The system of free food in India – Issues and the need for a reform

Context: The World Bank and IMF have released two new working papers, which has led to a renewed debate on poverty in India.

Claims of these working papers

Both papers claim that extreme poverty in the country, based on the international definition of $1.90 per capita per day (in purchasing power parity (PPP), has declined substantially.

The World Bank paper:

• The World Bank paper uses the Consumer Pyramid Household Surveys (CPHS) data to conclude that 10.2 per cent of the country’s population was at extreme poverty levels in 2019.

The IMF paper:

• 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.

An estimate by the NITI Aayog

• An 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 have significantly improved amongst the poor, especially after 2015.

The impact of Covid-19 on the offtake of the grains under NFSA

• 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) in April 2020 to distribute 25 kg bowls of cereal per family per month in addition to food transfers under the NFSA. 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.

What are the concerns associated with food freebies?

The distress caused by a further extension of free food on top of the NFSA allocation:

• 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.
• This shows that the public grain management system is crying out for reforms.

The need for excess stock and associated costs:

• 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.

A ballooning food subsidy:

• All the above issues have resulted 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).

Need of the hour

Change the current policy of free food:

• 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.

There is a need to make PDS more targeted:

• In reforming this system of free food, wisdom lies in going back to the Antyodaya Anna Yojana (AAY).
• Under AAY, the “Antyodaya” households (the poorest 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.
• This will make PDS more targeted and lead to cost savings.

Resolve the issues in identifying the poor:

• There could be some problems in identifying the poor. However, technology can help overcome this difficulty.

The option of receiving cash:

• The above measures should be combined with giving people the option of receiving cash instead of providing grains to targeted beneficiaries.

Use the savings as an investment:

• The savings so generated from the above reforms 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.

Practice Question for Mains

1. The public grain management system is crying out for reforms, and this is the right time for the government to fix it. Comment. (250 Words, 15 Marks).