S0CH

Team presents the solution to plug these leaks

Plugging the Leaks Improving reach and efficiency of

The Public Distribution System

Realise Real Lies

Ayush Gupta (Team co-ordinator)

ChinmaiGarg

Utkarsh Kumar

PranavSanga

SuryanshTibarewala

010,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000110,000120,000130,000

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Fo

od

Su

bsi

dy

2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15

Food Subsidy(Rs. in crores) 43,751 53,443 63,344 72,822 73,380 109,016 122,899.60

Quantum of Food Subsidies released by Government

In our nation, where 2166.581 lakh people live at a daily income of Rs

27.21 and 531.25

1 lakh urban people have just Rs 33.33

1 per day to earn

their living, feeding oneself become highly impossible. Therefore, The

Public Distribution System that provide subsidized food grains and

other materials of need (like sugar & edible oil) assume great

importance in catering to nutritive need of the nation.

For this, The Indian Government has spent a significant amount i.e. Rs

72,822 crores2 (which amounts to nearly 0.85% of the GDP) in the

financial year 2011-2012 and plans to spend even more. Data 1 give the

details of the amount spent by the Government and the amount it plans

to spend in future.

The amount spent in 2012-13 is about 7.33%3 of the total revenue (tax

& non-tax). Since,the food subsidy released by the GoI is increasing

exponentially, one question that comes in mind is whether the subsidy

released is actually reaching the poor or not? Unfortunately the answer

disappoints!

As per the Planning Commision’s‘Performance Evaluation of Targeted

Public Distribution system(TDPS) – 2005’ report, taking into account

all the inefficiencies of PDS, it is found that the GoI spends Rs 3.65 to

transfer Re 1 to the poor, i.e. Rs 2.65 is lost either as excess cost

(administrative overheads, inefficiencies etc) or as illegal diversions.

So, THE CORK just tries to give some revolutionary ideas to answer

the questions.

1 1 The statistics are computed as per the Tendulkar method on Mixed Reference Period(MRP). The poverty estimates may be revised by the Ramanujan Committee

that may submit its report by mid 2014. 2 Source: The Indian Union Budget 2013 3 Taking the earning of the Central Government to be about Rs 10 lakh crore during the financial year2011-2012.

* Projected as per NFSB for TDPS (excludes subsidies for other welfare schemes). ** AsPer Allotment of Food and Public Distribution Annual Report, Feb 2013 (does not include buffer subsidy).

Realise Real Lies

Where are the leaks?

The Public Distribution System (now TPDS 4) distributes rice, wheat, sugar, edible oil and kerosene at subsidized prices. However, the subsidy on food grains (specifically

rice and wheat) constitutes about 99.38% 5 of the total subsidy. Hence, rice and wheat have taken the centre stage throughout the presentation.

The food subsidy provided by the GoI through TPDS can be divided into THREE categories for better understanding :-

Particular Variables Economic cost of the grain E.P. Issue Price of the grain I.P.

Market Price of the grain M.P.

Quantity of food grain released by the govt. Q

Quantity of food grain purchased by the poor receiver Q.P.

Quantity of food grain purchased by non-poor receiver Q.N.

Income transfer to poor = Q.P.(M.P. – I.P.) Income transfer to non-poor = Q.N.(M.P. – I.P.) Food Subsidy = (E.P. – I.P.) Q = (M.P. – I.P. + E.P. – M.P.) [Q.P. + Q.N. + {Q – (Q.P. + Q.N.)} ] = Q.P. (M.P. – I.P.) + Q.N. (M.P. – I.P.)+ [Q – (Q.P. + Q.N.)](M.P. – I.P.) + Q(E.P. – M.P.)

Quantity of grain black market

Income transfer To Poor

Excess Cost

Income transfer To Non-Poor

Cost of illegal Diversions

2 4 Public Distribution system was re-launched as Targeted Public Distribution System (TDPS) in June 1997 to make it more targeted. 5The food grain subsidy during the financial year 2011-2012#was Rs. 72,370.90 crores and the total subsidy(all inclusive) was about Rs 72,822 crores.

Source : Department of Food and Public Distribution (dfpd) Annual Report, Feb 2013 & Indian Union Budget 2013 # Financial year 2011-2012 has been considered for calculations and other statistical references because, the data for the year 2012-2013 is available till 27

February 2013 only.

