S0CH

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S0CH

  1. 1. Team presents the solution to plug these leaks Plugging the Leaks Improving reach and efficiency of The Public Distribution System Realise Real Lies  Ayush Gupta (Team co-ordinator)  Chinmai Garg  Utkarsh Kumar  Pranav Sanga  Suryansh Tibarewala
  2. 2. 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000 110,000 120,000 130,000 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 FoodSubsidy 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 Food Subsidy(₹ in crores) 43,751 53,443 63,344 72,822 73,380 109,016 122,899.60 Data 1 : Quantum of Food Subsidies released by Government In our nation, where 2166.581 lakh rural people live at a daily income of ₹ 27.21 and 531.251 lakh urban people have just ₹ 33.331 per day to earn their living, feeding oneself becomes highly impossible. Therefore, Public Distribution System that provide subsidized food grains and other materials of need (like sugar & edible oil) assumes great importance in catering to nutritive needs of the nation. For this, The Indian Government has spent a significant amount i.e. ₹ 72,822 crores2 (which amounts to nearly 0.85% of the GDP) in the financial year 2011-2012 and plans to spend even more. Data 1 gives the details of the amount spent by the Government and the amount it plans to spend in future. The amount spent in 2012-13 is about 7.33%3 of the total revenue (tax & non-tax). Since, the food subsidy released by the GoI is increasing exponentially, one question that comes in mind is whether the subsidy released is actually reaching the poor? Unfortunately the answer disappoints! As per the Planning Commission’s ‘Performance Evaluation of Targeted Public Distribution system(TPDS) – 2005’ report, taking into account all the inefficiencies of PDS, it is found that the GoI spends ₹ 3.65 to transfer ₹ 1 to the poor, i.e. ₹ 2.65 is lost to excess cost (administrative overheads, inefficiencies etc), illegal diversions and income transfer to unintended beneficiaries. So, THE CORK just tries to give some revolutionary ideas to answer the question – Can the food subsidy released actually reach the poor? 1 The statistics are computed as per the Tendulkar method on Mixed Reference Period(MRP). The poverty estimates may be revised by the Rangrajan Committee that may submit its report by mid 2014. 2 Source: The Indian Union Budget 2013 3 Taking the earning of the Central Government to be about ₹ 10 lakh crores during the financial year 2011-2012. * Projected by NFSB for TPDS (excludes subsidies for other welfare schemes). ** As per Department of Food and Public Distribution, Annual Report, Feb 2013 (does not include buffer subsidy). Realise Real Lies ****
  3. 3. Where are the leaks? The Public Distribution System (now TPDS 4 ) distributes rice, wheat, sugar, edible oil and kerosene at subsidized prices. However, the subsidy on staple grains (i.e. subsidy on rice and wheat) constitutes about 99.38% 5 of the total subsidy. Hence, rice and wheat distribution has taken the centre focus throughout the presentation. The food subsidy provided by the GoI through TPDS can be divided into THREE categories for better understanding :- Particular Variables Economic cost of the grain E.P. Issue Price of the grain I.P. Market Price of the grain M.P. Quantity of food grain released by the govt. Q Quantity of food grain purchased by the poor receiver Q.P. Quantity of food grain purchased by non-poor receiver Q.N. Income transfer to poor = Q.P.(M.P. – I.P.) Income transfer to non-poor = Q.N.(M.P. – I.P.) Food Subsidy = (E.P. – I.P.) Q = (M.P. – I.P. + E.P. – M.P.) [Q.P. + Q.N. + {Q – (Q.P. + Q.N.)} ] = Q.P. (M.P. – I.P.) + Q.N. (M.P. – I.P.)+ [Q – (Q.P. + Q.N.)](M.P. – I.P.) + Q(E.P. – M.P.) Quantity of grain black marketed Income transfer To Poor Excess Cost Income transfer To Non-Poor Cost of illegal Diversions 4 Public Distribution system was re-launched as Targeted Public Distribution System (TPDS) in June 1997 to make it more targeted. 5 The subsidy on rice and wheat distribution during the financial year 2011-2012# was Rs. 72,370.90 crores and the total subsidy(all inclusive) was about Rs 72,822 crores. (Source : Department of Food and Public Distribution (dfpd), Annual Report, Feb 2013 & Indian Union Budget 2013) # Financial year 2011-2012 has been considered for calculations and other statistical references because the data for the year 2012-2013 is available till 27 February 2013 only. Food Subsidy Income Transfer Excess Cost Cost of illegal diversions Income transfer to the poor (intended beneficiaries) Income transfer to unintended beneficiaries (i.e. non-poor) Direct benefit to poor. Direct benefit to non- poor. Administrative overheads, inefficiencies etc. Black marketing of the grains. On studying these various categories, one gets a basic idea of how food subsidy operates. Data 2# (On page 3) gives a detailed analysis of these categories for, rice and wheat. Realise Real Lies
