Foodgrain Subsidies in India: Are they Reaching the Poor?

Size: px
Start display at page:

Download "Foodgrain Subsidies in India: Are they Reaching the Poor?"

Transcription

1 Foodgrain Subsidies in India: Are they Reaching the Poor? by Dina Umali-Deininger Lead Agricultural Economist South Asia Agriculture and Rural Development Unit World Bank Mona Sur Economist South Asia Agriculture and Rural Development Unit World Bank Klaus W. Deininger Lead Economist Development Research Group Development Economics Department World Bank Paper prepared for presentation at the American Agricultural Economics Association Annual Meeting, Providence, Rhode Island, July 24-27, 2005 Copyright 2005 by Dina Umali-Deininger, Mona Sur and Klaus W. Deininger. All rights reserved. Readers may make verbatim copies of this document for non-commercial purposes by any means, provided that this copyright notice appears on all such copies.

2 Foodgrain Subsidies in India: Are they Reaching the Poor? Abstract Concerns about the slow down in agricultural growth and the macroeconomic impact of rising fiscal deficits have refocused attention to public expenditures in the agricultural sector. Rising levels of agricultural subsidies have been blamed for crowding out much needed productivity-enhancing investments. This study examines the potential welfare impacts of subsidy reform by tracing the beneficiaries of the farmer and consumer foodgrain price subsidies, and by assessing the distribution and level of these subsidies across households at the state level. Using benefit incidence analysis, we find that producer price subsidies benefited only a few states, and larger farmers within these states. The shift to the targeted public distribution system contributed to an increase in allocation and offtake in states with higher rates of poverty. Household participation rates at the national level on average improved, from 22.6 percent to 31.6 percent between 1993/94 and 1999/00, but delivery problems still leave the major share of the poor out of the system. 2

3 Foodgrain Subsidies in India: Are they Reaching the Poor? India is increasingly being put forward as the next tiger in the Asia region, having displayed sustained average annual GDP growth rate in real terms of 6.3% during the 1990s, largely driven by the rapid growth of the industry and services sectors. Behind the strong economic performance, however, is a population that is still predominantly rural, 72% of the population still lives in rural areas (Census 2002). Although agriculture s contribution to gross domestic product (GDP) has declined to about 20% in 2002/03, 58% of the country s labor force (72% of the rural labor force) continue to depend on agriculture for employment. Rural poverty remains high. The rural poverty rate has declined from 39.0% in 1987/88 to 26.3 % in 1999/00, but in absolute terms, this still translates to million poor people or 85.1% of the poor in the country (Deaton and Dreze 2002). Using the National Sample Survey Organization (NSSO) 1999/00 quinquenial survey, we estimate that agricultural households comprise approximately 54% of poor households in rural areas. Promoting more rapid agricultural growth is therefore a major priority for the Government of India (GOI) because of the sector s economic, social and political importance in the economy. Strong agricultural growth performance, particularly for foodgrains in the 70s and 80s had been crucial to reducing poverty, eliminating famines, and improving food security in India. Poverty in both rural and urban areas declined as a result of declining food prices and increased demand for rural labor generated by agricultural intensification, which raised rural wages (Ravallion and Datt 1994 and 1995, Bhalla and Singh 1997). Ravallion and Datt (1995) estimated that the rise in rural wages contributed between 30 to 40% of the long-run impact of agricultural growth in reducing poverty. These achievements, which came about through the Green Revolution in rice and wheat, were supported by large public investments in research and extension, irrigation, and other rural infrastructure, combined with output price, fertilizer, irrigation, seeds, and credit subsidies. Concerns about a slow down in agricultural growth and the macroeconomic impact of rising fiscal deficits, have refocused attention to public expenditures in the agricultural sector. Rapidly increasing expenditures on agricultural subsidies have been blamed for crowding out much needed productivity-enhancing investments. In 1999/2000, total agricultural subsidies had risen to 3.0% of GDP, or 7.7 times the level of public investments in the agricultural sector (World Bank 2004). In the same year, food subsidies, including both producer and consumer subsidies, amounted to Rs 94.3 billion (0.5% of GDP). By 2003/04, foodgrain subsidies alone, reached Rs 258 billion ($5.7 billion) or 1.02% of GDP (Ministry of Finance 2005). The GOI is currently searching for an economically and politically acceptable strategy to rationalize its expenditures, particularly options for reducing subsidies to free up resources for 3

