9th Five Year Plan (Vol-2)
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Poverty Alleviation Programme
Poverty Alleviation in Rural India: Programmes and Strategy || Urban Poverty Alleviation || Public Distribution System



2.3.1 The Public Distribution System (PDS) is the key element of the Government's food security system in India. It is an instrument for ensuring availability of certain essential commodities at easily affordable prices especially for the poor. The Government, via the Food Corporation of India (FCI), procures and stocks foodgrains which are released every month for distribution through the PDS network across the country. In addition to sugar, edible oils and kerosene, foodgrains, mainly rice and wheat, are distributed to the public via a network of Fair Price Shops (FPS). The system of procurement is also used by the Government of India to provide minimum support prices to the farmers so as to stabilise farm output and income. To begin with, in the sixties efforts were made to procure rice and wheat not only for normal distribution through Fair Price Shops under the PDS but also to maintain buffer stocks, which were built in the years of good production to tide over the periods of lean production. In the eighties, given the increases in the foodgrains production and the resilience in the agricultural production scenario, the Government of India decided to operate a system whereby certain norms were fixed regarding the quantities to be held by the Food Corporation of India at different points of time during the year, thus merging the stocks meant for normal distribution and buffer stocks.

2.3.2 The PDS, till recently, has been a general entitlement scheme to all consumers without any targetting. On an average, about 15-16 million tonnes of foodgrains are issued by the FCI to the States at a uniform Central Issue Price (CIP) which is much less than the economic cost incurred by the Central Government by way of procurement, storage, transport and distribution. The difference between the economic cost and the CIP, called the consumer subsidy, is borne by the Central Government through its annual non-Plan budget. In addition to this, as mentioned above, the FCI maintains a large buffer stocks of foodgrains, which entails a substantial carrying cost. The consumer subsidy and the carrying cost of the buffer stock together add up to the total food subsidy. The total food subsidy, which was of the order of Rs.2000 crore in 1987-88, has gradually increased to the level Rs.7500 crore during the year 1997-98. Despite the mounting food subsidy bills, various evaluation studies of the PDS have shown that the system has failed to translate the macro level self sufficiency in foodgrains achieved by the country into household level food security for the poor. In a system with access to all, rich and poor alike, the quantum of PDS supply to each household formed only a small proportion of a family's total requirement. The increases in the Minimum Support Prices (MSP) effected over the years, which were considered necessary by the Government to keep up the production of foodgrains, led to corresponding increases in the consumer prices in the PDS, adversely affecting the economic access of the poor to the PDS foodgrains. Another fall out of the universal PDS has been that the States with the highest incidence of poverty, viz Orissa, Bihar, Madhya Pradesh and Uttar Pradesh are the ones whose per capita PDS off-take has been the lowest. It thus became clear that the PDS, which existed till recently, did not serve the poor well, especially in the poorer States. In view of the mounting food subsidy in recent years, coupled with the fact that the PDS did not reach the poor, a view has emerged that the universal coverage of the PDS is neither sustainable nor desirable. One of the central concerns of the economic reform process, that was initiated in 1991, is to limit the quantum of explicit and implicit subsidies as well as other forms of non-Plan expenditure, while at the same time raising both tax and non tax revenues. The unbridled growth of non-Plan expenditure in relation to the revenues during the decade of the eighties had brought about a severe fiscal imbalance, with a rapid build up of public debt and mounting interest burdens. It is in the context of correcting this macro economic imbalance that the view of curbing subsidies to the barest minimum emerged. While recognising the need to curb subsidies in general, it is important to recognise the need to provide foodgrains at affordable prices to the bottom rungs of the population, whose well being ought to be at the core of the Government's food security programme. One of the most important determinants of the changes in India's poverty level is the price of foodgrains which has a major impact on the real income, especially for the relatively poorer sections whose incomes are very largely spent on foodgrains. For example, at the all- India level the people spend on an average about 63% of their total expenditure on food in the rural areas and about 55% in the urban areas. Of the expenditure incurred on all food items the expenditure on foodgrains accounts for 45% in the rural areas and about 32% in the urban areas. The bottom 30-40% of the population spend over 70% of the total expenditure on food. Of their expenditure on food, the bottom 30-40% of the population spend about 50% on foodgrains in the rural areas and over 40% in the urban areas. In view of the fact that the poor devote a substantial part of their expenditure on foodgrains, it is essential to protect them from a continuous upward pressure on foodgrains prices, a phenomenon in-built in our system of procurement prices which need an annual increase as an incentive for increasing production. If the poor are not protected from the impact of the ever increasing pressures on prices of foodgrains through a subsidised PDS, the impact of many of the poverty alleviation measures and programmes would get neutralised. In other words, a system of food subsidy is an essential element of food security strategy. The challenge, however, is to contain the total food subsidy to the minimum necessary by devising a system of targeting so that the subsidies benefit only those sections whom the State wants to protect. The challenge lies in the fact that by international comparison most Indians are poor and most of them devote a substantial part of their expenditure on foodgrains. So naturally, there is a pressure to have a subsidised PDS with an almost open ended coverage. Open ended coverage, however, cannot be continued, not only because of its massive implication for the total volume of food subsidy but also because of the enormous price distortions that is implicit in an open ended, heavily subsidised PDS.

