SPECIAL ARTICLE

What Is the Cost of Providing One Rupee

of Support to the Poor?
Assessing the New PDS
Suman Chakrabarti, Pallavi Rajkhowa

The enduring equity-efficiency debate on Indias food

policy revolves around two key issuesleakage of
cereal grains from the system, and reduction in benefits
at the extensive margin to reduce the fiscal burden.
Using descriptive analysis and costing techniques, it is
found that the public distribution system works well in
regions with low market access, high cereal prices, and
high poverty. It protects households from inflation
through a price ceiling that automatically adjusts the
value of the real implicit transfer. However, the biggest
weakness is its one-size-fits-all approach. Even without
leakages, some states will not benefit as much from
such a costly cereal subsidy because of low market prices
for cereals in those states. Overall, it is found that
inclusivity and the possibility of leakage reduction,
thereof, has the potential to deliver a net gain of
$1 billion in social welfare from the status quo.

his paper follows up on articles in this journal that have

discussed the implications of the National Food Security
Act (NFSA) that was enacted in 2013. It seeks to connect
the insights from articles by Drze and Khera (2013, 2015),
Himanshu and Sen (2013a, 2013b), Svedberg (2012), Sinha
(2013) and Mishra (2013) into a costing framework for efficiency
analysis. Among other things, this paper attempts to decompose the NFSA at both the national and state level. Given the
raging debates surrounding the future of the public distribution
system (PDS), this study aims to go beyond the existing literature by making comparisons between costs and implicit consumer subsidies at an aggregate level in the presence and absence of leakages under different scenarios. We address gaps
in the literature by correcting for the base population, using
the latest poverty figures, and calibrate National Sample Survey Office (NSSO) multipliers with census data. Further, we
aim to observe NFSAs implications on quantity, implicit transfers and fiscal costsstatewise. We link current and possible
future trends with the existing theoretical and empirical literature on food transfers. We also give quick estimates of costs
and implicit transfers using the recommendations made by the
Shanta Kumar High Level Committee (HLC).

Cereal Surpluses and Chronic Hunger

We express our gratitude to Avinash Kishore, Harrold Alderman, Jean

Drze, John Hoddinot, Chris Desmond and Patrick Ward for providing
a rich set of comments and valuable feedback for this paper. This paper
also benefited from the guidance of Purnima Menon, P K Joshi and
Rasmi Avula. We thank Vinay Sonkar, Christine McDonald, Anjani
Kumar, Mamata Pradhan, Parul Tyagi and Michael Rahija for their
support. We also thank the referee who provided insights for the final
revision. Errors are our own.
Suman Chakrabarti (s.chakrabarti@cgiar.org) and Pallavi Rajkhowa
(P.Rajkhowa@cgiar.org) are researchers at the International Food Policy
Research Institute, New Delhi.
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vol l no 52

Home to over 1.25 billion people,1 India produced over 290 million
metric tonnes (mt) of cereal in 2014, making it the third-largest
cereal producer in the world.2 At the micro level, this translates
to a situation where India produces enough cereal to feed each
Indian about 19 kg of cereals every month. Under different
scenarios of income growth, monthly per capita consumption
of rice and wheat in 2025 is forecast to decline to 5.5 kg and 4.1 kg,
respectively, from their 200405 levels of 6.1 kg and 4.4 kg
(Ganesh-Kumar et al 2012). According to these estimates India
can currently feed every Indian 11 kg of cereal on average and
is left with an 8 kg per capita surplus for buffers and exports.
Yet, the abundance in cereals is not reflected in Indias
performance on important food-related human-capital indicators. In fact, India does rather poorly on the Global Hunger Index
(GHI), which combines undernourishment, child underweight,
and child mortality into one equally weighted indicator
(GHI 2014). India currently ranks, 120th among 128 countries
on the GHI. Indias poverty headcount ratio (HCR) at $1.25 a
day (in purchasing power parity (PPP) terms) was 32.7%
of the population in 2010.3 It fell sharply to 23.6% in 2012.
83

