The one time I really feel fleeced is when I want to have a soft drink in the middle of a flight. The soft drink can that you get in the market for thirty bucks costs as high as Rs 100 on a flight. Sandwiches and noodles retail for Rs 200.

A similar rip-off happens inside cinema theatres as well. Everything from soft drinks to bottles of water to popcorn is exorbitantly priced. In fact, the companies help both airlines as well as cinema theatres by producing the same products for them, but at a different maximum retail price. Hence, the same can of soft drink which costs Rs 30 outside, costs Rs 100 on an airplane. The same bottle of water which costs Rs 10 otherwise, costs Rs 30 inside an airplane or a cinema theatre.

This essentially means that companies end up offering the same product at different price points at different places. This essentially violates what economists call the One Product-One Price principle. And what is this principle? As the Economic Survey of 2015-2016 points out, it is basically the “intuition that products which are essentially the same should be charged essentially the same price.”

What allows airlines and cinema theatres to charge more is the lack of an option. When one is inside an airline, there is no other option. And the same stands true for a cinema theatre as well. Hence, the violation of the one product, one price principle does not have any repercussions.

But the same cannot be said about other walks of life. Take the case of the subsidised goods that the government offers the citizens. This includes rice, wheat, kerosene and sugar, among other things When these goods are sold through the public distribution system constituting of around five lakh fair price shops all over the country, they are offered at a price which is much lower than their market price.

And what does this do? It violates the one product one price principle. Let’s take the case of rice. It is available at a price of Rs 3 per kg under the National Food Security Act. In the open market, rice sells at many times this price. Hence, it is but natural that the rice which has to be supposedly distributed through the public distribution system at an extremely cheap price finds its way into the open market.

This violation of the one product one price principle leads to “incentives to divert the subsidised commodity from eligible to ineligible consumers”. What is true about rice is also true about wheat, kerosene, sugar, domestic cooking gas and urea.

In a research paper dated January 2015 and titled Leakages from PDS (PDS) and the Way Forward, economists Ashok Gulati and Shweta Saini, put the leakage of the public distribution system for the distribution of rice and wheat at 46.7 per cent. In absolute terms the leakage was at 25.9 million tonnes. This basically means that nearly half of the rice and wheat distributed through the public distribution system doesn’t reach those it is meant for.

The leakage rate in case of kerosene is 41 per cent. In case of sugar it is 48 per cent. In case of urea the leakage rate is 41 per cent. As the Economic Survey points out: “The 75 per cent subsidy on agricultural urea creates a large price wedge which feeds a thriving black market diverting urea to industry
and possibly across the border to Bangladesh and Nepal.”

This basically means that the government ends up wasting a lot of money that it spends on subsidies. What is the way out of this? The answer may very well lie in cash transfers, wherein money is directly deposited into the Aadhar-linked bank accounts of citizens, allowing them to buy these goods at their market price from the open market.

This will ensure that the violation of one product one price principle comes to an end and the government subsidies are well spent.

The column originally appeared in Bangalore Mirror on August 24, 2016



Forget Grains On Subsidy, India’s Poor Can Really Do with the Cash Instead


In the column dated July 21, 2016, I had said that the Food Security Act does not really provide “food security” to the citizens of this country. And given that nearly three years have passed after the passage of the Act, it is time that the government took a relook at the functioning of this Act.

In case you haven’t read the piece that appeared on July 21, 2016, I suggest you do that, before getting around to reading this one.

Other than the fact that the Food Security Act does not provide food security, there is also a lot of wastage of rice and wheat that are distributed to the citizens of this country under the Act.

The food grains are distributed using the network of around 5,00,000 fair price shops located all over the country. The trouble is that this network is extremely leaky. Economists Ashok Gulati and Shweta Saini calculate this leakage in a research paper titled Leakages from the Public Distribution System and the Way Forward.

In this research paper Gulati and Saini calculate the total amount leakage through the public distribution system. The union government supplies rice and wheat to states and union territories in order to meet the grain distribution commitments under the Food Security Act. Over and above the normal allocations, ad-hoc allocations are also made.