Targetting Public Distribution System:

Recommendations of the Working Groups(WG)

2.3.3 The logic of a targeted PDS described above was enunciated in the Report of the Working Group on National Policy on Public Distribution System (June, 1996) set up in the Planning Commission in August, 1995. The Working Group after discussing various forms and experiences of targeting, such as, through wage employment programmes (JRY,EAS etc), area-based targeting (ITDP, RPDS), exclusion of non-poor and the system of food stamps prevalent in some countries, suggested a scheme of allocation of foodgrains out of the Central Pool to the States at two sets of prices, namely, a highly subsidised price for the allocations meant for the poor and near open market prices for the non-poor. The recommendations of the Working Group are given in Box.

Recommendations of the Working Group on National Policy on Public Distribution System

  • The Central Government should adopt the Planning Commission's estimates of the proportion of population below the poverty line (BPL) available for 1987-88 as the criteria for allocating a feasible annual level of foodgrains to States/UTs for a targeted PDS.
  • Based on the levels of procurement and allocations/offtake of foodgrains in the past, the Central Government should maintain an annual allocation level of 15 million tonnes.
  • Earmark about 80% of the annual allocation i,e around 12 million tonnes for distribution to the States/UTs on the basis of their share of BPL population . This will work out to an availability of 20 kgs per month per BPL household.
  • 12 million tonnes of foodgrains meant for the BPL population should be issued to the States at highly subsidised prices and allocations to any State over and above this at near open market prices.
  • A ceiling limit should be imposed for each State based on the highest offtake of foodgrains in the past ten years. The States should be allowed full freedom to decide on the mode of distribution, pricing, identification of beneficiaries etc.

2.3.4 The Working Group also worked out the subsidy implications of the proposed targetted PDS. Distribution of 12 million tonnes of foodgrains to an estimated BPL population of 250 million (based on 29.9% BPL proportion applied on 1991 population census figure) worked out to a per capita availability of 20 kgs per poor household per month. The Working Group was of the view that the targetting exercise would be meaningless if the benefit through PDS supply was insignificant. Therefore, it suggested that the monthly savings to a beneficiary household should be at least around Rs.50.00 per month on the purchase of 20 kgs of foodgrains through the PDS. This worked out to an unit subsidy of Rs.2.50 per kg. At the time of the deliberations of the Working Group (1995-96), the weighted average Central Issue Price (CIP) of foodgrains worked out to a little over Rs.5.00 per kg. Thus, in effect the Working Group suggested an issue price for BPL population at half the normal CIP. The subsidy requirement per annum for 12 million tonnes worked to an additional Rs.3000 crore. Since the normal CIP of about Rs.5.00 per kg already involved an unit subsidy of about Rs.2.00 per kg, the actual consumer subsidy would have been Rs.4.50 per kg at 1995-96 costs and prices and the total subsidy would have been Rs.5400 crore. As the non-poor were required to purchase foodgrains at near open market price which was close to the economic cost of foodgrains to the FCI, no additional subsidy was involved on this account.

