Food Policy Reforms: A Rapid

Tour of Possibilities
Bharat Ramaswami
IGIDR Silver Jubilee International
Conference
December 1-3, 2012
Collaborators
Milind Murugkar
Ashok Kotwal
Pulapre Balakrishnan
A Rare Moment?
Food policy institutions have enjoyed stability and continuity for
decades despite changes in scale and objectives
The public distribution system (PDS): origins in WW II rationing
systems.
The Food Corporation of India (FCI) the Central government
agency responsible for procurement and storage was set up in the
mid-60s.
Practice of offering support prices to rice and wheat also dates from
that period.
At this moment, though, Indias food policy is in a state of flux.
Real possibility that Indias food policy institutions may look quite
different in a decade.

Pressures on Food Policy
Stunning GDP growth but only modest dent in
poverty.
Contradiction hard to ignore politically
The National Food Security Bill at the Central
level
Several food policy reforms at the State
government level.
Civil Society activism among other things they
have demanded and obtained judicial oversight
of the States food intervention.


The neo-classical economics case for
food policy interventions
Price supports and procurement
Absent risk markets, price supports can be Pareto
improving. Producers gain from insurance against low
price outcomes. Consumers gain too: the supply
response to price insurance lowers food prices (Innes,
QJE, 1990)
Subsidised food distribution to the poor
Traditionally, justified with reference to equity
objective.
A small literature now on growth impacts of safety
nets (Alderman and Yemetsov, 2012)

Other instruments: open market sales,
public stocks?
In the Indian context, it can be argued that these
are the outcomes of price supports and
subsidized food distribution.
Open market sales occur fitfully and almost
always to dispose off excess stocks. There is no
announced protocol for these sales.
Although there are announced norms for public
stocks, these are driven mostly by the needs of
the public distribution rather than market
stabilization.

Price supports in Practice
Price supports supplanted by administered
prices and procurement.
The farm lobby and its hold
Counter-moves by the government to reduce the
cost of procurement by restrictions on exports
and 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)

Subsidised food distribution in practice
Identifying the poor has been difficult
Drawing a line in the sand!
Massive exclusion of the poor both exogenous and
endogenous.
Illegal arbitrage between the PDS and the market
Rent seeking and political patronage of PDS dealers
Unviable government marketing chain (PDS) volumes
insufficient to justify the costs.
This has encouraged illegal diversion, limited and
unpredictable service timings and customer unfriendly
practices.

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.
The Tower of Babel: what do we do
next?
Policy advise from economists, multi-lateral
institutions: target subsidies, make state
agencies open to competition, include private
sector
Pressure from activists, NGOs: Make subsidies
universal, no private sector, empower
communities and enact laws to make the state
accountable.
Government speaks in many voices: axe of fiscal
consolidation, social justice, farmer rights,
consumer interests

The imbalance in the practice of food
policy (Peter Timmer, 2008)
When politics is in command, which seems to
be the normal state of affairs for most developing
countries, how do efficiency issues stay on the
agenda?
When markets are in command, which seems
to be the main policy advice from the donor
community in poor countries, how do
distributional and welfare issues stay on the
agenda?
Can we have only one or the other?
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 errors
bound to happen.
Therefore, tolerate the leakage of resources to
the non-poor.
Among other things, use markets in the form of
cash transfers to reduce diversions and other
waste.
No reason to tolerate such leakage of resources.
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.
Storage
Since 2010, the problem of insufficient storage
capacity has attracted both political and
media attention.
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So how bad is the shortfall in capacity?
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.
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
Seasonal demand for storage
Principle: Grain must be equally allocated
over time.

Application
1. Compute marketed surplus
2. Assume that the portion consumed on-farm
does not require commercial storage
3. No carry-overs of grain across marketing years
(only seasonal storage considered).
4. In the harvest periods, consumption demand is
instantaneously met without any storage. Of
course some temporary storage is required but
that could be in shops, transit or out in the
open.

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 marketing
year: start with zero rice
stocks
Jan 1 = 3/4
th
of 50 = 38.5
April 1 = of 50 = 25
July 1 = 1/4
th
of 50 = 12.5
Storage capacity
Peak seasonal storage demand occurs on Jan 1
and this is the capacity that needs to be created =
50 million tons.
Such a calculation can be worked out for any
other estimate of production and marketed
surplus.
For e.g., projection for 2013/2014 53 m tons of
rice and 43 m tons of wheat.
Implies peak storage demand of (3/4*53+1/4*43)
Demand for Public Stocks under the
National Food Security Bill
Scenari
os Total
Procurem
ent
Rice
procurem
ent
Wheat
procurem
ent
Rice
storage
on Jan 1
Wheat
storage
on Jan
1
Total
storage
on 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
Implications
Calculations suggest that peak seasonal
storage demand is of the order of 41 million
tons in the immediate future.
As rice procurement takes place across both
Oct-Dec and Jan-March quarter, above
estimate is an upper demand.
To this add, the emergency reserve
requirement for annual storage = 47 million
tons.
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?

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.
Procurement larger than PDS sales
Why excess procurement?
Procurement larger than PDS sales. No stabilization
Why? Farm lobby and coalition politics??
Other reasons: Suppose the central government only
wants to buy enough to meet PDS requirements. Then
the problem is: what is the right procurement price
that elicits the required quantity?
Politicians and bureaucrats fear the embarrassment of
under-supplying the PDS but receive no penalty for
excess stocks and high prices. Works to strengthen the
farm price lobby.
Bias in favour of higher than necessary procurement
prices and therefore large procurement.

