INDIAN policy makers face a stark question: Can the National Food Security Act, 2013 (NFSA) make a serious dent on the problem of food and nutritional insecurity in India within a reasonable time frame, and within reasonable cost? This is one of the more hotly debated issues since the Food Security Bill was first introduced in the Parliament, passed in 2013, and given the President’s assent on 10 September 2013. Responses vary widely.

On one extreme end are its votaries and promoters who see it as the ultimate Brahmastra (most powerful weapon of all) to solve India’s complex and sticky problem of hunger and malnutrition, while on the other extreme are those who feel it would be a massive waste of resources without giving much benefit. To be honest and candid, my own position is somewhat on the side of the skeptics, though not as extreme as made out by some opponents. I feel that we will be muddling through this NFSA at least in the short to medium term (for the next couple of years, or maybe even five) without gaining any serious traction to attack the problem of hunger and malnutrition. And in the meantime, there are high chances that we will be spending huge sums of money, distort the grain markets to an extent that there would be large efficiency losses, which may ultimately outweigh the welfare gains that we are trying to achieve. And this will happen because, fundamentally, as I see it, the policy design is flawed.

In essence, what the NFSA is trying to achieve is an equity objective (extending economic access to food for the poor) by using a price policy instrument, instead of an income policy instrument. So, there is high probability that it will fail to deliver on the promises made, or will deliver at a huge cost, which may not be worth the price. It would be more cost effective to use an income policy instrument, say conditional cash transfers, which is the best international practice, to achieve the desired ends. After all, the art of policy making lies in attaining ends with least cost. But before one can say all this, one must know what it contains and what are its biggest challenges, and whether the government can overcome all those within reasonable time and at low cost.

 

What are the key elements of NFSA? Very briefly, NFSA adopts a life cycle approach, promises to give five kilograms of cereals per person per month (pppm) at highly subsidized rates (Rs 3/2/1 per kg of rice/wheat/coarse cereals respectively) to 67% of the population (75% rural and 50% urban) (7 kgs pppm for those covered under Antyodaya Anna Yojana/AAY). The pregnant and lactating mothers get free meals from anganwadis (along with Rs 6000 as maternity benefits); children in the age group of six months to six years also get free meals from anganwadis, and those from six to 14 years, free mid-day meals in their schools. This is broadly the size and structure of support through which government wishes to banish hunger and malnutrition from India.

What are the major weaknesses and operational challenges to NFSA? First, it must be noted that the average cereal consumption in India is 10.7 kgs pppm (NSSO, 2009-10 data). So, if the NFSA is giving basically five kgs pppm (except those under AAY), people will have to buy at least half of their cereal requirements from the open market. So what happens to the price of cereals, especially wheat and rice, in the open market has significant implications for the common man. Currently, towards the end of 2013, the cereal inflation rate has hovered between 12 to 16% for the last six months. This is an unacceptably high rate of inflation, especially when the government is saddled with hugely excessive stocks. It amounts to giving food subsidy from one hand to the poor through NFSA, but taking it away through high cereal inflation from the other.

 

Second, the Public Distribution System (PDS) which is the main vehicle through which highly subsidized cereals have to be distributed is known to be highly leaky. The Commission for Agricultural Costs and Prices (CACP) studies, based on the NSSO data on what consumers have received from PDS and what is supplied by the states as per the records of the food department point out that in 2009-10, the rate of leakage was about 40% at an all India level and as high as 71% in a state like Bihar. Admittedly, there are provisions in the act for end to end computerization of PDS, use of Unique Identification Number with biometrics and iris scans to authenticate the beneficiaries, and plug the leakages. But the situation on the ground in December 2013 is that more than half the states are not ready even with beneficiary lists, not to talk of computerization of PDS.

The central government hopes to get all this done within a year (earlier it wanted to within six months). But several states, most notably Uttar Pradesh and Bihar, are in no mood to relent as they do not have the infrastructure in place to operationalize distribution. In this situation, one may ask: why could it not be done before hand? What was the hurry to promulgate an ordinance and then get it approved as an act without first doing the ground work necessary to launch it? The answer lies in the political realm and we refrain from commenting on that. Suffice it to say that this reflects the typical ‘muddling through’ approach of Indian policy making, which does not lend it much credibility.

Third, this act is likely to substantially distort the grain markets, which will have repercussions on the whole economy. To cite the current situation, in the second half of 2013, food inflation has been a major problem, which is not letting the RBI lower interest rates and kick start the growth impulses in the manufacturing and services sector. While the prices of edible oils, sugar, pulses, and even coarse cereals have been moderating, and most of them are below last year’s levels, the prices of wheat and rice and vegetables are very high. While vegetables price inflation (driven especially by onions) is more seasonal in nature, wheat and rice price inflation remains a puzzle given the large stocks in government godowns. As on 1 July 2013, the government had 74 million tonnes (mt) of stocks of wheat and rice, and a year before on 1 July 2012, 80 mt, against a buffer stock norm of only 31.9 mt.

