Why grain traders will love Sonia

Sonia Gandhi has approved the National Food Security Act. This aims to deliver 35 kg of grain per month at Rs 3 per kg to every family in the 200 poorest districts, extend this as feasible to other districts, and provide 25 kg per month to families that aren’t poor.

This is supposed to help the poor. Alas, the biggest beneficiaries will be grain traders, shopkeepers and corrupt officials.

NGOs and Sonia wanted to provide 35 kg to all households. But the government’s grain procurement was not remotely enough for this. So, Sonia reluctantly settled for feeding the 200 poorest districts.

Her approach betrayed an unwillingness to learn from history. Indira Gandhi had the same concerns. Her Garibi Hatao programme nationalized the wholesale trade in foodgrains to ensure that all the needy got cheap grain — the very aim Sonia has today.

Indira trumpeted nationalization as an anti-trader policy — the greedy bania would be replaced by the benevolent state. Alas, the state lacked the reach to distribute food to every household. Its public distribution system depended on licensed private shopkeepers reaching less than a quarter of the population.

Government food procurement agencies operated only in big mandis, not elsewhere.  Procurement plus imports amounted to less than a quarter of consumer needs. Most grain production was self-consumed by farmers or sold to local traders.

Indira did not realize that if the government decreed a grain monopoly, nothing legal would be left for the open market, and so open market prices would shoot up. When that duly happened, she blamed the traders!

Private trade was essential for producers and consumers. Had nationalization been fully enforced, farmers outside the procurement centres would not have been to sell their grain. Consumers would have been equally devastated: the government couldn’t supply them, and private traders were banned from doing so.

India survived thanks to massive illegal trading, but at higher prices. A socialist measure aimed at crushing middlemen ended up enriching them. Indira Gandhi admitted that the grain takeover was a mistake, and rescinded it.

Lesson: universal government provision of grain is conceptually delusional. Besides, even a limited PDS has proved outrageously costly, wasteful and corrupt.

A 2005 Planning Commission report revealed that the Targeted Public Distribution System spent Rs 3.65 to transfer one rupee of benefit to the poor. “The cost of income transfer to the poor through PDS is much higher than through other modes.”

A whopping 58% of subsidized grain failed to reach the poor because of identification errors, corruption and inefficient operation. Over 36% was siphoned off by shopkeepers /traders and another 21% leaked to non-poor households. The cost of handling of foodgrains by public agencies was also exorbitant.

Leakages exceeded 75% in Bihar and Punjab, and totaled 50-75% in Haryana, Madhya Pradesh and Uttar Pradesh. In the worst states, over half the leakages were at the ration shop level, while ghost cards accounted for up to 30% of leakages in Assam, Himachal Pradesh and Madhya Pradesh. A separate study by Ramesh Ramnathan showed that even in Bengaluru, India’s IT capital, ration cards issued for those below the poverty line exceeded the entire population of the city!

The new scheme provides a higher subsidy than ever. Open market prices of rice and wheat are Rs 20 and Rs 12 per kg respectively. PDS supplies at Rs 3 will make grain diversion more profitable than ever. How do you think shopkeepers and traders will respond to this?

Proposals to give smart biometric cards to consumers could reduce identification errors.  Even so, shopkeepers will blithely tell consumers — as they have done for decades — that they do not have stocks (which may be true after they have diverted everything to the open market). There is no system to detect leakages and levy penalties. Shopkeepers complain they have to bribe the local Food Corporation staff, transporters and inspectors, and so must divert supplies to the open market to avoid losses.

If everybody is going to get biometric cards, why not simply send cash directly to the needy? Why have a plethora of subsidies for grain, kerosene, sugar, cooking gas, fertilizers and much else, all of which leak like sieves? A 2005 ICRIER study by Arvind Virmani, former chief economic advisor, estimated that it would cost just Rs 22,478 crore at 1999-2000 prices to lift all poor people above the poverty line. Adjusted for current prices, this is still under 0.5% of GDP, a drop in today’s ocean of subsidies.

Madam Sonia, please abolish all subsidized goods and services that lead to huge leakages, and instead send cash to the needy. That will not only reduce waste and corruption but yield you more votes.

Sonia Gandhi has approved the National Food Security Act. This aims to deliver 35 kg of grain per month at Rs 3 per kg to every family in the 200 poorest districts, extend this as feasible to other districts, and provide 25 kg per month to families that aren’t poor.