Food Subsidy Income Transfer Excess Cost Cost of illegal diversions

Income transfer

to the poor (intended

beneficiaries)

Income transfer to

unintended beneficiaries

(i.e. non-poor)

Direct benefit to the poor. Direct benefit to non- poor.

Administrative overheads,

inefficiencies etc.

Black marketing of the grains.

On studying these various categories, one gets a basic idea of how food subsidy operates. Data 2 (On page 3) gives a detailed analysis of these categories for, rice and wheat.

Realise Real Lies

18%

39%

43%

₹ in crores

Income transfer to poor

Income transfer to non-poor

Cost and illegal diversion

7%

23% 58%

₹ in crores Income transfer to poor

Income transfer to non-poor

Excess Cost

Cost of illegal Diversion

Data 2

Rice : Income transfer to poor, non-poor and illegal diversions. Wheat : Income transfer to poor, non-poor, excess cost and illegal

diversions.

3

Realise Real Lies

11731.3

25493.759

37285.19

4730.237 451.1

14157.988

₹ in crores

Analysing the leaks? India is so self-sufficient in feeding itself that its

wheat production can alone cater to

89.49%(Data 3) of the cereal need of the people

with 105.31@

million ton of rice and 42.04

million tons of coarse grains left untouched.

It’s an obvious fact that these hungry people

comprise the same sect,for which the PDS

scheme of GoI operates. Than too, India rank

66th among 105 countries

in the 2012 Global

Hunger Index.

Income transfer

to the poor. Income transfer

tothe non-poor Illegal

diversion

cost

Excess

cost

Subsidy on

edible oils,

sugar etc.

Loss due to in-efficient

handling

* Calculations are shown in the Annexure

This indicate that subsidized grains intended to reach

the poor are not actually reaching them8.

Data 2 give the statistical

details or why is

it not reaching

them.

12%

@ During financial year 2011-2012 since for now we have advance estimate for 2012-2013. 8 TDPS right now entitles each poor family 35 kg of food grain per month which is almost sufficient for a family (considering average family comprises of 5 members)

Monthly cereal need of a family = Cereal need of a person X No. of person in a family

= 0.03 X 4 X 2 X 30 X 5 = 36

Plugging the leaks?

The impact of the food subsidy program on the poor via PDS can be more pronounced by working on two arenas :-

Making it more targeted i.e correcting the

exclusion and inclusion errors

While it is generally agreed that targeting leakages should be minimized the question arises whether and how can it be done. This debate is enduring because minimizing

inclusion errors can be costly (administratively) and often leads to greater exclusion errors. With such a tradeoff, optimal targeting depends on how much weight the

government puts on inclusion error relative to exclusion error.

Reducing the excess cost, illegal

diversions cost & other losses

due to mis-management.

Bring down the wastage of

public money

Study of the targeting errors pre-targeted PDS system regime and post (Data 4) stresses on

the fact that focusing to minimize the targeting errors# ,don’t give that much high returns as

enhancing the fraction of subsidy going in income transfer can (i.e. minimizing

leakages,excess cost, illegal diversion cost losses and other inefficiencies at the operational

and management level).

Exclusive error (in %) Inclusive error (in %)

2004/2005

Post TPDS regime

70 70

1999/2000

Pre TPDS regime

64 76

Moreover, the policies framed for the latter will save resources that could be used to increase the indulgence of the poor into the same.

THE CORK has aimed to bring ideas that can plug both these leaks.

4 # The failure of TPDS as it brought a minor change in the targeting error may rather be attributed to improper implementation of TPDS.

Data 4 : Exclusive and Inclusive errors (Source : adb Report)

Realise Real Lies

Present wheat track :- Farmers to FPS F

arm

ers

FPS

Private Procurement 1. Procurement at a price significantly below MSP.

2. Thus farmers do not get the returns they deserve.

5 # De-centralised procurement

* FCI procurement division

** Market Study

- FPS means fair price shops.

Realise Real Lies

1. Procures wheat from farmers at MSP fixed by GoI on the recommendation of CACP considering farmers’ benefit. 2. Procurement is done via Open End Policy for farmers’ benefit. This raises the central buffer stock to about 250-350% of the minimum buffer norms. 3. Ignorant of proper procurement targets. 4. Procured from mandi’s which have only 28%* production arrivals . Hence, farmers are not largely benefitted by MSP.

