby and coalition politics??
Other reasons: Suppose the central government onlywants to buy enough to meet PDS requirements. Then
the problem is: what is the right procurement pricethat elicits the required quantity?
Politicians and bureaucrats fear the embarrassment ofunder-supplying the PDS but receive no penalty forexcess stocks and high prices. Works to strengthen thefarm price lobby.
Bias in favour of higher than necessary procurementprices and therefore large procurement.
8/11/2019 Food policy reforms
27/55
8/11/2019 Food policy reforms
28/55
What can be done?
Open market sales
Basu (2010) proposed a mechanism of selling grain insmall batches to many traders and consumers tomaximise the impact of open market sales on price.
Basusproposal was made in the context of marketstabilizing intervention where procurement variesaccording to available supplies.
But as we have seen, Indian intervention has beensystematically biased towards subtracting supplies.
So the first best policy is to reduce procurement.
8/11/2019 Food policy reforms
29/55
Policy options
Reform procurement from being open-ended to closed-ended.
This may be politically difficult.
Incremental reform proposalcreate a new agency under
the CACP called the Risk Management Agency (RMA). Let the FCIs 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 recommendingprocurement prices!
8/11/2019 Food policy reforms
30/55
Part IIDistribution Reforms
The distribution of food subsidies happens withina federal structure.
Central government: largely responsible forfunding, procurement and transport of grain to
the States States: responsible for implementation and
delivery of food subsidies
Distribution reforms have to be understood withreference to initiatives at the Centre as well aswith the States.
We report on some state-level reforms
8/11/2019 Food policy reforms
31/55
Principal elements of distribution
reforms
1. Computerizing the data base of beneficiaries
2. New listing of beneficiaries
3. Issue of new ration cardsincorporating bar-coding and biometric id
4. Authentication of transactions by smart cards
and/or biometric id.
5. Recording of transactions in real time or
near-real time through IT systems.
8/11/2019 Food policy reforms
32/55
Use of IT systems in recording data is a
major distribution reform
Automation of retail transactions leads to real timeinformation on supply gaps at each retail outlet.
Hence, it is possible to connect this module with aback-end module of inventory management system
(stocks and grain movement between different storagedepots) resulting in automated supply and movement.
This reduces paperwork and increases the timelinessand predictability of supplies.
This is the major reform of PDS in the state ofChhatisgarh
8/11/2019 Food policy reforms
33/55
Authentication of transaction is a
major distribution reform
Illegal diversion of grain: arbitraged grain isrecorded as sold at the issue price in governmentrecords.
This is possible to do when the sales are to
fictitious consumers. Multiple ration cards maybe held by a single consumer or ration cards maybe `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
8/11/2019 Food policy reforms
34/55
Authentication by Smart cards
With or without biometric id (like bank cards with anumeric code id).
Requires the use of smart card readers at the retaillevel 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.
8/11/2019 Food policy reforms
35/55
Biometric ID
If employed at the retail level, it is subject to
the same limitations as smart cards (without
biometrics)namelyconnectivity 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.
8/11/2019 Food policy reforms
36/55
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.
8/11/2019 Food policy reforms
37/55
Individual State Experiences:
Chhattisgarh
Computerization of Procurement system under
the decentralized procurement scheme.
Timely management of supplies because of
computerization and control over supplies (notdependent on FCI for grain movement to state).
`Door-step delivery
No transaction authentication mechanismsmart card based solution (without biometrics
proposed for urban areas).
8/11/2019 Food policy reforms
38/55
Chhattisgarh
Extended coverage: 70% of population underBPL/AAY. Low exclusion errors.
Lower BPL rates: Rs. 2 for rice and Rs 1 for AAY
State spends significant resourcesover Rs.1000 croresin addition to Central subsidy
De-privatization of FPS: Shops are run by
community organizations: self-help groups,panchayats and coops. Such experimentshave not worked elsewhere.
8/11/2019 Food policy reforms
39/55
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 tohave checked illegal diversions.
8/11/2019 Food policy reforms
40/55
Chhattisgarh: Implications?
Supporters claim that (near) universal coverageand de-privatization of FPS is responsible forsuccess and can be replicated elsewhere.
Several unique features Willingness to spend out of its resourceshigh
political commitment
Bureaucracy is unusually pro-active in monitoring thesupply 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
8/11/2019 Food policy reforms
41/55
Gujarat
Encompasses all 4 components of distribution
reform.
Pilot project of reform: one FPS in each taluka
of 22 districts are participating.
8/11/2019 Food policy reforms
42/55
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 duringpilot).
8/11/2019 Food policy reforms
43/55
Gujarat Model 2
Computer operator uses a bar code reader toenter beneficiary details. On verification ofbiometrics, bar coded food coupons issued.
Biometric verification requires real timeconnectivity.
Beneficiary redeems coupons at designatedFPS.
FPS retailer submits these coupons at E-Kioskto be read into an electronic sales register.
8/11/2019 Food policy reforms
44/55
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.
8/11/2019 Food policy reforms
45/55
Gujarat model: Assessment
Transaction authentication is the focus and thestrength of the model.
Weakness Requires consumers to make 2 visits monthly the E-
kiosks are often more distant. Internet connectivity is not yet good enoughthe 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.
8/11/2019 Food policy reforms
46/55
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 withAadhar
, thenation wide biometric id project.
8/11/2019 Food policy reforms
47/55
MP Model 2
Aadharenrollment is a pre-requisite for PDS.
Camps organized in villages forAadharenrollment.
Enrollment used to create a newcomputerized data base of PDS beneficiariesand to the issue of newAadharbased rationcards.
Food coupons couriered annually tobeneficiaries.
8/11/2019 Food policy reforms
48/55
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
8/11/2019 Food policy reforms
49/55
Execution
Execution outsourced to a private consortium.
No capital costs for government; pays Rs. 10.98per transaction.
Strengths of model Transaction authentication
Avoided the smart card route which is demanding ofinfrastructure and which is prone to sabotage.
Zero upfront costs for governmentall risks of projectimplementation with consortium.
Incentives of vendors aligned with customers.
8/11/2019 Food policy reforms
50/55
Challenges to MP Model
Will enrollment leave out many of the eligible?
And how easy will be for them to subsequentlyenroll?
Reliance onAadhar: Issue of ids is not keepingpace with enrollment.
Will the real-time verification ofAadharid work?
MP model does not yet include computerizationof procurement and storage (unlikeChhattisgarh).
MP d G j t d l diff t f
8/11/2019 Food policy reforms
51/55
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 throughthe 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 verificationand is linked to a payments system.
This link transfers the subsidy directly to the beneficiarys
account. The direct subsidy model requires devices to capture
biometric id and transaction at the retail level while thecoupon model needs it only when the coupons are issued.
8/11/2019 Food policy reforms
52/55
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 `excessstocks visible.
8/11/2019 Food policy reforms
53/55
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 allowsreforms to be initiated.
8/11/2019 Food policy reforms
54/55
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.
8/11/2019 Food policy reforms
55/55
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 practicalperhaps 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 imposingadditional costs of access on poor consumers.