Govt evaluating impact of PDS ration on inflation
India offers food grains to nearly 813 million needy people at zero price, or for free, under the National Food Security Act 2013.
New Delhi When Dubai got selected as the host for the World Expo 2020, Baskin Robbins declared it would serve everyone who walked into their outlets in the UAE a free scoop of ice-cream.
Hell broke loose. The American ice-cream chain couldn’t handle a surge of crowds, which spilled from one street to another for a single scoop of its most basic ice-cream.
Consumers tend to feel irrationally drawn to free stuff, known as the zero-price effect. Some economists consider zero price to be a price point that can impact inflation.
India offers food grains to nearly 813 million needy people at zero price, or for free, under the National Food Security Act 2013. Through the public distribution system (PDS), each beneficiary gets five kilos of rice or wheat, which before the pandemic was anyway heavily subsidized at ₹3 and ₹2 per kilo respectively.
There is no clarity on how exactly the PDS is accounted for in retail inflation, the Ministry of Statistics and Programme Implementation has said. On Wednesday, officials held discussions with top government and private economists on the need to “capture the impact of PDS rations on the consumer price index or CPI”, which could have wide-ranging policy implications.
The ministry of statistics and programme implementation is undertaking a series of reforms and in the process of updating some of the most important economic indicators of Asia’s third largest economy. For instance, to measure changes in inflation, retail prices are indexed to a “base year”, currently 2011, which will be soon updated to the most relevant recent year.
India has been experiencing elevated food inflation since 2022, which has prevented the Reserve Bank of India from lowering its key interest rate. Higher rates for long can bite into growth.
“I’m glad that ministry of statistics and programme Implementation has become an active ministry again under the leadership of secretary Saurabh Garg. There is a need to update a lot of things,” said NR Bhanumurthy, director of the Madras School of Economics. “The debate around what impact the PDS has on consumer prices is important, but it should not impact public policy much. These benefits are representative. Not everyone consumes them,” Bhanumurthy added.
A well-known economist, requesting anonymity, said the outcome of evaluating the PDS, a welfare measure in a country where many are food-insecure, and its impact on inflation could be “contentious”.
Addressing a panel tasked with the exercise, Garg stressed the “critical importance of measuring the impact of welfare measures, particularly in light of the government’s extensive welfare initiatives”. The panel has been drawn from a diverse pool of economists, who hold different views. It agreed on a basic concept: “A zero price is also a price (point) and this fact should not be ignored,” according to an official.
Statistics ministry officials made two presentations, one on the methodology for capturing PDS items and other essentials in the Household Consumption Expenditure Survey, which evaluates how much people are spending, which serves as an indicator of how well-off they are. The other one highlighted the treatment of free PDS items in compiling consumer prices.
While prices are mostly an outcome of demand and supply, PDS items are zero priced. “But PDS items don’t tell us much about demand and supply or costs. So, I don’t think it can contribute much to monetary policy. We need more thinking,” Bhanumurthy said.
The government is looking to understand inflation better, the economist cited above, who requested anonymity, said. However, it should be “careful”. “We don’t know what if, at all, PDS can tell us about cost-push or demand-pull inflation. Let’s see.”
Cost-push inflation occurs when prices increase due to higher costs of wages and raw materials, while demand-pull is said to happen when an economy can’t keep up with people’s capacity to consume.