  4. 4. 18% 39% 43% ₹ in crores Income transfer to poor Income transfer to non-poor Cost of illegal diversions 7% 23%58% ₹ in crores Income transfer to poor Income transfer to non-poor Excess Cost Cost of illegal diversions Data 2 Rice : Income transfer to poor, non-poor and illegal diversions. Wheat : Income transfer to poor, non-poor, excess cost and illegal diversions. Realise Real Lies 11781.3 25493.759 37185.19 4730.237 451.1 14157.988 ₹ in crores Analysing the leaks?India is so self-sufficient in feeding itself that its wheat production can alone cater to 89.49% (Table 1 Annexure) of the cereal need of the nation with 105.31@ million ton of rice and 42.04@ million tons of coarse grains left untouched.It’s an obvious fact that these hungry people comprise the same sect for which the PDS scheme of GoI operates. Income transfer to the poor. Income transfer tothe non-poor Illegal diversion cost Excess cost Subsidy on edible oils, sugar etc. Loss due to in-efficient handling * Calculations are shown in the Annexure Then too, India rank 66th among 105 countries in the 2012 Global Hunger Index. This indicates that subsidized grains intended to reach the poor are not actually reaching them. Table 2 & 3 in annexure gives the statistical details as to why it is not reaching them. 12% @ During financial year, 2011-2012 since for now we have advance estimate for 2012-2013. *Calculations are shown in the Annexure
  5. 5. Plugging the leaks? The impact of the food subsidy program on the poor via PDS can be more pronounced by working on two arenas :- Making it more targeted i.e correcting the exclusion and inclusion errors While it is generally agreed that ‘target leakages’ should be minimized, the question arises whether and how can it be done. This debate is enduring because minimizing inclusion errors can be costly (administratively) and often leads to greater exclusion errors. With such a tradeoff, optimal targeting depends on how much weight the government puts on inclusion error relative to exclusion error. Reducing the excess cost, illegal diversions cost & other losses due to mis-management so that wastage of public money is reduced. Study of the targeting errors pre-targeted PDS system regime and post (Data 4) stresses on the fact that focusing to minimize the targeting errors# does not give that much high returns as enhancing the fraction of subsidy going in income transfer can (i.e. minimizing leakages, excess cost, illegal diversion cost losses and other inefficiencies at the operational and management level). Exclusion error (in %) Inclusion error (in %) 2004/2005 Post TPDS regime 70 70 1999/2000 Pre TPDS regime 64 76 Moreover, the policies framed for the latter will save resources that could be used to increase the indulgence of the poor into the same. THE CORK has aimed to bring ideas that can plug both these leaks. # The failure of TPDS as it brought a minor change in the targeting error may rather be attributed to improper implementation of TPDS. Data 4 : Exclusion and Inclusion errors (Source : adb Report) Realise Real Lies
  6. 6. Present wheat track :- Farmers to FPS Farmers FPS8 Private Procurement 1. Procurement at a price significantly below MSP. 2. Thus farmers do not get the returns they deserve. # De-centralised procurement @ Source : CAG Audit on FCI storage. * Source : FCI procurement division ** Market Study 8 FPS – Fair Price Shop i.e. Ration shop Realise Real Lies 1. Procures wheat from farmer’s at MSP fixed by GoI on the recommendation of CACP considering farmer’s benefit. 2. Procurement is done via Open End Policy for farmers’ benefit. This raises the central buffer stock to about 250-350% of the minimum buffer norms. 3. Ignorant of proper procurement targets. 4. Procured from mandis which have only 28%* production arrivals . Hence, farmers are not largely benefitted by MSP. Govt's Procurement Center 1. Packaging is done in B.Twill jute bags of 50 kg capacity that cost the GoI about Rs 35 per bag**. The resale value is Rs 15 per bag**. Hence effective cost of a bag is Rs 20**. 