4 productive investments. Concerns about the adverse welfare impact of subsidy reduction or removal on the large number of rural poor, however, increase the difficulty and political complexity of expenditure reform. This study aims to contribute to increased understanding of the potential welfare impacts of susbidy reform by tracing the beneficiaries of the farmer and consumer foodgrain price subsidies, and by assessing the distribution and level of these subsidies across households at the state level. The following describes India s foodgrain policy framework. Section 3 reviews the trends in public expenditures in food subsidies from 1980/81 to 2003/04. Section 4 examines who the beneficiaries are of the rice and wheat producer subsidies and their distribution across states and across different categories farm households, while section 5 examines who are the beneficiaries of the consumer price subsidies and their distributin across state and across different categories of consumer household. Finally, section 6 summarizes the main findings and draws some policy implications. India s Foodgrain Policy Framework The GOI's foodgrain (rice and wheat) policy has to main goals. First, is to ensure farmers a reasonable income through rice and wheat price support achieved through government procurement. Second is to assure the adequate availability of foodgrains to the public at reasonable prices and maintain the food security of the poor through the distribution of subsidized rice and wheat and price stabilization/buffer stocking operations. To achieve these objectives, GOI created a government marketing system that parallels that of the private sector. The Food Corporation of India (FCI), a government parastatal, is the main implementing agency of the GOI s foodgrain policy. Price Support Operations. FCI or its designated state government agency procures paddy and wheat from farmers at the minimum support price (Table 1). 1 In addition, FCI obtains additional rice supplies through a rice levy on rice mills. Depending on the state, rice mills are required to deliver to the FCI from 10 percent to 75 percent of their milled rice output at a government-prescribed levy price (Table 2). 2 On average, levy rice accounts for approximately 60 percent of total rice procurement by the FCI. Paddy/rice and wheat stocks accumulated through procurement then are used to meet the requirements of the public distribution system, buffer stocks, and other food-based welfare schemes. To ensure adequate foodgrain supplies for the government s procurement operations and to protect farmers and consumers from unfair practices by grain traders, a large number of restrictions were imposed on private traders by GOI and state governments. These restrictions include controls on 1 Paddy is the primary product; which when milled, produces rice, bran and other by-products. 2 The rice levy price is based on the MSP for paddy plus average rice milling costs and a margin of profit for the rice millers. 4

5 movement, storage, exports, imports, and access to trade credit, and use of risk management instruments (futures contracts). Controls are enforced or lifted depending on the severity of supply shortfalls and price rises, thus reducing private sector incentives for spatial and temporal arbitrage. In 2002, in the context of large foodgrain surpluses, the GOI lifted, although not permanently eliminated, the licensing requirements, stocking limits and movement restrictions on rice and wheat. The GOI did remove the Selective Credit Control Policy, which restricted access to trade credit in 2002 and the ban on the use of rice and futures contracts in 2003 (World Bank 2004). Targeted Public Distribution System. The Targeted Public Distribution System (TPDS), introduced in 1997, is the largest safety net program in the country and operates by providing a price subsidy to consumers for essential commodities. The most important of these are rice and wheat. 3 TPDS has a 2-tiered pricing structure for below the poverty line (BPL) and above the poverty line (APL) households. TPDS stocks are purchased by state governments from FCI at a central issue price (CIP), which is considerably below FCI s economic costs, which is equal to the sum of FCI s procurement, storage, and distribution costs (Table 3). TPDS grains are then sold through a network of about 475,000 privately operated retail shops, called Fair Price Shops. These shops operation on a commission basis. The TPDS is implemented jointly by the GOI and state governments. The GOI bears the cost of procurement, transportation, storage and bulk allocation of the foodgrains. The state governments bears the costs of intra-state distribution. The states are required to issue foodgrains at a margin of no more than Rs 0.50 per kg over and above the CIP for BPL families. States have flexibility over the pricing of APL grains.the state governments is also responsible for the identification of families bleow the poverty line, issuance of household ration cards for obtaining the TPDS grains, and supervision and monitoring of the fair price shop operations (Ministry of Consumer Affairs, Food and Public Distribution 2004). The shift to the TPDS marked a major milestone in the GOI s food security strategy. When it was adopted in 1997, a larger price subsidy was targeted to the poor (Table 2). This was later adjusted to also provide a small subsidy to APL households. By contrast, its predecessor, the Public Distribution System (PDS), was a general entitlement scheme. PDS was widely criticized for its failure to effectively reach the poor, its urban bias, substantial leakages, poor quality of grain supplied due to deficient inventory management and relaxed specification for procurement, lack of transparent and accountable delivery systems, and negligible coverage and low off-take in states with high concentration of poor due to nonavailability of stock (Radhakrishna and et al. 1997, Comptroller and Auditor General of India 2000, Drèze 2001, Dutta and Ramaswami 2001, Jha and Srinivasan 2001, Umali-Deininger and Deininger 2001, and Shariff et al. 02). It is estimated that leakages at the national level during 1997/98 amounted to 31 percent for rice and 36 percent for wheat (Ministry of Consumer Affairs and Public Distribution 2000). 3 The program also supplies sugar nationally, and other commodities such as edible oils and coarse grains in some states. 5

