Managerial Economics Group Project Team - GENEVA

Amit Rungta Neeraj Mohan Somdeep Deb Deepak Khandelwal Rajendra Vijay

MANAGERIAL ECONOMICS

PUBLIC DISTRIBUTION SYSTEM in INDIA

MANAGERIAL ECONOMICS

What is Public Distribution System?



PDS means distribution of essential commodities to a large number of people through a network of FPS on a recurring basis. The major commodities are as follows : Wheat Rice Sugar Kerosene

 PDS evolved as a major instrument of the Governments economic policy for ensuring availability of food grains to the public at affordable prices as well as for enhancing the food security for the poor.  PDS is operated under the joint responsibility of the Central and the State Governments. MANAGERIAL ECONOMICS

Public Distribution System Brief History:

The Oldest PDS System: Maurya Empire, Mughal Empire. The British Rationing System: Introduced in 1939 in Bombay for stabilizing food prices The PDS was expanded to many cities & towns to address the scarcity caused by the World War II & the Bengal Famine

Independent Indian PDS: The PDS evolved as a system of management of food scarcity and for distribution of food grains at affordable prices Each 5 year plan usually brings about some changes in the PDS MANAGERIAL ECONOMICS

Public Distribution System Objectives & Major stakeholders:

The Public Distribution System (PDS) was institutionalized in the country in the 60s to achieve multiple objectives including ensuring stability of prices, rationing of essential commodities in case of deficit in supplies, ensuring availability of basic commodities to the poor and needy and to check the practice of hoarding and black marketing.

Major Stakeholders:
 Central Government:

 State Government  Food Corporation of India:  Fair Price Shops

MANAGERIAL ECONOMICS

Universal Public Distribution System:

 Does not distinguish between different income groups of the society.  Original PDS launched in 1960 was universal.  Backed by Nobel laureate Amartya Sen & Economist Jayati Ghosh.

Advantages:
Defence of  Economies of scale Universal PDS  Reduction in transaction cost & administrative hassles.  Rich & politically influential have stake so the process is without any political hindrances.  States like Kerala, TN, AP defined BPL in such an inclusive way that majority of the population is covered.

Success Story Tamil Nadu:

The success of the scheme in Tamil Nadu relies heavily on groundwork. The mammoth task of minimizing diversion and reaching 317,000 tones of rice to more than 1.97 crore Cardholders who draw rations from about 31,439 outlets in 32 districts (including the newly formed Ariyalur and Tiruppur) involves technological interventions, drawing up innovative fool-proof delivery mechanisms, old-fashioned policing, surprise checks and constant reviews, and fixing responsibility at each level.
MANAGERIAL ECONOMICS

Issues with Universal PDS & emergence of Targeted PDS:

Major issue with Universal PDS pre 1997: How to define Disadvantaged section of society? No standard norm available to identify BPL families across states.

Increase in inter regional disparities & effect on fiscal deficit (10% in 1996)

Hence, TDPS was launched across all states Dedicated to people below Poverty line. Transitory allocation also available for people above Poverty Line at a higher price.

MANAGERIAL ECONOMICS

Targeted Public Distribution System:

The scheme was initially announced in the year 1997 but could not be implemented in NCT Delhi immediately, mainly for two reasons namely, for want of actual identification of the BPL families and the desire of the Govt. of NCT Delhi to make the scheme more broad based. Hence it was finally launched in 2000 in the form of ANTYODAYA ANNA YOJANA (AAY)

AAY launched in December, 2000 for 1 crore poorest of poor families (BPL)

First expansion : 2003-2004 by adding another 0.5 crore BPL households .

AAY was further expanded in 2004-2005 by adding another 0.5 crore BPL families.

AAY was further expanded in 2005-2006 to cover another 0.5 crore BPL households (i.e. 38% of BPL)

As on 30.04.2009, 2 42.75 lakh AAY families have been covered under this scheme.

MANAGERIAL ECONOMICS

Targeted Public Distribution System Leakage & Diversion:

For every Rs. 4 spent on PDS, only Rs. 1 reaches the poor 57% of the PDS food grain does not reach the intended people

As per FAO 400 million poor and hungry people in India. India is food surplus nation, still there is malnutrition and hunger.

The major reasons for leakage and diversion in PDS are:

 Inclusion Error.

 Ghost Cards.  The non-viability of FPSs.

MANAGERIAL ECONOMICS

Recommendations:
Viability of FPSs Involvement of PRI Monitoring of delivery Photo Identification mandatory

Integration with UIDAI

Greater control of resources by women

Concept of food coupon/ food stamp an alternate theory

Case Study (Brazil):

Bolsa familia program started in 2001 aimed at education. Expanded in 2003 to include food and fuel. Now cover 2.6 million families. Govt. transfers cash to family subject to condition like school attendance, nutritional monitoring, prenatal and post natal tests. Poverty level dropped by 15% from 2003-09. MDG 2000 sought to halve poverty by 2015.Cost of cash transfer 0.4% of GDP ( India spends 2% of GDP on subsidies) MANAGERIAL ECONOMICS

Recommendations (Economists point of view):

Madhura Swaminathan: In a country like India where the target group is very large, and where it is clearly important to focus on ensuring that the malnourished are reached, A Universal scheme is better than a narrowly targeted scheme. Targeted schemes are more difficult to administer than universal schemes, and the administrative costs involved are proportionately higher than for a universal scheme. Ref: http://www.hinduonnet.com/2004/08/03/stories/2004080300331000.htm Kaushik Basu (Chief economic advisor in the Union finance ministry: We usually like to keep procurement to less than a third of production. The total production last year was 218 mt. So it is double, provided we do not lose grain to leakages. Under the current system, operating through the PDS, we end up losing a lot of the targeted grain to illegal sales on the open market..... So, the short answer is, yes, it is feasible, provided we are willing to fix the leakages in the delivery mechanism we use to reach the poor. Ref: http://www.business-standard.com/india/news/qa-kaushik-basu-chief-economicadvisor/414099/ Bharat Ramaswami : Food subsidy (7.3% of tax revenue) is expensive not just because of transfers to the non-poor but also because of fraud (because of illegal diversions of grain to the market) and excess distribution costs of the PDS (relative to the private sector). The future of food subsidy programs is unlikely to lie in a centralized PDS. A regionally differentiated safety net of food subsidies (but financed primarily by central government funds) is likely to offer more opportunities for designing and delivering subsidies appropriate to local consumption patterns and capabilities. MANAGERIAL ECONOMICS Ref: http://www.isid.ac.in/~bharat/Doc/oxford_pds2.pdf

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