2. Considering that 28335 X 106 * of wheat was procured in 2011-12, the cost of packaging incurred was Rs1133.4 crores. 3. The jute bags used have a weave clearance of 6-10% . Hence, wheat bagged is prone to rotting. 4. Packaging is done via conventional methods. Hence LOT NUMBERS cannot be assigned to the packing bags. 5. It is easier to open the jute bag and repack it without considerable alterations. Hence, illegal diversions are prevalent. Packaging 1. The available storage capacity with FCI (including hired capacity) was only 336.04 LMT (excluding the food grains procured by DCP# states). 2. As on march 2012 the storage capacity hired was 179.64 LMT that costed Rs 1193.03 crores in 2011-12. 3. Average annual expenditure incurred on hiring (including caring over charges) from 2008-09 to 2011-12 was Rs 2265 crore.@ 4. To bridge the gap 'Private Enterprenures Guarantee' (PEG) scheme is being implemented. Storage 1. Packaging done by used jute bags procured from the GoI @Rs 15 per 50 kgs** bag. Packaging Storage 1. Have sufficient space for storage. SOLD
  7. 7. Farmers  Each farmer gets the benefit of MSP. This provides him with the incentives of his share and in situ boosts agricultural growth.  Since each farmer gets the benefit of MSP, the aim of open end policy of procurement followed in pre- scheme scenario is realised without filling the buffer stock to 250-300% of the minimum buffer norm .  This would benefit the GoI with Rs 19355.2 crores, since carrying of buffer food grains9 was Rs 483.88 per quintal10 in 2011-12 and the extra buffer stock over the minimum buffer stock norm was about 400 lakh tonnes11 of grains.  Moreover, about Rs 2000 crores11 on hired capacity and other charges incurred for that extra buffer stock would be saved. Advanced Processing Plants  Have advanced packaging machinery and sufficient storage space to procure all wheat from the yielding areas.  Have computerised scales and other equipments for mechanising the transfer of wheat from farmers to the consumers.  Built in each wheat yielding district by the local middle men & private players that were previously involved in the processing of market wheat.  Investment will befall upon a group of private players with shares of the corporation and thus profit distributed in proportion to investment.  The investment in one such plant can be estimated to be about Rs 50 crores12 and since there are 150 districts in India that are high producers of wheat , the total investment can be estimated to about Rs 7500 crores .  The extra market provided to the corporation will be of 28335 million tonnes of wheat (wheat procured by the govt. in 2011-12). This would profit the corporation by Rs 2125.125 crore.13 Therefore the investment of Rs 7500 crores can be covered in 3.5 years.  Loan at nominal rates can be provided to the corporation for investment if needed. Procurement in advanced plants  Procurement is done via a computerised weighing scale that updates the wheat procured by the corporation onto the server. This prevents quantitative corruption at the procurement level and would also give exact figures of the agricultural production of India.  Procurement is done at MSP that is directly transferred to the farmer’s account. This would provide a record of the money transferred and prevent cheating by the corporation in paying to the farmer.  Since the flow of wheat is through a unique processor, qualitative analysis, standard checks and quality controls can be exercised.  The corporation has an experience of properly identifying the procurement targets and thus can procure wheat from even the last farmer in the area (corporation being formed by local middle men). Realise Real Lies We can Decentrally Privatise the System! Solutions Proposed 9 Includes rice. 10 As per dfpd, Annual Report, Feb 2013 11 CAG Audit of FCI storage. 12 Since, the investors were in the same field in the pre-scheme scenario, all unified, they would be having enough storage capacity for market needs. The extra investment needed would be just in the packaging machines, scaling machines and in other technological inevitabilities. 13 The market price in pre-scheme scenario had a profit margin of Rs 75 per quintal for the processors. We consider the same in the post-scheme scenario.