SPECIAL ARTICLE

Economists have attributed a portion of this decline to the success of the New Style targeted PDS.
Himanshu and Sen (2013a) contend that the impact of in-kind
food transfers on HCR reduction, which was 2.6 percentage
points in 200405 and 4.6 percentage points in 200910,
increased further to 4.8 percentage points in 201112. Drze
and Khera (2013) report that at the all-India level, the PDS is
estimated to reduce the poverty-gap index of rural poverty
from 18% to 22%. The causal mechanism might have been a
nudging effect (Khera 2014) that induced households to
consume more calories in a given day and thus made them
jump over the calorie or income threshold that determines
poverty-line calculations in India.
The Right to Food

Keeping the aforementioned in view, the Supreme Court of

India signed the NFSA in 2013. It is the most comprehensive
reform of the Indian food safety net system since independence.
It encompasses a range of policy instruments and welfare
schemes including the PDS, Mid-day Meal (MDM) scheme,
Integrated Child Development Services (ICDS), and maternity
entitlements, among others. Indias poor performance on
nutrition indicators requires a life cycle response, which NFSA
promises. Both Supplementary Nutrition Programme (SNP)
and MDM procure large amounts of their food supplies from
the Food Corporation of India (FCI) which also supplies grains
through the PDS.4 Under NFSA, PDS now provides a legal
entitlement to receive cereal grains at subsidised prices to 75%
of rural population and 50% of urban population with a quota
of 5 kg cereal per person per month for below the poverty line
(BPL) persons and 35 kg per month for Antyodaya Anna Yojana
(AAY)for the poorest families in India. They were to be
priced at Rs 3/Rs 2/Rs 1 per kg for rice, wheat and coarse
grain, respectively.
Fiscal Stress and Leakage

By covering beneficiaries through various stages of life by using

welfare schemes designed for target groups, the NFSA envisioned
a more food secure India. Despite the reported success of the
PDS in recent years, the NFSA has faced criticisms on two
grounds, fiscal strain and inefficiency. The PDS is immensely
costly. In 2012, it cost around 12% of Indias total tax receipts.5
Thus expanding its scale further fuelled a debate on additional
costs, ushering a series of estimates that were put forth by
economists (Mishra 2013; Sinha 2013; Bhalla 2013; Gulati et al
2012; Kotwal et al 2013). Khera (2013) expects the NFSA to lead
to an increase of cost by $4.9 billion in food subsidy, that is,
from the current $14.7 billion to $19.6 billion, approximately.
In many states however, the PDS is riddled with inefficiency
that manifests as considerable leakage of foodgrain (Drze and
Khera 2015; Svedberg 2012; Himanshu and Sen 2013a; Rukmini
2015a, 2015b). Leakage is an imputed measure that is computed
in the following way. The FCI publishes statements of the
amount of cereal grains it transfers to each state in a given year.
Economists then estimate the amount delivered to households
using large nationally representative surveys. The difference
84

between the amounts transferred, as reported by the government,

and the transfer received by households, is imputed as leakage.
Over a third of the grain released to states on average, does
not reach the intended beneficiary (Khera 2011). It is either
syphoned off into the black market or rots in storehouses of the
FCI (Venkatesan 2010a, 2010b). There have been several
reports of massive amounts of grain that rots in FCI stores (PTI
2010). One encouraging outcome of a larger PDS was lower
leakage seen in states that had high coverage levels. The leakage
levels seem to be inversely linked with high coverage in many
states, that is, showing signs of reducing, as the scale of the
PDS got larger (Himanshu and Sen 2013a). However, Uttar
Pradesh, West Bengal and Delhi, all densely populated states,
show persisting leakage even with expanding coverage.
Early in 2015, as a response to the criticisms made to the PDS
and NFSA, the Government of India commissioned the HLC to
assess the PDS. The report of the HLC, Reorienting the Role and
Restructuring of Food Corporation of India recommends:
(i) Government of India should defer implementation of NFSA
in states that have not done end-to-end computerisation; have
not put the list of beneficiaries online for anyone to verify;
and have not set up vigilance committees to check pilferage
from PDS.
(ii) NFSA coverage should be brought down to around 40%.
(iii) Priority persons to be given 7 kg/person per month
instead of 5 kg.
(iv) Central issue prices should be linked to Minimum
Support Price (MSP) for BPL households (suggested 50% of
MSP).
(v) Targeted beneficiaries under NFSA or targeted PDS to be
given six months ration immediately after the procurement
season ends.
(vi) Gradual introduction of cash transfers in PDS, starting
with cities with a population of more than one million, extending it to grain surplus states, and then giving option to deficit
states to opt for cash or physical grain distribution.
The HLCs recommendations imply an increase in per capita
entitlements for existing beneficiaries of the PDS. However, it
reduces the overall value of the entitlement by an increase in
the issue price to half the MSP. The MSP has been increasing
year after year and was at Rs 14 a kg for grade-A rice and wheat
in 2014.6 Linking the MSP and the PDS price would imply that
beneficiaries would have to pay more for their entitlement every
time there is a hike in the MSP. The HLC does not wish to cover
any more beneficiaries through PDS and thus is less inclusive
than NFSA.
Data and Methodology