Govt's Procurement Center 1. Packaging is done in B.Twill jute bags

that cost the GoI about Rs 35 for 50 kgs**. The resale value is Rs 15 for 50 kgs ** Hence effective cost of bag for GoI is Rs 20 for 50 kgs ** 2. Considering that 28335 X 106 of wheat was procured in 2011-12 .The cost of packaging was Rs1133.4 crores. 3. The jute bags used have a weave clearance of 6-10% . Hence, wheat bagged is prone to rotting. 4. The packaging is done via conventional method . Hence LOT NUMBERS cannot be assigned to the packing bags. 5. It is easier to open the jute bag and repack it without considerable alterations. Hence, illegal diversions are prevalent.

Packaging

1. The available storage capacity with FCI including hired capacity was only 336.04 LMT (excluding the food grains procured by DCP# states). 2. As on march 2012 the storage capacity hired was 179.64 LMP that costed Rs 1193.03 crores in 2011-12. 3. Average annual expenditure incurred on hiring (including caring over charges) from 2011-12 was extended to Rs 2265 crore. 4. To bridge the gap 'Private Enterprenures Guarantee' (PEG) scheme is being implemented.

Storage

1. Packaging done by used jute bags procured from the GoI @Rs 15 per 50 kgs** bag.

Packaging

Storage 1. Have sufficient space for storage.

SOLD

Farmers

Each farmer gets the benefit of MSP. This provides him with the incentives of his share and in situ boosts agricultural growth.

Since each farmer gets the benefit of MSP , the aim of open end policy of procurement followed in pre- scheme scenario is realised without filling

the buffer stock to 250-300% of the minimum buffer norm .

This would benefit the GoI with Rs 19355.2 crores, since carrying of buffer food grains9 was Rs 483.88 per quintal

10 in 2011-12 and the extra buffer

stock over the minimum buffer stock norm was about 400 lakh tonnes11

of grains.

Moreover, about Rs 2000 crores11

on higher capacity and other charges for that extra buffer stock would be saved.

Advanced

Processing

Plants

Have advanced packaging machinery and sufficient storage places to procure all wheat from the yielding areas. Have computerised scales and other

equipments for mechanizing the transfer of wheat from farmers to the consumers.

Built in each wheat yielding district by the local middle men & private players that were previously involved in the processing of market wheat.

Investment will befall upon a group of private players, having shares of the corporation and thus profit distributed in proportion to investment.

Since, the investors were in the same field in the pre-scheme scenario, all unified, they would be having enough storage capacity for market needs. The

extra investment needed would be just in the packaging machines, scaling machines and in other technological inevitabilities.

Thus, the investment in one such plant can be estimated to be about Rs 50 crores and since there are 150 districts in India that are high producers of

wheat , the total investment can be estimated to about Rs 7500 crores .

The market price in pre-scheme scenario had a profit margin of Rs 75 per quintal for the processors .We consider the same in the post- scheme

scenario.

The extra market provided to the processors will be of 28335 million tonnes of wheat (wheat procured by the govt. in 2011-12). This would profit the

corporation by Rs 2125.125 crore. Therefore the investment of Rs 7500 crores can be covered in 3.5 years.

Loan at nominal rates can be provided to the corporation for investment if needed.

Procurement in

advanced plants

Procurement is done via a computerised weighing scale that updates the wheat procured by the corporation onto the server.

This prevents quantitative corruption at the procurement level and would also give exact figures of the agricultural production of India.

Since the flow of wheat is through a unique processor, qualitative analysis, standard checks and quality controls can be excersised.

Procurement is done at MSP that is directly transferred to the farmers’ account. This would provide a record of the money transferred and prevent

cheating by the corporation in paying to the farmer.

The corporation has an experience of properly identifying the procurement targets and procures wheat from even the last farmer in the area

(corporation being formed by local middle men).

Realise Real Lies We can Decentrally Privatise the System!

Realise Real Lies

Packaging

Packaging is done using advanced machineries and in HDPE bags that have 1-2% of weave clearance which protect grains from rotting.

Cost of HDPE bags is Rs. 15 per 50 kg, as is of the used jute bags that were in used in the pre-scheme scenario. Hence, no more investment

in packaging bags needed.