Targetted Public Distribution System (TPDS): - As Implemented

2.3.5 The principles enunciated by the Working Group were adopted by the Government while implementing the TPDS w.e.f. 1st June, 1997. However, the numbers and dimensions of TPDS as implemented differ greatly from those contained in the Report of the Working Group. Under the TPDS, a quantity of 10kgs of foodgrains per family per month is being issued at highly subsidised rates to the States on the basis of the number of BPL families as against 20 kgs recommended by the Working Group. One of the reasons that forced the Government to reduce the scale of the ration to BPL is that the number of BPL families had increased tremendously following the acceptance of the methodology of the Expert Group under Professor Lakdawala for estimation of poverty by the Government in March, 1997. Based on this methodology, the Planning Commission estimated the proportion of BPL population for 1993-94 at 35.97% as against 29.9% (1987-88) relied on by the Working Group. To arrive at the number of BPL population under TPDS, the Government applied the revised BPL percentage of 35.97 on the projected population of 1995 as against 1991 population adopted by the Working Group. As a consequence of the changed numbers, the number of BPL families increased to 58.7 million as against 50 million estimated by the Working Group. The second reason for reducing the scale of ration for BPL was that the TPDS envisaged the continuance of a substantial unit subsidy as well as allocations of foodgrains, for the Above Poverty Line (APL) or non-poor population as against no or little subsidy assumed by the Working Group. The allocations for the APL are however, transitory and based on the average 10 years' lifting which is in excess of the allocations for the BPL. The third reason for reducing the scale of ration of BPL is that unit subsidy for BPL had to be fixed a little higher than that envisaged by the Working Group in view of escalations in the economic cost of foodgrains between 1995-96 and 1996-97. It needs to be mentioned in this connection that the Government originally decided to fix the CIP at 50% of the economic cost for BPL and at 90% of the economic cost for APL population. In practice, it became difficult to stick to these percentages, which went down to about 40% of economic cost (1996-97) for BPL and 80% for APL.

2.3.6 The dimension of the TPDS being implemented since 1st June, 1997 is detailed Table 2.3.1.

                             Table 2.3.1

        Targetted Public Distribution System 1997-98
                            BPL            APL          Total
1. No.of Families
   (1995) lakh             586.64      Not Fixed    Not Fixed
2.Allocations of Foodgrains
 (lakh tonnes)
                      Total   70           104         174
                      Rice    37           62          99
                      Wheat   33           42          75
3. CIP (Rs/kg) Rice  Common   3.50            -
                      Fine    3.50         6.50 )
                                                )     7.15   Weighted
                                                )            Average
                      Super     -          7.50 )
                      Wheat   2.50         4.50
4. Eco.Cost(Rs/kg)
                  Rice Common 8.45         8.45
                        Fine  8.88         8.88 )
                       S.Fine 9.27         9.27 )9.00 Weighted
                       Wheat  7.61         7.61
5. Unit Subsidy
   (Rs/kg)             Rice   5.50         1.85          -
                       Wheat  5.10         3.10          -
6.  Total Subsidy
    (Rs/crore)         Rice   2035         1147         3182
                       Wheat  1683         1302         2985
G. Total   Foodgrains         3718        2449         6167
   Subsidy (Rs/crore)

2.3.7 The subsidy implication of the TPDS at current (1997-98) costs and prices as worked out above is a little over Rs.6000 crore, roughly the same as budgeted for 1997-98. This does not include a sum of about Rs.1500 crore towards the carrying cost of a reasonable volume of buffer stock.