6 Many states, however, encountered difficulties in transitioning to the TPDS in Some state governments took awhile to identify and issue the new ration cards to the BPL families. By 1999, 18 states/union territories (UTs) still had not completed the process of identifying the poor. This failure resulted in 18 percent of the population nationally not possessing ration cards. The number of BPL households covered increased marginally from 63.2 million in 1998 to only 65.2 million in The shift in entitlements to a family norm amounting to a uniform 10 kg of grain per BPL household in 1997, irrespective of family size and need, translated to 2 kg per person per month for a 5-member family. In response to criticisms regarding the inadequacy of the allocation and faced with the problem of mounting stocks, the GOI in April 2000 increased the BPL family allocation from 10 to 20 kg per month to be priced at 50 percent of FCI s economic cost. No changes were made to the APL allocation at this time (Jha and Umali-Deininger 2003). The GOI adopted further modifications to the TPDS by increasing the foodgrain allocation to the poor and help reduce excess stocks. The quota for BPL families was modified to depend on the number of family members, with each family allowed to purchase up to 5 kg per person per month at the announced BPL price; or an allocation of 20 kg per family whichever is higher (Department of Food and Public Distribution 2002). Any additional requirement will be provided at the APL price. In July 2001, the BPL allocation of food grains was increased further from 20 kg to 25 kg per family per month, priced at 48 percent of economic cost. GOI also allowed APL families to purchase TPDS foodgrains at 70 percent of the economic cost. From April 2002, the allocation of foodgrains for the Antyodaya Anna Yojana program, BPL, and APL families was increased again to 35 kg per family per month (Ministry of Consumer Affairs, Food and Public Distribution 2004). At the same time, the government also reduced the issue price for APL rice and wheat by Rs 1.00 per kg for 3 months (Jha and Umali-Deininger 2003). GOI introduced the Antyodaya Anna Yojana (AAY) in December 2000, as a sub-scheme to benefit the poorest of the poor. AAY provides a larger price subsidy and quantity than that received by BPL households. Each AAY household is eligible for 25 kg of food grain per month at a CIP of Rs 2 per kg for wheat and Rs 3 per kg for rice. In April 2002, the GOI increased the AAY household foodgrain allocation 35 kg per month. It is estimated that 15 million families or 23% of BPL families qualified for the AAY program in 2003/04 (Ministry of Consumer Affairs and Public Distribution 2004). Buffering Stocking Operations. FCI uses buffer stocking and open market sales to stabilize domestic rice and wheat consumer prices and meet India s food security needs. Buffer stock norms are adjusted by quarter and range from 16 million mt to 24 million mt (Figure 1). Actual buffer stock volumes stayed close to the norms until After 1999, however, stock levels jumped as a result of 6

7 large increases in the MSP, declining off-take from the Targeted Public Distribution System (TPDS), the government s foodgrain price subsidy scheme, and declining domestic and international prices. Steady increases in the minimum support price for rice and wheat in the second half of the 1990 s encouraged farmers to increase domestic production, necessitating greater government procurement. Prior to 1996/97, the GOI generally adhered to the Commission of Agricultural Cost and Prices (CACP) recommended MSP for rice and wheat. CACP uses as its benchmark the C2 cost of production, which approximates full production costs, including all expenses in cash and in kind, plus rent paid for leased land, imputed value of family labor, and the interest on the value of owned capital. Starting in 1997/98, the GOI began setting the MSP significantly higher than the C2 cost benchmark. In 2001/02, for example, the weighted average C2 costs of 8 wheat producing states was Rs 4.83 per kg while the MSP was set at Rs 6.20 per kg (Ministry of Finance 2003). In 2002/03 GOI s efforts to freeze the MSP were overwhelmed by pressures from the MSP beneficiary states (for example, Punjab, Andhra Pradesh, Haryana) to raise it. Thus, although the MSP was frozen at 2001/02 levels, GOI offered a drought relief bonus of Rs 200 per mt to the paddy MSP and Rs 100 per mt to the wheat MSP, despite the fact that these crops were generally grown in irrigated areas and thus had assured water supply. The high MSPs encouraged increased production of wheat and rice. Combined with the reduction in foodgrain off-take with the shift to TPDS and the downward trend in world market prices, which limited export possibilities, the government was left with no option but to procure more, resulting in the massive accumulation of buffer stocks (Gulati et al. 2003). The continuing overhang of burgeoning buffer stocks in turn exerted downward pressure on open market prices. As the private sector was unable to compete with the high MSPs, this necessitated even greater government procurement. In January 2003, actual buffer stocks stood at 48 million mt compared to the 17 million mt norm. To deal with problems of mounting buffer stocks, the government increased allocations to the TPDS and other welfare schemes and beginning in 2000,resorted to subsidizing the marketing and freight costs of private sector exports to offload stocks (Gulati et al 2003, Purcell 2003). In November 2000 the GOI decided to offer private traders wheat for export at a price equal to the Food Corporation of India economic cost minus two years carrying cost, but not lower than the central issue price for below poverty line households (Ministry of Consumer Affairs, Food and Public Distribution 2004). In 2003 the scheme was expanded to cover rice. This sharply increased India s foodgrain exports. From a net importer of wheat in 1999, wheat exports reached 2.6 million mt in Rice exports stayed at about 2.2 million mt). The GOI justified its export support policy under the exemption for developing countries from reduction commitments contained in Article 9.4 of the Agreement on Agriculture. This exemption permits export subsidies for reducing the costs of marketing and providing favorable internal transport charges on 7