LOT NUMBERS are printed on the bags which would help trace leaked wheat at each level of movement.

Out of the same lot, the required stock for TPDS is sent to the ration shops and the required buffer stock to the instructed centers.

TPDS beneficiaries get the same stock as the market, hence a certain minimum standard is unambiguously ensured.

Ration shops

The corporation delivers the grain stock to the ration shops as instructed by the Govt. at market price fixed for the area.

The received stock maintained by the ration operators and the dispatch stock maintained by the corporation will

reimburse the amount thus withstanding.

The check on illegal diversions and storage losses is now the responsibility of the private corporation since it gets money

for only the net quantity of food received for the TPDS and the buffer stock. Hence, the loss of Rs 11793.855 crore

incurred on illegal diversions can be safely eliminated.

The excess cost12

of Rs 4730.237 crore is also eliminated as the Govt. inefficiency is ruled out since the handling is now

carried out by the private people, who are quite efficient.

Market

The market price for wheat in a particular area13

is fixed by mutual consideration of the Govt. and the corporation, which

may be revised at requisite intervals.

This solves the problem of hoarding because how could and why would they hoard when they have to sell at a fixed

price.

The final price then for an area would be about Rs 50 per quintal more than the existing rates, since the procurement of

the entire grain stock of the nation would be on MSP. So,sssss if rates of 2011-12 are considered, market price would be

about Rs 1450 per quintal.

Realise Real Lies The grains you

gave are of

inferior quality!

Take it if you want

else leave it. The grains you gave are

under-weighed. Dare you accuse me!

Where are the

remaining grains of

my share?

The “rats” ate them up!!

Nobody listens to us

Realise Real Lies

Improving

reach of FPS

FPS i.e. ration shops can be made mandatory in each constituency with the elected representative of the constituency (Parshad)

ensuring that TPDS is properly implemented there.

This would give the Parshad some powers to monitor the TPDS in his constituency.

In case of any discrepancies, the Parshad can then be held accounted for.

Benefactors are

the operators

Instead of present ration shop owners, the ration shop should be operated by the beneficiaries themselves.

The beneficiaries who can read and write can take the charge of the shop rotatively.

Rotation would check leakages and corruption.

The operators can be paid in the form of grains from the stock @1 kg a day.

Since AAY offtake of foodgrains in 2011-12 was 97.08 lakh tons and retailer’s commission for each kg of grain offtake was Rs

0.5, the cost incurred can be calculated to Rs 485.4 crore (97.08*5 crore)

The total ration shops in the nation as on Jan 2013 were 5.13 lakhs. So the cost of the grain pay to the operators of ration shops

can be calculated to Rs. 271.5 crore (1*14.5*365*5.13 lakh)

This would bring down the GoI’s cost incurred on retailers’ commission for AAY allocation from Rs 485.4 crore to Rs 271.5

crore and lower the issue price for BPL and APL .

Consumer

friendly

Operations

Since most benefactors don’t know how to read and write, visual graphics like pictorial depiction of the amount to be paid outside

the FPS can help.

Realise Real Lies Policy Impact

The benefits of the policy proposed have already been stated with the solutions. Here we take a quick review of the economic impacts of the policy.

Income transfer to nonpoor

illegal diversion cost Excess Cost Handling Extra buffer cost Hired charges on extrabuffer cost

Losses due to in-efficienthandling

2549.759

37285.19

4730.237

19355.2

2000

14157.988

Rs in crores

Leakages plugged (statistically)

All calculations hitherto indicated Profit on export of extra buffer stock

In 2011-12 india exported 0.74 million tons of wheat which fetched 202.07 million US dollars. Hence 200 million tons of extra wheat lying in the buffer stock

(which would be useless to stock if our policy is implemented) would thus fetch us Rs 35498 crores ( 1 US Dollar = 65.2 indian rupees considered)

Similarly 200 million tons of extra rice in the buffer stock would fetch us Rs 64000 crores.

The policy proposes to use HDPE bags instead of jute bags. This will tax the domestic jute trade by Rs 1983.45 crores.

But this can be easily covered as we have a huge world market to capture.

Another potential protesters are the black marketers and those who benefit from the fallouts of the public distribution system.