2.3.8 Despite a very heavy subsidy burden, the TPDS has come in for severe criticism from various quarters including many State Governments. It has been argued that a scale of ration of 10 kgs per month per BPL family is grossly inadequate since the average requirement of a family is about 30 kgs per month. An unit subsidy of about Rs.5 per kg works to a subsidy of only Rs. 50 per month which is not sufficient to make a significant dent on poverty. It has been suggested that the scale of ration to BPL families should be raised to 20 kgs per month. Several State Governments have also expressed unhappiness that the quantum of overall allocations has been restricted to 10 years' average off-take, rather than the maximum of the allocations during the last 10 years. It has been suggested that the overall allocations to the States should be restored to the maximum level of 25.5 million tonnes achieved in 1996-97. Some of the State Governments have also represented that under poverty based allocations for BPL they are being penalised instead of being rewarded for bringing down their poverty ratios as compared to other States.

Review of Targetted PDS

2.3.9 A review of the TPDS is necessary in order to make it acceptable to the participant States. A system which is acceptable to the States should also be sustainable over a period of time. Sustainability is a function of coverage, scale of allocations, unit economic cost of foodgrains and unit subsidy which together determine the amount of subsidy that the exchequer is required to bear. The key to sustainability lies in adhering to the principles of the targetted subsidy system, in particular the need for confining the subsidies to the BPL families and reducing them, and eventually eliminating them, for the APL families, as enunciated by the Working Group of the Planning Commission. Based on the current (1997-98) costs and prices, and other dimensions, the TPDS that may be acceptable to the States and sustainable from the point of view of the Central Government are outlined below.

2.3.10 The most persistent complaint against the current TPDS is the very low scale of allocation @10kgs of foodgrains per BPL family per month. The scale needs to be raised to 20 kgs. The annual requirement of foodgrains @20kgs per month for an estimated 58.7 million BPL families (based on Expert Group Methodology and the projected population of 1995) comes to about 14 million tonnes, which needs to be earmarked. The second most important demand of the States is to restore the overall annual allocations to 25.5 million tonnes achieved in 1996-97. This means that about 11.5 million tonnes of foodgrains will have to be allocated to the APL population.

2.3.11 As per the principles enunciated by the Working Group, the BPL families will have to be issued foodgrains at half the normal CIP, which should be defined as equal to economic cost of foodgrains to the FCI. At current (1998-99) economic costs, the subsidy on 14 million tonnes of foodgrains meant for BPL comes to about Rs.6300 crore as per the details given in Table 2.3.2.

2.3.12 If the sustainable amount of subsidy is assumed to be Rs. 7500 crore (excluding the carrying cost of buffer stock), as has been budgeted for 1998-99, about Rs.1200 crore (7500-6300) only will be available for APL. This will be just enough to provide a subsidy of Re 1.00 per kg for an allocation of 11.5 million tonnes for the APL population. One fall out of the principle of pricing foodgrains at near economic cost for APL would be that there will be little demand from this section in normal times. With the market prices ruling at par with the economic cost, the consumers tend to rely more on the market than on the PDS. Therefore, it is expected that only a fraction of the allocation of 11.5 million tonnes will actually be lifted.

Table 2.3.2

Subsidy At Half Economic Costs to BPL(1998-99)
                   Rice     Wheat       Total
--------- -------- ---------------------------
1. Quantity        74        66         140  
  (LMT) @20 kg   
  per month
2. Econ.Cost      10.00      8.00        -
3. CIP (1/2 Eco.   5.00      4.00        -
4. Unit subsidy    5.00      4.80        -
5. Total subsidy
  (Rs/crore)       3700      2640       6340


2.3.13 The second important key to sustainability is the periodic revision of economic cost following changes in any of its components, such as, procurement price, procurement incidentals and distribution cost. While all attempts should be made to reduce the economic costs, especially when they exceed the market price, and the FCI's operational system be constantly reviewed and monitored for the purpose, the need for revision of economic cost, which is inherently upwardly mobile, should not be overlooked. Otherwise, the subsidy burden, which is the gap between economic cost and CIP, will tend to rise and in no time exceed the sustainable limit.