8 export shipments (Pursell 2003). 4 During the last three years, the GOI adopted more conservative adjustments to the minimum support price. These efforts contributed to bringing down buffer stock levels closer to the norm (Figure 1). Public Expenditures in Foodgrain Subsidies Food subsidies comprise two major components. They cover the difference between the central government issue price (CIP) of foodgrains channeled through the TPDS and other smaller welfare schemes and the FCI s economic cost for procuring, storing and distributing these foodgrains. They also cover the cost of buffer stocking operations, that is the difference between the price at which government procured foodgrains are sold in the market and FCI s economic costs. Foodgrain subsidies grew steadily of the 1990s, and increased rapidly beginning in 1998/99, in large part due to the rapid increase in minimum support prices coupled with decline in TPDS offtake. It increased in real terms from Rs 61.7 billion in 1998/99 (0.6% of GDP) to Rs billion in 2003/04 (1% of GDP) (Figure 2). In the following sections, we investigate to what extent these subsidies have benefited the poor. Who benefits from foodgrain price support? Distribution of Benefits Across States. To assess how equitable the government s price support operations are, we first examine the trends in FCI procurement levels across states in India. Our analysis show that price support benefited farmers in only a few states. Nearly all states in India grow rice, and approximately 20 states and Union Territories (UT) grow wheat. However, FCI wheat and rice procurement are concentrated in a few states. During the period 2000/01 to 2004/04, wheat procurement was concentrated in three states: Punjab on average accounted for 53.9% of total procurement, Haryana for 30.1% and Uttar Pradesh for approximately 10% (Figure 3). 5 In Punjab and Haryana, FCI procures nearly 100 percent of total market arrivals. Varying by year, FCI procures rice from 15 to 22 states in India. During the period 2000/01 to 2003/04, Punjab, Andhra Pradesh, Haryana, Uttar Pradesh, and Chhatisgarh accounted on average for 87.9% of total rice procurement. Punjab accounted for the largest share, 44.4%, Andhra Pradesh 16.4%, Uttar Pradesh 9.3%, Haryana 7.7% and Chhatisgarh 8.9%. In Punjab, FCI procures approximately 90 percent of total market arrivals, approximately 50 percent in Haryana, and 40 percent in Tamil Nadu. 4 India's most recent notification to WTO for export subsidies was made in March 2002 and covers the marketing years 1996/97, 1997/98, 1999/00, and 2000/01 (WTO document G/AG/N/IND/3, 1 March 2002). 5 FCI wheat procurement in other states is minimal: Madhya Pradesh and Rajasthan account for about 4.2 % to total wheat procurement, while and Bihar, Delhi, Chandigarh and Uttaranchal accountsfor about 2.2 %. 8

9 We estimate the total amount of fiscal transfers to farmers in selected states in 2000/01 by taking the difference between the MSP and the state specific C2 cost of production as estimated by the CACP multiplied by the FCI and state agency procurement of rice and wheat. We find that Punjab captures the larger share of price support benefits. Punjab farmers received the major share of price support benefits, amounting to Rs 26.4 billion ($577.7 million) (Figure 4). In contrast, Haryana farmers received only Rs 7 billion, Uttar Pradesh farmers Rs 3.8 billion and Andhra Pradesh farmers Rs 2.0 billion. The benefits transferred to other states were insignificant. Producer Benefit Incidence. At the state level, we estimate the total benefit accruing to paddy or wheat farmers by computing a per unit benefit (Rs/kg) equivalent to the difference between the MSP and the C2 cost of production estimated by the CACP (Table 4). An alternative estimate of the per unit benefit can be obtained by taking the difference between the MSP and the A2+ family labor (FL) cost. The A2+FL cost represents the minimum cost of production and corresponds to actual costs paid-out by a farmer plus a margin for family labor. Since the A2+FL corresponds to the minimum cost of production, it also reflects the lowest minimum price that would be needed by farmers to avoid a loss. In some respect the difference between the MSP and the A2+FL cost most accurately reflects the per unit benefit received by farmers. Multiplying the per unit benefit by the total amount of wheat or paddy procured from the respective states provides a value of the total direct benefit to wheat and paddy farmers, respectively. Dividing the total wheat/paddy benefit at the state level by the number of wheat/paddy farmers results in an estimate of the benefit per farmer. In order to estimate the benefit per farmer by different farm size groupings (marginal, small, medium, large) a few assumptions need to be made since there are no data on procurement by FCI from different groups of farmers. 6 Using data from the 54 th round (1998) of the Indian National Sample Survey (NSS) on the distribution of wheat and paddy area by farm sizes along with state-level estimates of area and grain yields (HLC, 2002) it is possible to arrive at an estimate of grain production by farm size. We then estimate the marketed surplus by taking the difference between the production by farm size and the amount of amount of grain consumed from home production by farm size (obtained from the Consumption Expenditure module of the 55 th round of the NSS (1999/00)) less a 10% set aside for seeds, losses and uses. The proportion of grain sales from each farm size group multiplied by total procurement of wheat/paddy in the state provides an estimate of procurement by farm size. The benefit per farm household can be computed by dividing the total benefit (procurement multiplied by the difference between the MSP and C2 or A2+FL costs) accruing to each farm size group 6 Households that cultivated crops and own less than 1 hectare (ha) are classified as marginal farmers, those with 1 to less than 2 ha are classified as small farmers, those with 2 and less than 4 Ha are classified as medium farmers. Households owning 4 or more hectares are classified as large farmers. 9

