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Cash or kind, it’s all the same

Our scepticism about the poor’s capacity to use subsidy responsibly smacks of an ingrained elitism, Milind Murugkar writes.

india Updated: Jan 16, 2013 20:32 IST
Milind Murugkar

Recently, the anti-cash transfer camp got support from unexpected political quarters. At a rally in Maharashtra, Union agriculture minister Sharad Pawar opposed the idea of cash in lieu of subsidised food, as he feels that recipients could misuse cash. This position has no logical or empirical basis and is also at odds with the interest of poor farmers in his state.

Will the misuse of cash subsidy reduce the grain consumption of the poor? There is a straightforward argument to allay these concerns. Food subsidy is essentially an income transfer. So the form of subsidy (cash or in kind) is unlikely to change the consumption pattern of the poor. If 20 kg of rice at Rs. 20 per kg is supplied at Rs. 5 per kg through the public distribution system (PDS), the poor save Rs. 300. In the absence of PDS, she would have spent this Rs. 300 to buy the same quantity of rice from the market. This saved amount now gets spent on other items. Instead, if Rs. 300 is given as cash assistance, the result would also be the same. The pilot project of cash transfers in Delhi has shown no decrease in grain consumption but a diversification of poor people’s diet.

Paternalism could be defended if the desired social goal such as increased grain consumption is not met. But in the case of food subsidy, it is likely to succeed only if the PDS quota was more than the grain consumption by the poor and if the resale of PDS grain was restricted. But both these conditions haven’t been met. Bharat Ramswami’s work shows that despite wide differences in total consumption expenditure, the amount of wheat and rice purchases does not differ much between the rich and the poor and a income rise doesn’t get spent on these cereals. So even if we feel the need for paternalism through in-kind transfer of subsidy, we are unlikely to succeed in raising grain consumption by the poor.

Doesn’t our scepticism about the poor’s capacity to use subsidy responsibly smack of elitism? Will we — the non-poor — accept our incomes in kind? Also, is our concern legitimate when the net subsidy transfer through PDS is just a small part of the total income of the poor? The logic of paternalism leads us to absurd conclusions. Would we demand that all other cash subsidies such as pension, cash assistance for the destitute and even private wage payments be made in kind?

Pawar’s opposition to cash transfers also reflects the poor political representation of the grain producers in Maharashtra. In Maharashtra, and many other parts of India, the poor consume grains such as sorghum and pearl millet, which are not subsidised by the PDS. Typically, these local grains are grown in arid, semi-arid and undeveloped areas. In a system with in-kind transfers, the government finds it logistically convenient to procure grain from two or three large surplus states and then distribute it. Typically, the farmers in these surplus states are well-to-do. As subsidised wheat and rice get distributed in poorer areas, they exert a downward pressure on the prices of coarse grains to the detriment of the poor growers of these grains.

The rationing system of in-kind transfers thus invariably generates inequality between the farmers of the surplus states and those in arid and semi-arid areas. In the system of cash transfers the consumers would choose to spend their cash on local grains, which would boost their demand and, hence, their prices. Finally, Pawar’s main opposition to the National Food Security Bill was on the ground that it would necessitate more grain procurement by the Food Corporation of India (FCI) and that would distort the grain market further. On the other hand, cash transfers shift the supply of grain to open markets.

The newly launched Annashree scheme of cash transfers in Delhi has expanded the food security coverage without putting additional demand on the FCI’s operations. Should not Pawar, in the interest of the poor farmers in his home state, take a cue from this scheme?

Milind Murugkar is a policy analyst with Pragati Abhiyan, a non-profit development organisation. The views expressed by the author are personal.