This is supposed to help the poor. Alas, the biggest beneficiaries will be grain traders, shopkeepers and corrupt officials.

NGOs and Sonia wanted to provide 35 kg to all households. But the government’s grain procurement was not remotely enough for this. So, Sonia reluctantly settled for feeding the 200 poorest districts.

Her approach betrayed an unwillingness to learn from history. Indira Gandhi had the same concerns. Her Garibi Hatao programme nationalized the wholesale trade in foodgrains to ensure that all the needy got cheap grain — the very aim Sonia has today.

Indira trumpeted nationalization as an anti-trader policy — the greedy bania would be replaced by the benevolent state. Alas, the state lacked the reach to distribute food to every household. Its public distribution system depended on licensed private shopkeepers reaching less than a quarter of the population.

Government food procurement agencies operated only in big mandis, not elsewhere.  Procurement plus imports amounted to less than a quarter of consumer needs. Most grain production was self-consumed by farmers or sold to local traders.

Indira did not realize that if the government decreed a grain monopoly, nothing legal would be left for the open market, and so open market prices would shoot up. When that duly happened, she blamed the traders!

Private trade was essential for producers and consumers. Had nationalization been fully enforced, farmers outside the procurement centres would not have been to sell their grain. Consumers would have been equally devastated: the government couldn’t supply them, and private traders were banned from doing so.

India survived thanks to massive illegal trading, but at higher prices. A socialist measure aimed at crushing middlemen ended up enriching them. Indira Gandhi admitted that the grain takeover was a mistake, and rescinded it.Lesson: universal government provision of grain is conceptually delusional. Besides, even a limited PDS has proved outrageously costly, wasteful and corrupt.

A 2005 Planning Commission report revealed that the Targeted Public Distribution System spent Rs 3.65 to transfer one rupee of benefit to the poor. “The cost of income transfer to the poor through PDS is much higher than through other modes.”

A whopping 58% of subsidized grain failed to reach the poor because of identification errors, corruption and inefficient operation. Over 36% was siphoned off by shopkeepers /traders and another 21% leaked to non-poor households. The cost of handling of foodgrains by public agencies was also exorbitant.

Leakages exceeded 75% in Bihar and Punjab, and totaled 50-75% in Haryana, Madhya Pradesh and Uttar Pradesh. In the worst states, over half the leakages were at the ration shop level, while ghost cards accounted for up to 30% of leakages in Assam, Himachal Pradesh and Madhya Pradesh. A separate study by Ramesh Ramnathan showed that even in Bengaluru, India’s IT capital, ration cards issued for those below the poverty line exceeded the entire population of the city!

The new scheme provides a higher subsidy than ever. Open market prices of rice and wheat are Rs 20 and Rs 12 per kg respectively. PDS supplies at Rs 3 will make grain diversion more profitable than ever. How do you think shopkeepers and traders will respond to this?

Proposals to give smart biometric cards to consumers could reduce identification errors.  Even so, shopkeepers will blithely tell consumers — as they have done for decades — that they do not have stocks (which may be true after they have diverted everything to the open market). There is no system to detect leakages and levy penalties. Shopkeepers complain they have to bribe the local Food Corporation staff, transporters and inspectors, and so must divert supplies to the open market to avoid losses.

If everybody is going to get biometric cards, why not simply send cash directly to the needy? Why have a plethora of subsidies for grain, kerosene, sugar, cooking gas, fertilizers and much else, all of which leak like sieves? A 2005 ICRIER study by Arvind Virmani, former chief economic advisor, estimated that it would cost just Rs 22,478 crore at 1999-2000 prices to lift all poor people above the poverty line. Adjusted for current prices, this is still under 0.5% of GDP, a drop in today’s ocean of subsidies.

Madam Sonia, please abolish all subsidized goods and services that lead to huge leakages, and instead send cash to the needy. That will not only reduce waste and corruption but yield you more votes.