10 by the number of farm households growing the particular grain. Estimates of the number of wheat and paddy farmers are obtained from the 54 th round of the NSS. This methodology for apportioning the producer benefit among different farm size groupings relies on several assumptions. First, it is assumed that grain yields are homogenous across farm sizes. Second it assumes that the proportion of grains kept in storage and losses of grains (from crop spoilage/damage) from total production are identical across farm sizes. Third, it is assumed that the efficient total cost of production is identical across all farm sizes. In the results summarized below the producer benefit equal to the difference between the MSP and C2 is referred to as the C2 benefit. Correspondingly, the benefit calculated by taking the difference between the MSP and A2+FL is referred to as the A2+FL benefit. We find that distribution of wheat and rice area is skewed in Punjab and Haryana. Medium and large farmers, who account for approximately 45.2% and 40.8% of all farmers, cultivate 78.3% and 69.9% of total wheat area Punjab and Haryana respectively. Similarly, medium and large farmers, who account for approximately 46.3% and 46.2% of all farmers, cultivate 77.2% and 73.9% of total rice area in Punjab and Haryana respectively (Table 5). The distribution of wheat and rice area is less skewed in Andhra Pradesh, Uttar Pradesh and Tamil Nadu.. At the household level and taking C2 costs of production as reference, we estimate that in 1998, the average transfer was Rs 3,041 per rice farmer in Punjab and Rs 164 per farmer in Andhra Pradesh. The difference in absolute transfers per farmer is due to differing levels of production efficiency and number of farmers. The average transfer for wheat farmers during the same year was considerably higher than those of rice farmers because of the large margin between the MSP and C2 costs (Table 6). These amounted to Rs 9,980 per farmer in Punjab, Rs 5,794 per farmer in Haryana, and Rs 217 per farmer in Uttar Pradesh. Whether for wheat or rice, in each state, the average income transfer to large farmers is approximately 10 or more times greater than those received by marginal farmers. Punjab, Haryana and Uttar Pradesh received benefits from both the rice and wheat price subsidies, because of the rice-wheat production systems practiced in these states. This translated to an average total transfer per farmer of Rs 13,021 per year, and range from Rs 3,008 for a marginal farmer to Rs 34,307 for a large farmer. The total transfer jumps significantly if the A2 + FL benchmark is used. In the scenario, the average total transfer per farmer in Punjab increases to Rs 39,175 per farmer, ranging from Rs.9,395 for a marginal farmer to Rs 101,579 for a large farmer. Who benefits from the Targeted Public Distribution System? The shift to TPDS resulted in an increase in the government TPDS foodgrain allocations to the states, especially those which account for the largest share of the poor in the country. Between 1993/94 and 2003/034, the largest increases in total rice and wheat allocation occurred in Bihar, Madhya Pradesh, 10

11 Maharashtra, Orissa, and Uttar Pradesh, the states which account for the majority of the poor in the country (Figure 5). For the two states with the largest number of poor people, total allocations in Uttar Pradesh increased by 664% from 1.5 million mt in 1993/94 to 11.5 million mt in 2003/04. Bihar s allocation increased by 499% from 1.02 million mt to 6.14 million mt, while Madhya Pradesh s allocation increased by 496% from 980,000 mt to 5.86 million mt during the same period. A large increase in allocations occurred between 2001/02 and 2003/04, bolstered by the increase in household allocations from 20 kg to 35 kgs per household per month. While foodgrain allocations illustrate the intended GOI foodgrain assistance to state governments, offtake volumes provide an indicator of the volumes which state governments actually draw down. Between 1997/98 and 2003/04, we find that total national offtake increased significantly from 13.2 million mt in 1997/98 to 23.9 million mt in 2003/04 (Table 7). However, compared to total allocations, the percentage share of offtake over allocations at the national level declined from 72.7% to 33.6% during this period. A major factor driving this decline is the decline in state offtake for APL households, which dropped from 71.9% of allocations in 1997/98 to 9.0% in 2003/04. Another factor explaining this trend was the downward pressure on prices exerted by the large bufferstocks in the early 2000s. This narrowed the wedge between market prices and APL prices, reducing the incentives of APL households to buy foodgrains from the TPDS (World Bank 2004). By contrast, state offtake for BPL households declined only slightly from 74.3% of allocations in 1997/98 to 70.1% in 2003/04. A similar trend is mirrored as the state level. Thus the TPDS has been relative successful in channeling a large share of subsidized foodgrains to below poverty households. Consumer Benefit Incidence. We analyze the change in benefit incidence of the consumer rice and wheat price subsidy between the PDS and the TPDS using the NSS 50 th round (1993/94) and 55 th round (1999/00) quinquennial surveys, which includes data on foodgrain prices, expenditures and consumption, and amounts of PDS/TPDS purchases. The consumer price subsidy is defined as the difference between the market price and the PDS/TPDS price. Our analysis finds that the targeting of the benefits improved with the shift to the TPDS. Household participation rates increased from 22.6 to 31.6 percent between 1993/94 and 2001/02. The largest improvements in access by BPL persons occurred in Orissa, Assam, and Karnataka, in which access increased by 54, 30, and 26 percentage points respectively. Participation of the BPL persons was highest in Kerala and Tamil Nadu, in which more than 80 percent of BPL persons used TPDS in 1999/2000 (Table 8). Although access still remains low, there was nevertheless a significant increase in access in the poorest states of Bihar, Madhya Pradesh, Orissa, and Uttar Pradesh. Rajasthan was the only state in which access declined between the two periods, but this decline also could be due to the sharp cut in foodgrain allocation between 1993/94 and 1999/00. 11