  8. 8. Realise Real Lies Packaging  Packaging is done using advanced machineries and in HDPE bags that have 1-2% of weave clearance which protect grains from rotting.  Cost of HDPE bags is Rs. 15 per 50 kg capacity, as is of the used jute bags that were used in the pre-scheme scenario. Hence, no more investment in packaging bags needed.  LOT NUMBERS are printed on the bags which would help trace leaked wheat at each level of movement.  Out of the same lot, the required stock for TPDS is sent to the ration shops and the required buffer stock to the instructed centers.  TPDS beneficiaries get the same stock as the market, hence a certain minimum standard is unambiguously ensured. Ration shops  The corporation delivers the grain stock to the ration shops as instructed by the Govt. at market price fixed for the area.  The received stock maintained by the ration operators and the dispatch stock maintained by the corporation is considered to reimburse the amount thus withstanding.  The check on illegal diversions and storage losses is now the responsibility of the private corporation since it gets money for only the net quantity of food received for the TPDS and the buffer stock. Hence, the loss of Rs 11793.855 crores incurred on illegal diversions can be safely eliminated.  The excess cost14 of Rs 4730.237 crore* is also eliminated since the handling is now carried out by the private people who are quite efficient. Market  The market price for wheat in a particular area15 is fixed by mutual consideration of the Govt. and the corporation, which may be revised at requisite intervals.  This solves the problem of hoarding because how could and why would they hoard when they have to sell at a fixed price.  The final price then for an area would be about Rs 50 per quintal more than the existing rates, since the procurement of the entire grain stock of the nation would be on MSP. So if rates of 2011-12 are considered, market price would be about Rs 1450 per quintal. 14 Excess cost = Q (E.P. – M.P.), Since economic cost incurred by the GoI would be same as the market price excess cost is zero. 15 M.P. in wheat growing areas would be less than in other areas because of less transport cost. * Calculations are shown in the Annexure. The solution to the problem related to rice can be solved with a similar approach as wheat. Right now rice is procured via levy, then handled by the govt. for distribution through TPDS. In this process Rs. 25391.335 crores of public money is lost. A much efficient method would be to make these private rice millers responsible for ensuring that rice reaches the ration shops without leaks. The received stock as maintained by the ration shop operator could be then considered for reimbursement of money to the miller at a price higher than the current procurement price (which includes transportation, storage and distribution charges incurred by the miller).
  9. 9. Realise Real LiesThe grains you gave are of inferior quality! Take it if you want else leave it. The grains you gave are under-weighed. Dare you accuse me! Where are the remaining grains of my share? The “rats” ate them up!! Nobody listens to us  Distribution from FPS to consumers
  10. 10. Realise Real Lies Improving reach of FPS  FPS i.e. ration shops can be made mandatory in each constituency with the elected representative of the constituency (Parshad) ensuring that TPDS is properly implemented there.  This would give the Parshad some powers to monitor the TPDS in his constituency.  In case of any discrepancies, the Parshad can then be held accounted for. Benefactors are the operators  Instead of present ration shop owners, the ration shop can be operated by the beneficiaries themselves.  The beneficiaries who can read and write can take the charge of the shop in rotation(rotation would check leakages and corruption).  The operators can be paid in the form of grains from the stock @1 kg a day.  This would bring down the GoI’s cost incurred on retailer’s commission for AAY allocation from Rs 485.4 crore16 to Rs 271.5 crore17 and lower the grain’s issue price for BPL and APL. Consumer friendly Operations  Since most benefactors don’t know how to read and write, visual graphics like pictorial depiction of the amount to be paid, outside the FPS can help. Solutions Proposed 16 Since AAY offtake of foodgrains in 2011-12 was 97.08 lakh tons and retailer’s commission for each kg of grain offtake was Rs 0.5, the cost incurred can be calculated to Rs 485.4 crore (97.08*5 crore) 17 The total ration shops in the nation as on Jan 2013 were 5.13 lakhs. So the cost of the grain pay to the operators of ration shops can be calculated to Rs. 271.5 crore (1*14.5*365*5.13 lakh) Rs.14.5 is the post-scheme revised price. TDPS right now entitles each poor family 35 kg of food grain per month which is almost sufficient for a family (considering average family comprises of 5 members) Monthly cereal need of a family = Cereal need of a person X No. of person in a family = 0.03 X 4 X 2 X 30 X 5 = 36 kg
