Insights into Editorial: Replacing Food with Cash

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Insights into Editorial: Replacing Food with Cash

23 October 2015

The central government gazetted the Cash Transfer of Food Subsidy Rules on 21 August 2015. With this, it appears that the current government is deeply committed to substitute subsidised wheat and rice supplied through the public distribution system (PDS) with direct cash transfers into bank accounts of targeted households.

Cash transfers in lieu of PDS would involve the transfer of money directly into bank accounts of identified card holders. The amount transferred would be the difference between the market and subsidized price of the grain. Instead of going to their local ration shop to purchase subsidized grains, recipients would withdraw this money to buy the food of their choice from the market.

However, the substitution of food transfers with cash is not being appreciated by food rights campaigners.

What PDS was opposed?

Some reports have shown that PDS is an inefficient mode of transfer of subsidies, prone to enormous leakages into the black market, and high waste in costs of transferring subsidies in the form of food transfers.

Why cash transfer would be better?

  • Replacing food with direct cash transfers would greatly reduce corruption and leakages.
  • It would enable the poor to access goods currently denied them by a PDS beset by corruption.
  • It would enable people to buy better quality food of their choice from the open market and not be restricted to items sold in the PDS, which are often inferior in quality and limited in range.
  • It would both bypass brokers as well as reduce the waste and holding costs of storing grains in government silos.
  • The amount of grain actually required for India’s buffer stock needs could be held in better-quality warehouses, eliminating waste and rotting.
  • It would also help reduce fiscal deficit by curbing expenditures earmarked for the PDS that are siphoned off through corruption, as well as avoiding substantially higher costs of transferring food rather than cash.

Why cash transfer may not be a great idea?

  • It is possible for people to spend cash transfers not on more nutritious food but instead on non-food items, which would decrease the amount of household money left for buying food.
  • Research confirms that culturally decisions relating to cash in households tend to be made by men, who may or may not spend the money on food.
  • Decisions relating to food are made by women in almost all cultures, and therefore food rather than cash in a household is more likely to end up as food in a child’s stomach.

Why PDS would be better than cash transfers?

  • There are worries about how genuinely inclusive of people in remote rural regions is India’s banking system. Fair price shops exist in three of every four villages, and are therefore generally accessible.
  • PDS supplies rations at a constant price, irrespective of the fluctuations in market prices. This therefore provides a shield against inflation, a benefit that cash transfers cannot match.

Conclusion:

It is also problematic to assume that cash transfers would in themselves bring about drastic reductions in corruption and leakages in welfare programmes, as there is nothing intrinsic to cash transfers which renders them less vulnerable to leakages. Irregularities are empirically found to be high in existing cash transfer programmes like pension schemes. The difference between the corruption or probity of delivery of welfare programmes is not dependent on whether cash or food is delivered, but on political and administrative will and capacities, and public vigilance and organization. Studies have confirmed that many states have been able to reform PDS and significantly reduce leakages.