Fighting the market forces - why PDS scores over cash transfer

PDS offers stability in food prices with massive procurement of grains at minimum support price


Prasanna Mohanty | June 17, 2010

Now that the idea of replacing the public distribution system (PDS) with direct cash transfers (DCT) – in which the beneficiaries get the subsidy amount directly in their bank accounts – is gaining ground with the Delhi government poised to adopt it shortly and Bihar asking the centre to follow suit, it is time to take a good look at it. Especially the way it may impact the agricultural production and the food security scenario.

It is often overlooked that PDS is linked to the support price mechanism (that is the Minimum Support Price) and the procurement operations, which are massive (52 million tonnes were procured last year). Together, these measures form a system that ensures that food grain prices remain stable throughout the country; food grains are easily available and evenly distributed across the country, as only a handful of states like Punjab, Haryana, Andhra Pradesh and Maharashtra are food surplus and the rest are food shortage states and, finally, the farmers are protected from the market forces. As would be clear, dismantling of the PDS will mean that this system goes.

The consequences can be damaging. For example, food prices in food-shortage states may go up because there would be no procurement at MSP or distribution through the Food Corp of India (FCI) and the PDS to strike a balance. Higher price in these states would mean a lower amount of food grains the DCT (which would be uniform) would fetch. Money supply by way of DCT in food shortage states would also add its own bit to the inflation. Secondly, market prices would keep fluctuating in absence of a price stability mechanism and may or may not provide farmers a reasonable price for their produce – which is important to the farmers to keep producing excess food grains that they sell to buy other items of their daily needs and which is also important for the rest of us because if the farmers make rapid transition to cash crops, it may lead to shortage of food grains.

Depending entirely on the market forces can be tricky. Dr Alok Shukla, the man who turned the PDS around in Chhattisgarth, says: “Empirical evidence shows the market price is never higher than MSP, except for items meant for export like basmati rice.” Had that not been the case, the farmers would have been happily selling their produce in the open market. Given the fact that our food production has stagnated or even declined in recent years and that of the pulses and the oil seeds have remained low for decades, there is a cause for concern if market is given a free run.

In a crisis, like drought or food inflation, the situation may worsen. In the absence of the PDS, no matter how much buffer stock the government keeps or imports from abroad the ability to reach the poor would be compromised. So would the ability for market intervention and price stabilisation.

In fact, Dr Shukla says, to dismantle PDS would amount to “throwing the baby with the bathwater”. In 2002, Planning Commission member Abhijit Sen also argued on similar lines in his report on “long-term grain policy.” Advising against dismantling the system in place, he wrote: “End of open-ended procurement at this stage would deal a severe, possibly a crippling, blow to the farmers which may be followed by a blow to the consumers in about two years time. Despite the many sources of inefficiency which we have identified, particularly in the functioning of the FCI and the PDS, we are convinced that it is reform and not annulment of the existing system that should be on the agenda.”

When it comes to food for the poor and the food security of the country it may not be a good idea to dismantle a system that actually delivers food grains.



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