At the outset of this section, we state that our objective is to

answer the following questions about the NFSA, HLC and PDS
in general: (i) How much more cereal grain (quantity) and
financial benefits (implicit income transfer) are beneficiaries
entitled to under NFSA as compared to the existing PDS in
2014? (ii) How much more will the consumer subsidy under the
NFSA cost the central government as compared to the existing
PDS in 2014, nationally and statewise? (iii) By how much do
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costs outweigh implicit transfers under different scenarios?

How do leakages affect benefit to cost ratios? (iv) How does
NFSA compare with HLC in these aspects?

access to the PDS. This scenario establishes upper limits for

PDS procurement under the NFSA, ceteris paribus.

(iii) HLC Scenario: In this scenario, we assume that the population continues to grow at a constant rate and the poorest 50%
of rural households and the poorest 20% of urban households
(intended beneficiaries of the HLC) receive their cereal entitlements. The quantity quota under HLC recommendations is 35
kg for AAY households and 7 kg for BPL persons. Rice/wheat/
coarse grains will be sold at half the MSP via PDS for priority
households, while prices for AAY households will continue to
be Rs 3/2/1 per kg for rice/wheat/coarse grains.
To estimate costs and implicit benefits for the three scenarios
we use monthly per capita consumer expenditure incurred by
households in 201112 as the proxy variable to measure poverty
rates across states. The intended beneficiaries of the NFSA are
captured under the first three quartiles of the rural population,
and the first two quartiles of the urban population. Any PDS
users from the remaining parts are defined as the
Table 1: Data Sources and Assumption Used for Projections
Data
Current PDS
NFSA
HLC
unintended beneficiaries of the system. Similarly,
Population Census of India 2011
for HLC scenario we define 40% of the populaBeneficiaries Monthly per capita consumption expenditure to proxy poverty
tion as intended beneficiaries. We find a strong
Quantity
NSSO
As per NFSA
As per report rank correlation of 0.7 between our selection
Market prices NSS unit level prices aggregated at the state level for rural and urban areas
criterion and the governments poverty estimates.
Unit cost
FCI unit costs for rice and wheat (2014)
The correlation was particularly high for rural
PDS price
NSSO
As per NFSA
Half MSP
India (0.8), where the bulk of NFSA beneficiaries
Inflation
Trends in the Wholesale Price Index
are concentrated.
Leakage
Reduction in leakage based on national trends from Himanshu and Sen (2013a)
Next, using the derived annual growth rate (that
Source: Compiled by authors.
is, decadal growth rate divided by 10) figures proMethodology: The estimation methodology used in this paper vided in the Census 2011 data, statewise rural and urban popuis termed as the programme experience approach in the lation were projected for 2014.7 Once the target populations
literature. It has been used to estimate the costs of scaling up were identified under the three scenarios, statewise quantity
nutrition by the World Bank in 2008 (Horton et al 2010). It is estimations were made by multiplying current and expected
expected that future demand for PDS cereals could be affected future PDS cereal procurement (in kg) by the target population
by a variety of factors such as a food price rise, certainty and under the three scenarios. Scenario-wise implicit income
timeliness of PDS supply, the quality of cereals available at fair transfers or consumer subsidies associated with PDS entitleprice shops, and so on. In the absence of reliable parameter ments were calculated as the difference between subsidised
estimates of demand elasticities of cereals for targeted house- price at fair price shops and the open market price of cereals
holds, the second-best strategy is to establish reasonable lower multiplied by quantity.8 Costs were calculated under the difand upper bounds to costs and benefits under the NFSA. There- ferent scenarios as the difference between the economic costs
fore, this paper models costs and implicit transfers within of grain (total cost of delivering food through the FCI) and isthree scenarios:
sue price at fair price shops, multiplied by quantity.9
The three main estimating equations in their general form
(i) No Change Scenario: If the population continues to are expressed below:
grow at a constant rate and rates of consumption of cereals Cereal Quantity (Q) = Target Population (TP) x Entitlement (E)
from the PDS remain at their 201112 levels, that is, in a situa...(1)
tion when the NFSA is not enacted and the PDS continues in its Implicit Benefit (IB) = Cereal Quantity (Q) x Unit Subsidy (US)
current form. This scenario establishes lower limits for PDS pro...(2)
curement, ceteris paribus.
Cost (C) = Cereal Quantity (Q) x Unit Cost (UC)
...(3)
Data Source: Given a dearth of primary data on costs or benefits
with regards to the PDS, this study has relied on the best available sources of secondary data. The main secondary sources of
data used are: (i) population census of 2011, and (ii) consumption expenditure data from the Ministry of Statistics and
Programme Implementation, specifically, the 68th round of
NSSO data (201112). The census data provide population figures segmented by states across rural and urban regions while
the NSSO data allows for the calibration of NFSA coverage with
census data by providing details of states, regions, existing PDS
beneficiaries, and a host of demographic variables. The study
has used per capita consumption expenditure information for
201112 as a measure of interstate poverty and coverage under
the NFSA (Table 1).