2.3.14 In order to make the TPDS not only consistent with the principles of TPDS but also attractive to the States, a reasonable amount of additional subsidy of, say, Rs.500 crore, can be given to those States that succeed in reducing the level of poverty below the national average. For this purpose, a scheme can be introduced to distribute the additional subsidy as grant to the eligible States based on their relative share of BPL population who have been lifted out of poverty as a result of special efforts in bringing down their poverty ratios below the national average. Other important features of the current TPDS should be retained and strengthened. One such feature relates to issue of subsidised foodgrains to all workers under EAS/JRY @1kg per manday. This is in addition to the entitlement under TPDS. Under this scheme, the TPDS envisages issues of "Food Coupons" to the beneficiaries to enable them to obtain foodgrains from the FPS, to which their normal family card is attached. Another important feature of the TPDS which should be retained and strengthened is the detailed operational scheme. In order to make the TPDS transparent and accountable and thereby plug the leakages, a number of steps have been prescribed. These include: (a) release of foodgrains to the States subject to satisfactory completion of identification of eligible families; (b) involvement of the Panchayats/Nagar Palikas in the identification exercise as well as for supervision of the work of the FPS, (c) constitution of Vigilance Committees at FPS, Taluka, District and State levels and (d) a system of monitoring and reporting on the working of the TPDS.

2.3.15 While the provision for food subsidy is made in the non-Plan budget of the Central Government, for strengthening the operational machinery of the PDS, the Planning commission provide funds under its plan programmes for the following schemes:

  1. Construction of Godown
  2. Purchase of Mobile Vans/Trucks
  3. Training, Research and Monitoring.

2.3.16 The Godowns scheme is intended to assist the State Governments /UTs. for construction of small godowns of the capacity upto 2000 tonnes in interior areas where it is necessary to maintain adequate stocks to ensure regular supplies under PDS. Since 1983-84 this scheme was being implemented to supplement the resources of the State Governments. to augment the storage capacity in remote/inaccessible/hilly areas. Till 1991 the scheme was restricted to North Eastern States, Himachal Pradesh, Sikkim, J and K, Lakshadweep and Andaman and Nicobar Islands. With the launching of RPDS in January, 1992 the scheme was further extended to cover all the identified RPDS areas. In 1998, a decision was taken to extend the scheme to all such areas in the country where the need for such facilities may exist. Funds under the scheme are released for small godowns in places where Central agencies like CWC, FCI etc. do not operate. The present pattern of financial assistance is 50% loan and 50% subsidy. However, in the case of UTs without legislatures the entire assistance is in the form of subsidy only. The Mobile Vans scheme is intended to provide financial assistance to the State Governments /UT administrations for purchase of mobile vans/trucks for distributing essential commodities in rural/hilly/remote and other disadvantaged areas where static/regular Fair Price Shops are not found viable/feasible. Initially, an assistance of Rs.2.50 lakh was being provided for a delivery van/truck with 75% loan and 25% subsidy. With the liberalisation of the scheme during 1992-93 the subsidy component of the assistance was enhanced from 25% to 50% and the financial assistance per van/truck was also raised to Rs.4 lakh in the case of delivery van (for 4 tonner) and Rs.8 lakh for big truck ranging from 8-10 tonnes and above subject to the ceiling of actual cost whichever is lower. Under this scheme, vehicles can be used not only as mobile Fair Price Shops but also for effecting door delivery of PDS commodities to Fair Price Shops. The scheme is supplementary in nature as the running cost and its maintenance etc. are borne by the respective State Governments from their own budget.

2.3.17 The training scheme aims at strengthening and upgrading the skill of personnel engaged in PDS and also to improve the management of supplies. The efforts of the State Governments./UT administrations, Civil Supplies Corporations etc. are supplemented by providing financial assistance for organising training programmes on PDS. Evaluation studies, research studies on various aspects of PDS are also sponsored under the scheme. Provision also exists for organising workshops, seminars for various level officers/officials of States as well as Central Ministries/Organisations. Generally, the maximum Central Assistance for a week's training course is limited to Rs.50,000/-. The assistance for research/studies/seminars etc. however, depends on the size, merits of each case.

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