12 The share of TPDS foodgrains in total household foodgrain consumption increased among BPL households in most states. At the All India level, the contribution of TPDS to household foodgrain consumption on average remains limited, and changed only slightly from 8.3% of total grain consumption in 1993/94 to 9.4% in 1999/00 (Table 9). This unchanged share could be attributed partly to the fact that, at inception, household allocations were fixed at 10 kg per month household. The increase in allocation to 35 kg per household for BPL and AAY households likely will lead to a further increase in consumption shares among these vulnerable households. Although TPDS s share was small, its contribution did increase significantly for BPL households in many states between 1993/94 and 1999/00. Some of the states that showed significant increases in share in total consumption among BPL households during the same period include Orissa, which increased from 0.9% to 13.9%, Tamil Nadu from 23.2% to 42.3%, Karnataka from 26.5% to 32.4% and Kerala form 58.9% to 70.8%. Despite the shift to the TPDS, 68.4% of the poor households still do not have access to the TPDS. In the NSS 55 th round, households were asked why they had not purchased any rice or wheat from the TPDS during the previous 30 days. That the item was not available in the ration shop was the most frequently cited reason for those not buying rice 30 percent for all households and 41 percent for the poorest households, that is, the bottom 20 percent of the expenditure quintile (Table 10). Not having access (28 percent) was the second most common reason. For wheat buyers, nonavailability was cited as the most common problem (30 percent of all households and 36 percent among the poorest households), followed by item not required (29 percent) and having no access (20 percent). For both grains, the proportion expressing dissatisfaction with the quality of foodgrains sold in the TPDS increased with increasing wealth. Poor quality was less important among households in the poorest quintile. The degree of severity of the problem of not having foodgrains available in the ration shop varied significantly by state and wealth categories. The lack of availability of foodgrains in the ration shops is likely due to continuing leakages in the delivery system of the TPDS. A survey of 3,600 households in 18 states in India 2003/04 commissioned by the Planning Commission of the GOI found that leakages of BPL foodgrain exceeded 75% in Bihar and Punjab, ranged from 50%-75% in Haryana, Madhya Pradesh, and Uttar Pradesh, and ranged from 25% to 50% in Assam, Gujarat, Himachal Pradesh, Karnataka, Maharashtra and Rajasthan (Table 11). Sources of leakages included diversions at the fair price shop level and ghost BPL cards (the share of total cards handled by the fair shops are lower than the share of BPL cards issued by the state).. Conclusion The Government of India s foodgrains subsidies have increased significantly over the last decade. Benefit incidence analysis shows that producer price subsidies benefited only a few states, and larger 12

13 farmers within these states. The shift from the Public Distribution System to the Targeted Public distribution system resulted in an increase in the allocation and offtake among states with a larger number of poor. There was some improvement in the targeting of benefits, with household participation rates increasing from 22.6% to 31.6% between 1993/94 and 1999/00. Despite this improvement, more than two-thirds of the poor are excluded. The findings of the study highlights the complex political challenge for reform that will be faced by the government as the benefits of price support is confined to a few but politically influential states and to influential large farmers within these states. While targeting of subsidies would potentially reduce the fiscal cost of the price support program and free up resources for much needed investments, reform will likely be opposed by the large farmer constituency, as they will lose the most. This raises the question of whether compensatory mechanisms would be needed and/or justified as a price for reform. The shift to TPDS, on the other hand, had some positive impact on the welfare of the poor by improving access and availability. To build on this success, it will be urgent to improve delivery efficiency and effectiveness, thereby ensuring outreach to the poor and marginal.. Further reduction in fiscal costs could be explored in piloting alternative delivery mechanism that will not require government physical handling of the grain, such as food stamps or coupons. References Bhalla, G.S., and G. Singh Recent Developments in Indian Agriculture: A State Level Analysis. Economic and Political Weekly 32 (March): A2 18. Jha, S. and P.V. Srinivasan Taking the PDS to the Poor: Directions for Further Reform. Economic and Political Weekly (September 29): Deaton, A., and J. Dreze Poverty and Inequality in India: A Re-Examination. Economic and Political Weekly (September): Drèze, J Starving the Poor. The Hindu (February 26, 27). Dutta, B., and B. Ramaswami Targeting and Efficiency in the Public Distribution System: Case of Andhra Pradesh and Maharashtra. Economic and Political Weekly (May 5): Gulati, A., G. Pursell, and K. Mullen Indian Agriculture Since the Reforms: Performance, Policy Environment, and Incentives. Washington, D.C., IFPRI. Jha, S. and P.V. Srinivasan Taking the PDS to the Poor: Directions for Further Reform. Economic and Political Weekly (September 29): Jha, S., and D. Umali-Deininger Public Expenditures on Food and Nutrition Security Programs in India: Are They Meeting the Challenge? Working Paper. South Asia Rural Development Unit, World Bank. Ministry of Consumer Affairs, Food and Public Distribution Report of the High Level Committee on Long-Term Grain Policy. New Delhi Annual Report New Delhi: Government of India. 13