Mistakes endure
Once stocks are large, private traders withdraw and
procurement continues to be high in successive years
(even without high procurement prices)
This cycle has only been broken by droughts, exports
(often subsidised), and ad-hoc sales through the PDS
and the market.
An increase in scale of the PDS together with legal
obligations to keep the PDS supplied will amplify the
tendency to play safe.
Under NFSB, a continuation of present procurement
policies could result in excess stocks even higher than
what is seen today.


What can be done?
Open market sales
Basu (2010) proposed a mechanism of selling grain in
small batches to many traders and consumers to
maximise the impact of open market sales on price.
Basus proposal was made in the context of market
stabilizing intervention where procurement varies
according to available supplies.
But as we have seen, Indian intervention has been
systematically biased towards subtracting supplies.
So the first best policy is to reduce procurement.
Policy options
Reform procurement from being open-ended to closed-
ended.
This may be politically difficult.
Incremental reform proposal create 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 recommending
procurement prices!

Part II Distribution Reforms
The distribution of food subsidies happens within
a federal structure.
Central government: largely responsible for
funding, procurement and transport of grain to
the States
States: responsible for implementation and
delivery of food subsidies
Distribution reforms have to be understood with
reference to initiatives at the Centre as well as
with the States.
We report on some state-level reforms
Principal elements of distribution
reforms
1. Computerizing the data base of beneficiaries
2. New listing of beneficiaries
3. Issue of new ration cards incorporating 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.
Use of IT systems in recording data is a
major distribution reform
Automation of retail transactions leads to real time
information on supply gaps at each retail outlet.
Hence, it is possible to connect this module with a
back-end module of inventory management system
(stocks and grain movement between different storage
depots) resulting in automated supply and movement.
This reduces paperwork and increases the timeliness
and predictability of supplies.
This is the major reform of PDS in the state of
Chhatisgarh


Authentication of transaction is a
major distribution reform
Illegal diversion of grain: arbitraged grain is
recorded as sold at the issue price in government
records.
This is possible to do when the sales are to
fictitious consumers. Multiple ration cards may
be held by a single consumer or ration cards may
be `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
Authentication by Smart cards
With or without biometric id (like bank cards with a
numeric code id).
Requires the use of smart card readers at the retail
level 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.
Biometric ID
If employed at the retail level, it is subject to
the same limitations as smart cards (without
biometrics) namely connectivity 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.
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.
Individual State Experiences:
Chhattisgarh
Computerization of Procurement system under
the decentralized procurement scheme.
Timely management of supplies because of
computerization and control over supplies (not
dependent on FCI for grain movement to state).
`Door-step delivery
No transaction authentication mechanism
smart card based solution (without biometrics
proposed for urban areas).
Chhattisgarh
Extended coverage: 70% of population under
BPL/AAY. Low exclusion errors.
Lower BPL rates: Rs. 2 for rice and Rs 1 for AAY
State spends significant resources over Rs.
1000 crores in addition to Central subsidy
De-privatization of FPS: Shops are run by
community organizations: self-help groups,
panchayats and coops. Such experiments
have not worked elsewhere.
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 to
have checked illegal diversions.
Chhattisgarh: Implications?
Supporters claim that (near) universal coverage
and de-privatization of FPS is responsible for
success and can be replicated elsewhere.
Several unique features
Willingness to spend out of its resources high
political commitment
Bureaucracy is unusually pro-active in monitoring the
supply 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
Gujarat
Encompasses all 4 components of distribution
reform.
Pilot project of reform: one FPS in each taluka
of 22 districts are participating.

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 during
pilot).
Gujarat Model 2
Computer operator uses a bar code reader to
enter beneficiary details. On verification of
biometrics, bar coded food coupons issued.
Biometric verification requires real time
connectivity.
Beneficiary redeems coupons at designated
FPS.
FPS retailer submits these coupons at E-Kiosk
to be read into an electronic sales register.
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.
Gujarat model: Assessment
Transaction authentication is the focus and the
strength of the model.
Weakness
Requires consumers to make 2 visits monthly the E-
kiosks are often more distant.
Internet connectivity is not yet good enough the 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.
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 with Aadhar, the
nation wide biometric id project.
MP Model 2
Aadhar enrollment is a pre-requisite for PDS.
Camps organized in villages for Aadhar
enrollment.
Enrollment used to create a new
computerized data base of PDS beneficiaries
and to the issue of new Aadhar based ration
cards.
Food coupons couriered annually to
beneficiaries.
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

Execution
Execution outsourced to a private consortium.
No capital costs for government; pays Rs. 10.98
per transaction.
Strengths of model
Transaction authentication
Avoided the smart card route which is demanding of
infrastructure and which is prone to sabotage.
Zero upfront costs for government all risks of project
implementation with consortium.
Incentives of vendors aligned with customers.
Challenges to MP Model
Will enrollment leave out many of the eligible?
And how easy will be for them to subsequently
enroll?
Reliance on Aadhar: Issue of ids is not keeping
pace with enrollment.
Will the real-time verification of Aadhar id work?
MP model does not yet include computerization
of procurement and storage (unlike
Chhattisgarh).
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 through
the 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 verification
and 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 the
coupon model needs it only when the coupons are issued.
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 `excess
stocks visible.

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 allows
reforms to be initiated.
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.
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 practical perhaps 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 imposing
additional costs of access on poor consumers.