  11. 11. Income transfer to non poor illegal diversion cost Excess Cost Handling Extra buffer cost Hired charges on extra buffer cost Losses due to in-efficient handling 25493.759 37185.19 4730.237 19355.2 2000 14157.988 Rs in crores Realise Real Lies Policy Impact The benefits of the policy proposed have already been stated with the solutions. Here we take a quick review of the economic impacts of the policy. Leakages plugged (statistically) *All calculations hitherto indicated Profit on export of extra buffer stock In 2011-12 India exported 0.74 million tons of wheat which fetched 202.07 million US dollars. Hence 200 million tons of extra wheat lying in the buffer stock (which would be useless to stock if our policy is implemented) would thus fetch us Rs 35498 crores ( 1 US Dollar = 65.2 indian rupees considered) Similarly 200 million tons of extra rice in the buffer stock would fetch us Rs 64000 crores. The policy proposes to use HDPE bags instead of jute bags. This will tax the domestic jute trade by Rs 1983.45 crores. But this can be easily covered as we have a huge world market to capture. Another potential protesters are the black marketers and those who benefit from the fallouts of the public distribution system. AND IF THESE BLACK MARKETERS, PROTEST WE WILL TAKE IT AS A COMPLIMENT. Potential Protests
  12. 12. consump Rice Wheat Particulars AAY BPL APL Total AAY BPL APL Total Off-take (X 108 kg) @ 65.80 113.34 64.11 243.25 31.28 59.69 96.79 187.76 % consumption of subsidized staple reported in(2004-2005)** 28.0627% 56.3395% 97.55046% 58.9140% 22.08% 29.50% 22.792% 26.531% % consumption by poor (out of off-take) (2004-2005)** 13.1894% 19.15545% 20.4855% 18.2542% 11.70% 12.09% 5.01% 10.26% % Leakage reported (out of off- take) (2004-2005)** 71.937% 43.6604% 2.4495% 41.0859% 77.917% 70.498% 77.207% 73.468% Consumption of subsidized staple (X 108 kg) # (% consumption in 2004-05)# X off-take in (2011-12) 18.4652 63.8551 62.5395 143.3083 6.906 17.6085 22.06 46.5745 Quantity of Leaked staple (x 108 kg) (% leakage in 2004-05) x off-take in (2011-12) 47.334546 49.48469 1.57037445 99.94145 24.374 42.0815 74.73 141.1855 Market Price (₹/ kg) 30 30 30 14 14 14 Issue Price (₹/ kg) 3 6.15 10 2 5 7.2 Leakage Cost (in crores) [leaked rice x (market price – issue price)] 12780.32 11296.94547 314.07 25391.335 2924.88 3787.335 5081.64 11793.855 Income transfer (in crores) [Q received x (market price – issue price)] 4985.604 15867.99 12507.9 33361.494 828.72 1584.765 1500.08 3913.565 Income transfer to poor(in crores) [Q received by poor x (market price – issue price)] 2341.54 5394.93 2626.58 10363.05 439.08 649.44 329.73 1418.25 Realise Real Lies Annexure Calculations # For calculations % consumption in 2011-12 and in 2004-05 are assumed to be same. It is justified since steps for improving on the targeting errors have not been taken since then. * Data for year 2012-13 is available only till 27 Feb 2013. Hence it is not taken for calculations. ** NSS Survey of 2009-10 divided per capita consumption in rural and urban categories and deciles @ As for Department of Food and Public distribution, Annual Report Feb 2013. Decomposition of staple subsidy (2011-2012) *
  13. 13. Cereal need Wheat production of India 94.88 million tons # as per population census 2011 ** weighed on scale Weight of wheat in our roti 0.03 kg ** Cereal need of our nation Weight of wheat in our roti No. of roti in a meal No. of meals Days in a year Population of India 0.03 X 4 X 2 X 365 X 1210193422# = 1.060129438 X 1011 kg % of wheat catering the need 89.498% Rice ₹ in crores Income transfer to poor 10363.05 Income transfer to non-poor 22998.444 Excess cost 7 ------- Cost of illegal Diversion 25391.335 Total Subsidy 58752.829 Subsidy paid by GoI 37775.255 Subsidy paid by private rice millers 20977.574 Wheat ₹ in crores Income transfer to poor 1418.25 Income transfer to non-poor 2495.315 Excess Cost 4730.237 Cost of illegal Diversion 11793.855 Total Subsidy 20437.65 Realise Real Lies X X X X Table 1 7 Procurement Price is decided on levy basis where a part of the subsidy is borne by the private rice millers. Hence, the Economic Price of rice is below the Market Price# . During 2011-2012, Source : Market trends and FCI M.P. = ₹ 30/kg E.P. = ₹21.8420/kg Table 2 Table 3
  14. 14. Realise Real Lies  Indian Union Budget, 2013  Department of Food and Public Distribution, Government of India, annual report, Feb 2013  Department of Food and Public Distribution, Government of India, annual report, Nov 2011  Food Corporation of India, financial section  Comptroller and Auditor General of India, Audit on FCI  Comptroller and Auditor General of India, Audit on PDS efficiency in Nagaland  Performance Evaluation of Targeted Public Distribution System (TPDS)- 2005, Planning Commission India  Department of Food and Public Distribution, Government of India, Appendix 3  Jute Commissioner of India, Statement of Account  Department of Agriculture and Cooperation, Government of India  PDS public portal of Government of India  Asian Development Bank, Economics working paper series  Indian economy, by Ruddar Datt and K.P.M Sundharam REFERENCES

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