14 Ministry of Finance Economic Survey New Delhi: Ministry of Finance, Government of India Economic Survey New Delhi: Ministry of Finance, Government of India Economic Survey New Delhi: Ministry of Finance, Government of India. Planning Commission, Performance Evaluation of Targeted Public Distribution System. New Delhi: Program Evaluation Department, Planning Commission. Pursell, G Indian Trade Policies in India Trade Policy Note. (February 21). Radhakrishna, R., K. Subbarao, with S. Indrakant and G. Ravi India s Public Distribution System: A National and International Pespective. World Bank Discussion Paper No Washington, D.C.: World Bank. Ravallion, M., and G. Datt How Important to India s Poor Is the Urban-Rural Composition of Growth? Policy Research Working Paper World Bank Growth and Poverty in Rural India. Policy Research Working Paper World Bank. Shariff, A., P. Ghosh, and S.K. Mondal State-Adjusted Public Expenditure on Social Sector and Poverty Alleviation Programmes. Economic and Political Weekly. (February 23) Umali-Deininger, D.L., and K.W. Deininger Towards Greater Food Security for India s Poor: Balancing Government Intervention and Private Competition. Agricultural Economics 25: World Bank India Re-energizing the Agricultural Sector to Sustain Growth and Reduce Poverty. New Delhi: Oxford University Press. 14

15 Table 1: Minimum Support Prices for Rice and Wheat, 1990/91 to 2004/05. Paddy a, Rs/kg Year Wheat, Rs/kg Common Fine Superfine 1990/ / b / b / / / / / c 5.30 c 5.60 c Na Notes: a - Fine and superfine paddy grades were merged into Grade A in 1997/98. b - includes GOU bonus of Rs 250/mt. c - includes drought bonus of Rs 100/mt for wheat and Rs 200/mt for rice Source: Ministry of Finance 1997 and Table 2: Rice Levy Rate at the State Level in Name of the State/Union Territory Category Quantum of Levy Andhra Pradesh Millers/Dealers 50% Assam Millers 50% Bihar Millers/Dealers 40% or 250 mt compound levy on millers. 25% or 50 mt. compound levy on wholesalers. Gujarat Millers 10% Haryana Millers/Dealers 75% Himachal Pradesh Millers/Dealers 50% Karnataka Millers/Dealers 33.33% Madhya Pradesh Millers/Dealers 30% (Raw rice) Maharashtra Millers 30% Orissa Millers 75% Punjab Millers/Dealers 75% Rajasthan Millers/Dealers 50% Tamil Nadu Millers/Dealers 50% Uttar Pradesh Millers/Dealers 60% (Western Uttar Pradesh) 40% (Some districts in Eastern Uttar Pradesh) Uttaranchal Millers/Dealers 60% West Bengal Millers 50% Chandigarh Millers/Dealers 75% Delhi Millers/Dealers 75% Pondicherry Millers/Dealers 10% (20% transport levy) Source: Ministry of Consumer Affairs, Food and Public Distribution,

16 Table 3: TPDS Central Issue Prices (CIP) and FCI Economic Costs Rice, Rs/kg Wheat, Rs/kg Year BPL CIP APL CIP FCI cost BPL CIP APL CIP FCI cost 1997/ / / / / /03-Apr July (P) (P) Note: P provisional. Source: Economic Survey 2001/02, 2002/03, , Ministry of Finance. Table 4: Minimum Support Price and State Specific Cost of Production of Rice and Wheat, MSP Cost of Production, Rs/kg Crop/State Rs/kg C2 A2 + FL Rice Punjab Andhra Pradesh Wheat Punjab Haryana Uttar Pradesh Source: Ministry of Consumer Affairs, Food and Public Distribution 2002 Table 5: Distribution of Wheat and Rice Growing Households in Punjab, Haryana, Uttar Pradesh, Andhra Pradesh and Tamil Nadu, 1998 Procurement Ag HH growing wheat Distribution of wheat growing Distribution of wheat area Wheat share 1998/99 HH percent Est no. (000) Percent of total Marginal & small a Medium & large b Marginal & small a Medium & large b Punjab Haryana , Uttar Pradesh , Procurement Ag HH Growing Rice Distribution of rice Growing Distribution of rice Area Rice share1998/99 HH percent Est. No. (000) Percent of total Marginal & small a Medium & large b Marginal & small a Medium & large b Punjab Andhra Pradesh , Haryana Tamil Nadu 6.3 2, Uttar Pradesh , Note: HH = households. a. Marginal farmers own less than 1 ha of land and small farmers own 1 to less than 2 ha of land. b. Medium farmers own 2 to less than 4 ha of land and large farmers own 4 or more hectares of land. Source: Authors calculations 16

