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Economy Nov 28, 2012

Why direct cash transfer shouldn't be used to kill the PDS

By G Pramod Kumar

If we are willing to believe the best practice examples of cash transfers from Brazil and Philippines, and trust the UPA on the fact that their cash-for-subsidy is going to be all hunky-dory, we also have a right to believe Sitaram Yechury's concerns about the fancy plan.

According to the CPM leader, the cash transfer is a ploy by the government to dismantle the PDS and systematically reduce subsidies.

"This is to cover up for reducing the subsidies. As inflation continues to grow, the value of cash subsidies keeps dropping. That is in effect the most efficient way of reducing subsidies without saying so," he said on Tuesday.

We should certainly be suspicious over the UPA planners' alleged efforts to reduce fiscal deficit at the cost of 400 million destitute people of the country because they had earlier tried to cheat us on the number of poor in the country.

Is it time to do away with the PDS? AFP

Learning from World Bank/ADB documents, case studies and mathematical models, they also seem to believe in techno-fixes and targeting, while the real results in the field come from radically different approaches.

Yechury's worry about the dismantling of the PDS, is a case in point, although the UPA's cash roll-out doesn't include it in the initial phase. Despite all the pitfalls and leakages, what the CPM and Left-leaning development specialists have been arguing for is increased coverage and a universal system - that enables everyone to access PDS-goods - as opposed to the government's efforts at weaning people away.

Conventional wisdom, borrowed knowledge and cold numbers certainly make this sound illogical - why should undeserving people be eligible? Why should the government keep adding to its deficit by subsidising the non-poor? In addition, the government believes that by giving cash, instead of rice and wheat, they will remove all the ills of the system such as leakages and inferior goods in one stroke.

In an op-ed article in The Hindu, Jean Dreze and Reetika Khera point to a different reality in the field. According to them, as commodity prices increased, many states initiated bold PDS reforms. Increased public pressure and political commitment to PDS has led to more regular distribution and reduced leakages.

They point out that many states such as Andhra Pradesh, Chhattisgarh, Himachal Pradesh, Kerala, Orissa, and Rajasthan have moved towards a near-universal PDS, at least in rural areas.

"This approach has helped to not only avoid exclusion errors but also ensure that the PDS works: a more inclusive PDS is under much greater pressure to function," they said.

In other words, while the UPA mandarins advocate for targeting and exclusion, the states, which are directly responsible for people's welfare, have moved in the opposite direction and have shown results. The efficiency of the system also has improved considerably.

As the authors point out, exclusion errors are massive and targeting is divisive. Taking the PDS benefits as an implicit income transfer, they show how universlised PDS impacts rural poverty - reducing it from 40 percent in some states to 15 percent in others. Other than the transfer-benefits, they also have stablisation-benefits, wherein the PDS-supplies act as an additional income and helps stabilise their lives.

The question is as the cash-transfer is implemented in over 600 districts in the country, what will happen to the mammoth PDS network? If people are mandatorily given cash instead of PDS goods, will the PDS network, that too after the recent fortification by responsible state governments, close down? Will the cash and PDS regime co-exist?

It will certainly kill our age-old PDS and its nearly 500,000 fair price shops. With all its defects such as bogus cards, inferior goods replacing original supplies, cheating and pilferage, it has been a proven lifeline for tens of millions of people in India. In states such as Tamil Nadu, Kerala, Andhra Pradesh and Arunachal Pradesh, their scope has gone much beyond what central planners can even think of.

By the logic of the task force on subsidies: "A subsidy, by its very nature, introduces two or more prices for the same good, and creates incentives for pilferage and diversion. As a result, the underprivileged suffer the most. Ensuring that goods move in the supply chain at market prices can minimize the incentives for diversion."

The cat is out of the bag here. Effectively, with the meagre cash transferred to them through their Aadhaar accounts, people shun the PDS and go to supermarkets to buy their supplies. Instead of a 35 kg rice at an extremely fair price from a location that they have been quite familiar with, will they have to now buy 35 kg rice from the market? And what if inflation prices the commodities out of their reach?

As some pointed out, PDS is socialist and cash-transfer neo-liberal. While PDS tries to equitably distribute, the cash scheme seeks to bring the bottom of the pyramid into the market. Millions of poor will become consumers; but what one doesn't realise at the moment, is what Yechury has pointed out - inflation will erode the value of the transfers. Soon, one will see the poor cash-transfer beneficiary clutching a few hundred rupees going hungry and under-fed.

One also has to read the new policy along with the government's push for FDI in retail. FDI in retail will certainly translate into more retail shops, which needs more customers. By converting 400 million poor into new retail customers, the government is doing a great favour to the retailers.

Dismantling social safety-net infrastructure and replacing it with neo-liberal models, citing efficiency and quality, is a trend that needs to be strongly opposed. Over the last few years, the governments' withdrawal from the social sector, particularly education and health, have spelt disaster.

The problem with PDS is bad governance. Better governed states (Tamil Nadu, Kerala) have better PDS and better welfare measures. Applying uniform yardsticks for a country, socio-economically as diverse as India is fraught with huge risks. One could hope that the states will ensure that the PDS-networks stay and get better.

Pushing cash to the desperately poor ahead of a general election might be a good political strategy, but a dangerous development gamble.

by G Pramod Kumar

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