Saturday, March 6, 2010

Why PDS should continue to remain disbursed through FPS

The Public Distribution System (PDS) which distributes food rations among those classified Below the Poverty Line (BPL) in India deserves every ounce of the criticism heaped on it for being the embodiment of corruption, inefficiency, and political patronage in the delivery of welfare benefits. Not only does it not meet its desired objectives, but it also ends up very badly distorting market incentives. In this context, over the years, there have been numerous efforts to reform it ranging from re-surveys, vouchers, bio-metric validations, smart cards and so on.

Now, in view of the possibility of a unique identification (UID) number and a Total Financial Inclusion (TFI) bank account becoming available for all citizens, there is a theoretical possibility of even eliminating the Fair Price Shops (FPS) that deliver PDS rations. It can be argued that the BPL beneficiaries could purchase their rations from the market by paying the PDS prices and then the shops could get their subsidy reimbursed on production of proof (bills/vouchers) of their BPL sales. I am inclined to argue that this arrangement will fail for the following reasons

1. Unlike petrol, diesel or LPG prices, food grains are decontrolled and their prices vary widely across markets, often within the same city. Further, there are numerous varieties of rice, wheat, sugar etc. Even within the same variety, there are considerable variations in quality. All these makes standardization (across the state or country) and quantification of the extent of subsidy difficult and therefore its administration near impossible.

2. Food prices are subject to wide fluctuations, often within a short time. Further, the same variety of food grains undergoes different price changes at different places at the same time. There is no reliable and universal index that reflects these variations. In the circumstances, the volatility in food prices and the need for dynamic adjustment of the proportionate subsidies becomes a herculean administrative task.

3. The number of outlets/shops vending these products are too many. Therefore the logistics of administering them becomes extremely difficult. Many of the retailers, especially in rural areas and in smaller towns, work outside the formal economy and bringing them into a formal UID-linked subsidy reimbursement channel poses a whole new set of challenges.

4. FPS are the primary outlet for government's buffer-stock and open-market operations to stabilize food prices at times of shortages and price spikes. In its absence, governments will have to off-load stocks in the open market, which could end up being hoarded and thereby put upward pressure on prices. Private retailers could game the market by driving up the prices to pocket ever larger subsidies. Such price gouging can be even more pronounced in certain areas, especially with a few monopoly/oligopoly retailers/traders. Food security could be seriously compromised.

In view of all the aforementioned, it is inevitable that FPS's remain the outlets for delivering PDS rations. The objective should be to ensure that the delivery of rations from these shops are done after due validation checks, so that pilferage of rations by way of bogus cards and without the presence of the actual beneficiary is eliminated. This can be done in both on-line (the database is hosted elsewhere and real-time validation of all accounts and identities are carried out) and off-line (the database is hosted in the systems at the FPS and is updated with some periodicity over a dial-up connection) environments using biometric or iris-based smart cards, depending on the local conditions (electricity supply/telephone services).

1 comment:

AnandG said...

To imagine effective uses of UID, one has to step OUTSIDE the "bureaucratic box". Subsidies, target groups, BPL etc are ways to discriminate between people. When a policy ensures that people get benefitted by remaining honest, system gains as a whole.

Anand Gupta