17 Table 6: Estimated price subsidy transfers to producers in selected states in I. Producer Price Support, Rs Billion A. Rice Producers Farmer Category C2 base: All Marginal Small Medium Large Punjab Andhra Pradesh A2 + FL base: Punjab Andhra Pradesh Wheat Producers C2 base: Punjab Haryana Uttar Pradesh A2 + FL base Punjab Haryana Uttar Pradesh II. Producer Transfer Per Household, Rs/household Rice Producers Farmer Category C2 base: All Marginal Small Medium Large Punjab 3, ,674 3,094 7,556 Andhra Pradesh A2 + FL base: Punjab 17,508 4,598 9,637 17,813 43,502 Andhra Pradesh 3,826 1,260 4,315 7,876 14,454 Wheat Producers C2 base: Punjab 9,980 2,210 5,094 9,761 26,752 Haryana 5,794 2,236 3,597 6,547 14,705 Uttar Pradesh ,807 A2 + FL base Punjab 21,667 4,797 11,059 21,190 58,077 Haryana 10,957 4,229 6,803 12,382 27,809 Uttar Pradesh ,470 3,351 Notes: Marginal farmers own less than 1 ha of land. Small farmers own 1 to less than 2 ha. Medium farmers own 2 to less than 4 ha. Large farmers own 4 or more ha. Source: Authors calculations. 17

18 Table 7: Percent of State Foodgrain Offtake over Allocation by Household Category, 1997/98 to 2003/04. State/Union BPL, % AAY, % APL, % Total, % Territory 1997/ / / / / / / / / /04 Andhra Pradesh Arunachal Pradesh Assam Bihar 61.7 a 85.0 a a 5.7 a a 65.4 a 20.6 Chhatisgarh na na na na 2.2 na na 38.4 Delhi 0.0 na Goa Gujarat Haryana Himachal Pradesh Jammu & Kashmir Jharkhand na na na na 5.2 na na 37.1 Karnataka Kerala Madhya Pradesh 61.8 a 84.0 a a 35.4 a a 69.3 a 34.2 Maharashtra Manipur Meghalaya Mizoram Nagaland Orissa Punjab Rajasthan Sikkim Tamil Nadu Tripura Uttaranchal na na na na 0.2 na na 26.8 Uttar Pradesh 71.2 a a a 12.1a a 58.7a 35.9 West Bengal A & N Islands Chandigarh D & N Haveli Daman & Diu Lakshadweep Pondicherry All India Total All India offtake,million mt Note: na not applicable, a Unsplit states.bihar was split into Bihar and Jharkand, Madhya Prades into Madyha Pradesh and Chhatisgarh, and Uttar Pradesh into Uttar Pradesh and Uttaranchal. Source: Food Corporation of India: Ministry of Consumer Affairs, Food and Public Distribution,

19 Table 8: Percentage of Households with Access to PDS/TPDS by Poverty Status. State Above Poverty Line HH Below Poverty Line HH All Households 1993/ / / / / /00 Andhra Pradesh Assam Bihar a Gujarat Haryana Karnataka Kerala Madhya Pradesh a Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh a West Bengal Other States All India Note: HH = household. a unsplit states. Data from NSS50 th (1993/94) for PDS and 55 th Rounds (1999/00) for TPDS. APL and BPL classification based on official poverty line estimates. Table 9: Percent Share of PDS/TPDS Purchases in Total Grain Consumption by Households, 1994/94 and 1999/00. Above Poverty Line a Below Poverty Line a All Households State 1993/ / / / / /00 Andhra Pradesh Assam Bihar a Gujarat Haryana Karnataka Kerala Madhya Pradesh a Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh a West Bengal Other States All India Note: HH- household. Data from NSS50 th (1993/94) for PDS and 55 th Rounds (1999/00) for TPDS.. BPL includes AAY also. APL and BPL classification based on official poverty line estimates. Source: Authors calculations. 19

20 Table 10: Reasons Cited by Households for not Purchasing Foodgrains from TPDS, 1999/00 Reason Household Expenditure quintile, percent Rice Poorest 2nd 3rd 4th Richest All No access a Not available b Item not required Quality not satisfactory Other reasons Wheat Poorest 2nd 3rd 4th Richest All No access a Not available b Item not required Quality not satisfactory Other reasons Notes:a. Not entitled or no ration card. b. Not available or not available in sufficient quantities. Data from NSS50 th (1993/94) for PDS and 55 th Rounds (1999/00) for TPDS. Source: Authors calculations. Table 11. Balance Sheet of Central Pool of BPL Foodgrains, kg/bpl household/year Foodgrains Not Offtake by State Govt Offtake by Identifed BPL Households Reaching Poor Households Estimated Leakages, % Andhra Pradesh % Assam % Bihar % Gujarat % Haryana % Himachal Pradesh % Karnataka % Kerala % Madhya Pradesh % Maharashtra % Orissa % Punjab % Rajasthan % Tamil Nadu % Uttar Pradesh % West Bengal % 16 States (Avg.) % Source: Planning Commission, Performance Evaluation of Targeted Public Distribution System 20