Cash transfers are bad for food security
The stabilising effect of the Public Distribution System on prices will be lost as beneficiary households turn to the market for their needs
India's hard won gains in achieving food security are in danger of being undermined by a clause in the National Food Security Bill that encourages States to adopt cash transfers in lieu of food entitlements under the Public Distribution System (PDS). Supporting this view, a recent report by the Commission for Agricultural Costs and Prices (CACP) concluded that the provision of food subsidies in the form of cash would save the government crores of rupees. Additionally, cash transfers will supposedly eliminate middlemen such as dealers and transporters, ensuring that the subsidy reaches intended beneficiaries.
Cash transfers are a solution only if we view the PDS in isolation, rather than as part of a larger food policy. India's food policy begins with the procurement of rice and wheat and price support operations by the Food Corporation of India (FCI) and the CACP. Each State is entitled to purchase a certain amount of food grains from the FCI at subsidised prices for distribution through its Fair Price (Ration) Shops. It is this distribution end that constitutes the PDS, and what the cash transfers would replace.
Besides not taking into account the devaluing effect of inflation or the role of intrahousehold dynamics when it comes to cash transfers, its supporters do not specify what would happen to the agricultural commodities that are procured by the FCI. As the policy exists today, the government holds millions of tons of rice and wheat, well above the buffer norms required by law. To reduce its stocks, the government has preferred open market operations (to bulk consumers) and export to distribution through the PDS.
Experiments with decontrol
Using those actions as an indicator of the government's policy orientation, cash transfers arguably are a gateway to greater deregulation of the food market. Relying on cash transfers alone would mean that the beneficiary households would have to turn to the market to meet all their food needs. More importantly, the stabilising effect that the PDS has on consumption and prices would be lost. Cash transfers thus are only a partial substitute to the PDS.
To understand the importance of a broad food policy, we only have to look at India's brief experiments with decontrol. The government's policy reaction to the Bengal famine of 1943, which led to the death of 1.5 million people, provides us with a primer of what not to do in a famine situation. At first, there was a complete laissez-faire policy towards food grain trade, which led to hoarding by traders, farmers and consumers. Subsequently, the provincial governments introduced a policy of procurement and distribution of food grains, which failed miserably as they did not have the requisite infrastructure to implement the policy. For example, grains were rotting in Calcutta, the centre of distribution in the eastern region, as the government had not made arrangements to handle incoming stocks. To avoid what was called a "tragedy in unpreparedness," the government took steps towards setting up a comprehensive food administration, including procurement by the government, the building of buffer stocks and the introduction of rationing.
However, soon after Independence, India abandoned these policies on the insistence of Gandhiji, who by then had started chanting the following prayer, "Controls give rise to fraud, suppression of truth, intensification of the black market and to artificial scarcity. Above all, it (they) unmans the people and deprives them of initiative; it undoes the teaching of self help, they have been learning for generations, makes them spoon-fed." Shortly thereafter, droughts and floods led to insufficient production, food shortages and price rise. Controls in the form of rationing, price control and distribution had to be reintroduced in March 1949 to deal with the adverse food situation.
The next phase of free markets in food was under the Food Minister, Rafi Ahmed Kidwai, beginning 1952. Improved food grains production in 1953 and 1954 led to declining prices and a temporary break from chronic shortages. Government procurement of food grains was stopped and restrictions on the movement of grains were removed. Paradoxically, even as farmers faced deflationary conditions, there were shortages and price rise in various parts of the country. The instability in prices, combined with adverse weather in the autumn of 1955, had a dampening effect on production.
In 1957, the Ashok Mehta-led Food Grains Enquiry Committee concluded that an expanded money supply, growing industrialisation and urbanisation and increased investment led to enhanced purchasing power. On the other hand, hoarding by traders, producers and consumers as well as speculative activities in anticipation of public investment by the government led to a rise in prices. Additionally, it found that prices were allowed to fall too low in 1955 and that there was no coordinated policy of combating inflation and shortages that began in 1956.
Back to controls
The government had to reintroduce controls and carry-out price support operations to curb the fall in prices. It opened an additional 10,000 ration shops between October 1956 and September 1957, and released its stocks to combat price rise. This episode underscored the need for the government to intervene in the market to influence prices and output. The Food Grains Enquiry Committee recommended the setting up of institutions like the FCI and the CACP for this purpose. The government's decision to promote cash transfers in the National Food Security Bill presented in the recently concluded session of Parliament ignores these lessons from India's past.
Since the 1950s, India has made major strides in agricultural production as evidenced by the large government-held stocks of wheat and rice. However, problems of inadequate nutrition, starvation and double digit food price inflation remain. Strengthening of the PDS, as seen in Chhattisgarh and Tamil Nadu, would serve the purpose of ensuring food security for the nation through stabilising prices, production and consumption. As seen in the past, government withdrawal from the food sector can lead to a decline in production and an increase in hoarding and speculative activity. Unlike the PDS, cash transfers cannot counter the resultant shortages and price rise. In a growing economy like India with constantly increasing demand, the government needs to intervene on both the demand and supply sides to ensure food security for all its citizens.
(Madhavi Cherian is a PhD scholar at the Department of Sociology, New York University.)
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