6 thoughts on “Why grain traders will love Sonia

  • 2010.Sep.23 at 23:54
    Permalink

    Dear Sir
    I am regular reader of your article since 1995 at that time i was reading TOI. I am finding your article simple, Logical and detailed analytical presentation of facts.
    I want to highlight few facts to minimize corruption in PDS:
    1. Issue Smart Biometric card and use UID no. to check identification error
    2.Make database of food grains available to FCI godown and PDS shops and Make it online.
    3.Take strict action against shopkeeper who have involved in food diversion.
    4. Third party random verfication of ration card owner and proper distribution of food grains.
    5. Give more food in the open market so that the price of food grains come down and margin between PDS and open market will reduce.
    6. Make accountable to all supply inspector , ADSO, DSO,if anything going wrong and take strict action against them.
    7.Made it mandatory for supply Inspector to visit shops every month and give detailed report to higher authority.
    8. Cross verification of PDS system with third agencies may be NGO.
    9. Make to mandatory to every PDS related officer to declare thier asssets every month online. If any irregularities find against them then take strict action.

    Reply
  • 2010.Aug.03 at 20:53
    Permalink

    Great facts are given in this article. I am totally against subsidies because they reach to people who do not need it. But I am also not agree with sending direct money. Because this money belongs to those who work for country. If we send money directly to the poor they will become more reluctant in doing anything to live. This money is earned by somebody’s effort.
    Sending money is another form of beggary. Instead of it make these people indulged in some work so they can earn to live. MNREGA is one such scheme. Although there are corruption in this but we have to take some tough decisions to make it a success.
    We are taking short term cure for years but now we should think in the long run as after all we have to take first step every time we start.

    Reply
  • 2010.Aug.03 at 17:28
    Permalink

    Two things preventing India from going a step further:
    1) Reservation
    2) Fantom Subsidies
    And the dear govermnet is introducing many more of these instead of wiping them out slowly. We should not be astonished to see more and more demansds by different classes for awarding thm as OBC, SC/ST to get additional benefits.

    Reply
  • 2010.Jul.30 at 02:57
    Permalink

    Regarding your advice of sending money to ppl instead of providing subsidies, I suggest you to make small experiment randomly choose 100 poor families from any slum area, give 50 Rs each to head of family and follow them.. I am sure that 60-70% of them will stop at nearest liqure shop. I hope you understand the point.

    moreover, If there are faults in PDS for comodities, how the money will be distributed ? You will send cheques ? PPl who don;t know what to read and write.. Imagine how much cash will reach their hands and how much will be kept by middle men helping the mto get their cheque encashed..

    Reply
  • 2010.Jul.23 at 20:55
    Permalink

    the subsidizing of grain and reaching out to the poorest never makes sense and Swaminomics has actually reflected the ground situation.
    (a) there is no empirical study to see as to how much per Kg it costs the government to reach the grain to the poorest?
    (b) Even if there are leakages from the FCI to the wholesaler and the PDS leak points, still, the margin being fabulous at Rs 20 to Rs 13 in the open market, the initiative could well be more of a indirect subsidy for all, more rice in the market at cheaper procurement for the trader ,means, more money in his pocket, but eventually after six months to a year, the price of rice falls by Rs 2 to Rs 3 because rice is sourced cheaper…remember the phenomenon of the food for work programme, when value of rice was quite sensibily down.
    (c) The PDS needs a revamp and the system needs to be monitored by using innovative means- the only fighting back mechanism in the PDS is the information to all end consumers that this much rice at this much price is available to you statutorily and if not getting it , complain for action to three different authorities
    (d) if we get too sceptical about the rice not reaching, it only means that we are still waiting for the best mechanism to ensure cost effective reach to the poorest, in a country like india i suppose that the food security approach is more valid, let’s translate the political will of Smt Gandhi and there after tweak the system for better performance
    it was interesting to read the stats on the PDS……i suppose there is considerable room for improvement and that’s were our focus should be

    food stamps, radio tagged whole sale packaging to track rice/ food grain/ there are several things that can be thought off, lets mull over it

    Reply
  • 2010.Jul.21 at 13:45
    Permalink

    Dear Sir,

    I am an avid reader of your articles. They are exemplary.
    Upon reading this post, I have few things to highlight.
    One. Politically and practically, removal of all subsidies will be far difficult to happen. Several reasons. Regional and Social divide will make this unfathomable to poorer class of India.
    Two. Replace subsidized goods by cash. Cash distribution will not work either. One simple reason. In India, there is no sieve which will not filter the cash. Hardly 10% will reach the poors.

    I must admire that fact you brought forward on similar program during Indira’s tenure. And yes, the situation is no different.

    Great article !

    Reply

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