Food subsidy: Go for direct transfer to curb leakages

Despite extensive measures implemented by the government, including digitisation, pilferage persists, revealing systemic flaws in how food subsidies are administered

According to a Study titled ‘Rationalising Public Distribution System in India’ done by the Indian Council For Research On International Economic Relations (ICRIER), there was grain leakage under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) of 20 million tons (17 million ton of rice and 3 million ton of wheat) which is 28 per cent of the 71 million ton of grain off-take by states (that included 52 million ton of rice and 19 million ton wheat) during August 2022 - July 2023. The Study estimates the annual fiscal cost of this leakage to be around Rs 70,000 crore.  Under the PMGKAY, the Union Government asks the Food Corporation of India (FCI) and other state agencies to procure food from the farmers at MSP (minimum support price) and organise its distribution to around 820 million people for free.

The entire cost i.e. MSP paid to farmers plus handling and distribution cost (HDC) is reimbursed to the FCI/other state agencies as a subsidy. The money comes from the Union Budget’s allocation for ‘food subsidy’. While, the PMGKAY has been in force since January 1, 2023, before that, the Centre was giving food to 820 million persons (7 kg of cereals per person per month to 120 million poorest of the poor persons covered under the Antyodaya Anna Yojana or AAY families and five kilograms of cereals per person per month to the remaining 700 million) at a heavily subsidised price of Rs 2/3/1 per kg for wheat/rice/coarse cereals under the National Food Security Act (NFSA). In addition, since April 2020, it has given 5 kg of food per person per month for “free” to all 820 million beneficiaries under PMGKAY to mitigate the consequences of the COVID-19 pandemic.

From January 1, 2023, it merged the free part of PMGKAY with the regular food security schemes under NFSA. Now, food is available to all 820 million beneficiaries for free under the new incarnation of NFSA, the PMGKAY. As Prime Minister Narendra Modi announced in November 2023, this arrangement will continue for five years until the end of CY 2028. During the financial year (FY) 2022-23, the Centre’s expenditure on food subsidy was Rs 272,000 crore. Apart from expenses under PMGKAY for the whole of that FY, this amount also included the subsidy on food grain given under NFSA at the subsidised price of Rs 2/3/1 per kg for wheat/rice/coarse cereals from April to December 2022. Within this total expenditure, how much money was lost due to pilferage? How does the Study reach Rs 70,000 crore? The authors look at the ‘economic cost’ (EC) of rice and wheat. This is the MSP paid to farmers plus HDC.

During 2022-23, this was Rs 36.7 per kg or Rs 36,700 per ton for rice and Rs 25.9 per kg or Rs 25,900 per ton for wheat. Multiply the pilfered quantity of rice 17 million tons by its EC, we get the cost of its pilferage Rs 62,390 crore. Likewise, multiply 3 million tons of pilfered wheat by its EC, and the cost comes to Rs 7770 crore. Thus, the total cost was around Rs 70,000 crore. This is around 26 per cent of the food subsidy expenditure of Rs 272,000 crore for 2022-23.

Taken as a percentage of the subsidy given under PMGKAY alone (the budget doesn’t provide this figure; a back-of-the-envelope calculation using annual off-take of 55 million tons, EC for rice and wheat given above and their use in 75:25 ratio, yields Rs 187,000 crore), this is much higher at 37 per cent.

How has the Study arrived at the quantum of leakage?

The Study picked up monthly off-take (albeit “reported”) data from the FCI from August 2022 to July 2023 and saw this in juxtaposition with “actual household consumption levels” taken from the Household Consumption Expenditure Survey (HCES) 2022-23. While the former was taken as an approximation for the quantity of food grain sent for distribution amongst the PMGKAY beneficiaries, the latter was taken as a proxy of the quantity received.

Based on the above comparison, it was concluded that as against 52.4 million tons of rice that were sent, 35.7 million tons were received suggesting a shortfall of 16.7 million tons. Likewise, against 19 million tons of wheat that was sent, 16 million tons were received pointing toward a shortfall of 3 million tons. Thus, a total of 19.7 million tons or close to 20 million tons was pilfered from the public distribution system (PDS). But, there is a flaw in such a comparison.

At the Off-take level, it can’t be surmised that the quantities that left the FCI warehouses and were picked up by states were ‘entirely’ meant for  PDS stocks to be used for distribution (actual consumption) by the PMGKAY beneficiaries.

Off-take figures also include food stocks in transit, buffer stock, operational reserves and cereals set aside for social welfare schemes and commercial sales by the government. Each of these serves a specific purpose. For instance, ‘buffer stock’ refers to a strategic stock for smoothening out price fluctuations —buying a commodity when the price is low and releasing it in the market when the price is high. Likewise, ‘operational reserves’ are kept as a backstop which can be used quickly in the case of an unplanned event/emergency. Similarly, stock in transit can’t be considered as part of food grain meant for PDS consumption within a given time frame.  

The quantities meant for all such purposes need to be excluded from the grains that left FCI warehouses and only the net figure available for PDS consumption should be compared with actual household consumption levels as read from the Consumption surveys. It seems, the Study hasn’t done it.

This is also corroborated by the fact that the annual distribution of free food for PMGKAY beneficiaries is normally 55 million tons; against this, the Study uses 71 million tons.

At the beneficiary’s end also, the actual household consumption level includes cereal consumed from multiple sources, such as private purchases or state-specific schemes and not just the quantities available under PMGKAY etc. Therefore, it won’t be on all fours to directly correlate with PDS off-take.

To conclude, there are leakages from the PDS though not on a scale indicated by the Study. Its root cause has to do with how food subsidy is administered. Under the extant system, the subsidy is built into the price which under this Scheme is Zero. Herein lies the rub.

The availability of a mammoth of around 55 million tons (the quantity distributed under the PMGKAY) in the supply chain with zero price tag is an open invitation to dubious operators to siphon off and sell in the open market raking in a moolah. Howsoever, foolproof one may make the system (Modi – government has done an exemplary job getting PoS (point of sale machines) installed at 530,000 fair price shops across the country; digitisation of supply chain from procurement to distribution; authentication of beneficiaries with their Aadhaar numbers and so on), as long as subsidy is routed through the State agencies, unscrupulous characters will always find ways to circumvent even the best of technology interventions aimed at curbing pilferage. Pilferage can be eliminated only when the government gives subsidies directly to the beneficiaries and allows the food markets to function competitively and efficiently.  

(The writer is a policy analyst; views are personal)