Further, the state wise monthly per capita consumption of rice and wheat is also available. This is used to calculate the consumption numbers of rice and wheat for every state. As Gulati and Saini point out: “The grains off-taken by each state gives the total grain supply in the year and the consumption figures give how much is received by the targeted consumer. The excess of what is supplied over what is consumed should reflect the extent of leakage of grain from the system. Our calculations show that in 2011-12, 25.9 MMTs or 46.7 per cent of the off-taken grain leaked from the public distribution system.” Hence, a little less than half of the grains distributed through the public distribution system do not reach those who they are meant for.

In fact, in 15 states, the leakage was more than 50 per cent. This included: Delhi (82.6 per cent), Gujarat (72.2 per cent), Haryana (70.3 per cent), West Bengal (69.4 per cent), Bihar (68.7 per cent) and Punjab (60.7 per cent). In fact, in some North Eastern states, like Nagaland and Manipur, the leakages were as high as 95 to 97 per cent. In absolute numbers, Uttar Pradesh comes at the top of the list. This is followed by West Bengal, Bihar, Maharashtra, Rajasthan and Madhya Pradesh.

Other estimates suggest that the leakage of the public distribution system is anywhere between 40 per cent to 54 per cent. Hence, the point is that the leakage of the public distribution system run through the five lakh fair price shops, is excessive. It means that a major portion of the food grains distributed through these shops does not reach the intended beneficiaries.

As the Report of the High Level Committee on Reinventing the Role and Restructuring of Food Corporation of India (better known as the Shanta Kumar committee report) points out: “Leakages don’t happen in a vacuum. There is connivance at several levels, breeding corruption. It is now time to think out of the box and find some alternative policy solutions that can plug such large scale leakages and associated corruption, and that can ensure that benefits reach directly to the neediest.”

And how can this be done? The answer lies in giving cash directly to the beneficiaries of the Food Security Act. There is this great belief among the well-off that giving money directly to the poor will mean that the men will simply drink it away. This argument only sounds true because it plays on a stereotype of the poor being poor because they waste their time drinking.

Nevertheless, as economist Joseph Halon points out: “Poverty is fundamentally about a lack of cash. It’s not about stupidity.” (Source: Rutger Bergman’s Utopia for Realists). Hence, if poor do get money under an unconditional cash transfer scheme, they don’t waste it on alcohol and tobacco. In fact, there is enough research from all over the world that proves that.

As Rutger Bergman writes in Utopia for Realists: “The great thing about money is that people can use it to buy things they need instead of things that self-appointed experts think they need. And, as it happens, there is one category of product which poor people do not spend their free money on, and that’s alcohol and tobacco. In fact, a major study by the World Bank demonstrated that 82% of all researched cases in Africa, Latin America, and Asia, alcohol and tobacco consumption actually declined.”

In fact, such an experiment has happened in Delhi as well, and the results were along similar lines. As Gulati and Saini point out: “It is worth noting that a study by the Government of Delhi and SEWA, under the GNCTD-UNDP project, tested the effects of substituting PDS rations by cash transfers for BPL families in a west Delhi region in the year 2011. It found that the consumption of the studied food items did not fall, and interestingly, the consumption of items like pulses, eggs, fish and meat went up. Contrary to expectations, the alcohol consumption did not increase; rather, the efficiency of PDS shops surely increased!

The Food Security Act just distributes rice and wheat at subsidised prices. A nutritious meal is about consuming other food items as well. By giving cash directly to families, families can decide what is best for them. In fact, by moving to cash transfers, the country can save close to Rs 33,087 crore, Gulati and Saini calculate, and that is clearly a lot of money. This money can be better utilised elsewhere.

Given this, the Shanta Kumar committee has recommended that cash transfers should be introduced by starting with the “large cities with more than 1 million population; extending it to grain surplus States, and then giving option to deficit States to opt for cash or physical grain distribution.” The Committee has also said that the “cash transfers can be indexed with inflation” and “given to the female head of the family”.

The trouble is that the infrastructure that allows the government to do this (Jan Dhan bank accounts seeded with Aadhar numbers) is not yet ready. The sooner this gets ready, the better it will be for the nation as a whole.

The column originally appeared in Vivek Kaul’s Diary on July 28, 2016