 

One key reason why the government is sitting on this pile of stocks is that it feels it may require much more grain for distribution under the act, and therefore needs to hold on to all the stock. There is even talk of substantially revising the buffer stock norm upwards. CACP’s research (see its Discussion Paper 6 on Buffer Stocking Norms by Ashok Gulati and Surbhi Jain, May 2013) reveals that these norms can be 42 mt, or 47 mt or 52 mt under three alternative scenarios. The CACP favours the lower side of these norms (42 mt) for efficiency reasons, while the most expensive and inefficient processes would demand 52 mt. Even if one takes these new (under discussion) norms as indicators of the need to hold stocks, the actual stocks are still way above these, clearly signalling huge economic inefficiency in grain management. And since the government has become the largest hoarder of grains, it is responsible for creating scarcity in the open market and driving up cereal inflation in the country. And it is the poor, whose cereal consumption is a little higher than 10.7 kg pppm, who suffer the most from this.

The chances are that these distortions are only likely to increase in the years to come. Already, in many states, taxes and other levies on wheat and rice are as high as 14.5% (as in Punjab), and 70-90% of market arrivals (say in Punjab, Haryana, Andhra and lately Chhattisgarh and Madhya Pradesh) are being procured by state agencies, leading to a de facto takeover of the grain trade by the state. The CACP has already recommended to the government that it should ask the Competition Commission of India to look into this matter as state monopsony is as bad as private monopoly. So far there is no action on that front, and an open-ended distorted structure of procurement is tying up huge resources without serving any purpose, and driving up domestic cereal inflation, adversely hitting the poorest of the poor.

 

The fourth challenge is on the fiscal front. The financial implications of the NFSA are likely to ramp up quickly, which the state may find difficult to afford, given an already precarious situation on the fiscal front. The current estimate is that the direct cost of food subsidy for a full year roll out to distribute roughly 61.2 mt of grains will cost the government Rs 130,000 crore (the budget for FY14 is Rs 90,000 crore). It may be noted that these are the direct costs. Schedule III of the NFSA does point out that for the purpose of advancing the cause of food security, added investments would be needed (i) in revitalization of agriculture (in agri-R&D, irrigation, remunerative prices, crop insurance, and so on); (ii) in procurement, storage and movement (godowns, railways, procurement machinery, etc); and (iii) access to safe drinking water and sanitation, health care, nutrition, health and education support to adolescent girls, etc.

Since these investments fall under the purview of other line departments, there are no estimates attempted by the department of food to tabulate the full cost (direct and indirect) of the NFSA. Our research in this area (see CACP Discussion Paper 2 on National Food Security Bill by Ashok Gulati, et al., December 2012), and back of the envelope estimates suggest that the real cost of this act will be at least Rs 600,000 crore for the first three years (Rs 200,000 crore per year), Only if it is implemented sincerely will it have any meaningful impact on the problem of food security and malnutrition in the country. But the reality suggests a muddle through approach again. The country may not invest in the supporting facilities, and even after 10 or even 20 years we may still be debating the same issue.

 

Fifth, availability of grain may remain an issue. Today, India has surplus cereals. Stocks with public agencies are overflowing; in fact, there is more grain than can be safely stored, leading to large wastage and quality deterioration. But will there be ample cereals supply from domestic production in the years to come? The answer is most probably ‘yes’, but with large fluctuations. Remember that in 2002-03, a drought year, foodgrain production fell by 38 mt. Where will India go to buy so much grain in the international market? The global rice market is around 35-36 mt, and if India enters the market with a demand for 10 mt, rice prices would simply explode.

This is just to stress the point that India needs to invest heavily in irrigation if it is to stabilize its grain production. There are already more than 300 pending irrigation projects, which have lingered on for years due to paucity of funds. If no new irrigation scheme is taken up, the existing projects themselves need more than Rs 300,000 crore of additional investment for completion. The existing allocation is about Rs 15,000 crore per annum. At this pace, it will take at least 20 years, if not more, to stabilize grain production in the country.

Unfortunately, drought is unlikely to wait for 20 years! In fact, given the pace of climate change, the frequency and intensity of droughts (and floods) is likely to increase. What will happen to this commitment of distributing 61.2 mt of cereals at highly subsidized rates at that time has perhaps not been fully factored in. One may say that the NFSA has a clause of force majeure, which states that the state shall be liable for a claim by any person entitled under this act, except in the case of war, flood, drought, fire, cyclone or earthquake affecting the regular supply of foodgrains or meals to such person under this act. The inclusion of drought and flood under this clause is surprising as India faces droughts and/or floods every fourth year or so. That’s the time when people need state support most, and if help disappears at this critical juncture, one may well ask, what is the point of such an act? Is it just a promise on paper or is it a reality? Also, if compensation is to be given in cash, how would it happen if we have not sufficiently developed the infrastructure for that.