Potential Protests

AND IF THESE BLACK MARKETERS PROTEST WE WILL TAKE IT AS A COMPLIMENT.

consump

Rice Wheat

Particulars AAY BPL APL Total AAY BPL APL Total

Off-take (X 108 kg) @ 65.80 113.34 64.11 243.25 31.28 59.69 96.79 187.76

% consumption of subsidized staple reported in(2004-2005)**

28.0627% 56.3395% 97.55046% 58.9140% 22.08% 29.50% 22.792% 26.581%

% consumption by poor off-take (2004-2005)

13.1894% 19.15545% 20.4855% 18.2542% 11.70% 12.09% 5.07% 10.26%

Leakage % off-take in (2004-2005)

71.937% 43.6604% 24.495% 41.0859% 77.917% 70.498% 77.207% 73.468%

Consumption of subsidized staple (X 108 kg) #

(% consumption in 2004-05)# X off-take in (2011-12)

18.4652 63.8551 62.5395 143.3083 6.906 17.6085 22.06 46.574

Leakage staple (x 108 kg) (% leakage in 2004-05) x off-take in (2011-12) 47.334546 49.48469 1.57037445 99.94145 24.374 42.0815 74.73 141.1855

Market Price (₹/ kg) 30 30 30 14 14 14

Issue Price (In Rs.) 3 6.15 10 2 5 7.2 Leakage Cost (in crores)

[leaked rice x (market price – issue price)]

12780.32 11296.94547 314.07 25391.335 2924.88 3787.335 5081.64 11793.855

Income transfer (in crores) [Q received x (market price – issue price)]

4985.604 15867.99 12507.9 33361.494 828.72 1584.765 1500.08 3913.565

Income transfer to poor(in crores) [Q received by poor x (market price – issue price)]

2341.54 5394.93 2626.58 10363.05 439.08 649.44 329.73 1418.25

Realise Real Lies Annexure

Calculations

# For calculations % consumption in 2011-12 and in 2004-05 are assumed to be same. It is justified since steps for improving on the targeting errors have not been taken since then.

* Data for year 2012-13 is available only till 27 Feb 2013. Hence it is not taken for calculations. @

As for Department of Food and Public distribution, Annual Report Feb 2013.

** NSS Survey of 2009-10 divided as per capita consumption rural and urban categories and deciles

Decomposition of staple subsidy (2011-2012) *

Wheat ₹ in crores

Income transfer to poor 1418.25

Income transfer to non-poor 2495.315

Excess Cost 4730.237

Cost of illegal Diversion 11793.855

Total Subsidy 20437.65

Cereal need

Wheat production of India 94.88 million kg

# as per population census 2011

** weighed on scale

Weight of wheat in our roti 0.03 kg ** Cereal need of our nation

Weight of wheat

in our roti

No. of roti in

a meal

No. of meals Days in a year Population of

India

0.03 X 4 X 2 X 365 X 1210193422#

= 1.060129438 X 1011

kg

% of wheat catering the need 89.498%

Rice ₹ in crores

Income transfer to poor 10363.05

Income transfer to non-poor 22998.444

Excess cost 7 -------

Cost of illegal Diversion 25391.335

Total Subsidy 58752.829

Subsidy paid by GoI 37775.255

Subsidy paid by private rice millers 20977.574

Realise Real Lies

X X X X

Table 1

7 Procurement Price is decided on levy basis where a part of the subsidy is borne by the private rice millers. Hence, the Economic Price of rice is below

the Market Price#.

# During 2011-2012, Source : Market trends and FCI

Mp Price = ₹ 30/kg

Ep Price = ₹21.8420/kg

Table 2 Table 3

Realise Real Lies

Indian Union Budget, 2013

Department of food and public distribution, Government of India, annual report, Feb 2013

Department of food and public distribution, Government of India, annual report, Nov 2011

Food Corporation of India, financial section

Comptroller and Auditor general of India, Audit on FCI

Comptroller and Auditor general of India, Audit on PDS efficiency in Nagaland

Performance evaluation of Targeted Public Distribution System (TPDS)- 2005, Planning Commission

India

Department of food and public distribution, Government of India, appendix 3

Jute Commissioner of India, statement of Account

Department of Agriculture and Cooperation, Government of India

PDS public portal of Government of India

Asian Development Bank, Economics working paper series

Indian economy, by Ruddar Datt and K.P.M Sundharam

REFERENCES