 

Where does one go from here? All the operational challenges elucidated above point to a very weak preparation for effective implementation of NFSA. It needs a minimum of two to three years, if not more, of ground work in fixing the highly leaky PDS; in streamlining the procurement machinery; fine-tuning the rules on taxes, levies, etc.; and in creating proper storage and movement facilities for effective implementation of NFSA. Since we have not done that, in all probability, we will muddle through, as we did in MNREGA or many other such ‘entitlement schemes’, leading to way sub-optimal results.

 

How can we mend it at this stage? CACP has suggested that the government should gradually switch over to conditional cash transfers. Besides being the best international practice, it will not interfere with the grain markets, and in fact, will help consumers enjoy a more nutritious diet than just cereals. This is well demonstrated by the studies on Brazil, Mexico, and many others countries. Lately, even Pakistan has dismantled its fair price shops and moved on to income support to the poor under its Benazir Bhutto Income Support Programme in 2008. Luckily, the Indian act does have the provision of cash transfers under its chapter III. It says that in case of non-supply of the entitled quantities of foodgrains or meals to specified persons, such persons shall be entitled to receive food security allowance from the concerned state government to be paid to each person, within such time and manner as may be prescribed by the central government.

The technology of UID provides the platform to do it, even enable a choice whether the person wants cash or grains. True, it cannot be done right away across the country, but with the registration of about 600 million people under UID by end of 2013, one can initiate this to begin with in 53 cities/ urban agglomerations of more than one million population, as per 2011 Census. The cities will have the necessary financial infrastructure to get it moving quickly. The amount of cash transfer should be the difference between the economic cost of FCI and the issue price. In case of wheat, the current economic cost is about Rs 22/kg and the issue price promised under the act is Rs 2/kg. Thus, it would amount to Rs 100 pppm (Rs 20/kg multiplied by 5 kg). So, for a family of five, it would amount to a cash transfer of Rs 500 per month. In case of rice the amount will be more as its economic cost is around Rs 26/kg.

In phase two, this should be extended to all farming families. Currently, those farmers who produce food, and held back a significant part for self-consumption, now first bring larger surplus to the government for procurement and then expect the government to give it back at a highly subsidized rate. The problem is that as soon as the government touches the grain for procurement, its cost goes up by 50% on top of MSP. So, if it is paying say Rs 1400/qtl for wheat as MSP, its economic cost is likely to be more than Rs 2200/qtl. In a situation where government does not have good infrastructure and the state machinery is inefficient, it is better to minimize the load on the government for physical handling of grains. So, all farming families can be given cash.

 

At the end, if some remote areas or tribal belts need to be served with physical distribution of grains, the government can continue doing that. But that segment will be much smaller. Giving an option to people to choose from cash or grains is the best way to go, and UID is equipped to do it.

Whether India can make this transition and save on massive resources for better use will have to be seen. Our estimates are that at least 30-40% of food subsidy can be saved, and given to the poor people by augmenting income support. But that will need a change in mindset, moving from an old philosophy and instruments of state grain takeover to new instruments of UID and cash, and having faith in people that they will spend on what is good for them.

 

On nutritional security, one often hears about high rates of malnutrition amongst children in India (more than 40% for children up to five years of age). However, it may be noted that the global and Indian research in this area reveals that there are three key determinants of nutrition: (a) availability and access to adequate and nutritious food; (b) access to safe drinking water and sanitation (especially toilets); and (c) female education. All three factors have a roughly similar weight in the equation. So, in a country where almost half the population does not have access to safe drinking water or toilets at home, where the dropout rates in schools are more than 60% (from class I to XII), especially for females in higher secondary classes, and where more than 40% of schools and anganwadis do not have hygienic kitchens or toilets, how can one deal with malnutrition of children through one mid-day meal or through five kg of cereals pppm? It must be recognized that malnutrition is a multi-dimension problem and will need a multi-pronged approach, asking for much higher resources than provisioned in the current NFSA.

Given all this, it does not seem realistic to expect that in the next three to five years or even 10 years, the current form of NFSA can make a serious dent on food and nutritional insecurity in India. On the other hand, the growth process itself is leading to much faster reduction of poverty, at 2.2% per annum during 2004-11, almost three time faster than was achieved during 1993-2004 (0.7% per annum). This growth process is also driving the rural wage rates up, and may contribute to reduction in food and malnutrition insecurity in due course.

 

* The views expressed are personal.