(ii) NFSA Scenario: (a) If the population continues to grow

at a constant rate and the poorest 75% of rural households and
the poorest 50% of urban households (intended beneficiaries
of the NFSA) receive their cereal entitlements under the NFSA.
(b) In this scenario, we also include any benefits or costs that
accrue from the unintended beneficiaries of NFSA who have
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Caveats and Other Considerations

It is also important to note that while comparing costs to implicit

benefits, if one takes the implicit benefit of the programme only
to be the dollar value of the transfer, one will never have
benefits exceeding costs. This is because there are latent
benefits such as nutrient intake which also has to be considered.
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SPECIAL ARTICLE

correlated with poverty.11 According to

our estimates, the NFSA will expand the BPL
list to persons living on less than Rs 72
per day in urban areas and Rs 55 per day
in rural areas at 201112 prices. In essence,
the NFSA expands the BPL list far beyond
the poverty line estimated by the Planning
Commission in 201112 (rural Rs 27.2 and
urban Rs 33.3). At a disaggregate level,
coverage rates would vary statewise
depending on the incidence of poverty
within states and across rural and urban
regions. Jharkhand, Chhattisgarh, Odisha,
Bihar, Assam, Madhya Pradesh, Uttar
Pradesh, West Bengal, Tripura and Manipur
were identified as states with the highest
incidence of poverty in rural and urban
India as per the identification criterion
80
90
100 used in the study (Figure 1).
At the national level, the NFSA intends
to cover an additional 34% of the rural and 29% of the urban
population through the PDS from its current levels. Moreover,
coverage of NFSA in rural areas will be almost universal in
most states with the high incidence of poverty. However, these
coverage rates under NFSA are only achievable if there are low
exclusion errors, regular supply, relatively small leakages, increased accountability, quality cereals, and a political will to
transform the old PDS to the new PDS akin to Chhattisgarh
or Tamil Nadu. In contrast, the HLC recommends that the coverage would be brought down to around 40%. Our estimates
show that around 44% households are covered under the current PDS. At the state level, the picture is more complicated.
Out of those states identified as high poverty, Uttar Pradesh,
Jharkhand, Bihar, Assam and Madhya Pradesh require improvements at the extensive margin via coverage expansion.
While states like Nagaland, Manipur, West Bengal and Gujarat
require improvements at both intensive and extensive margins.

Figure 1: Governments Rural Poverty Estimates and Additional Coverage under NFSA
Punjab

7.7

28.3

Haryana

11.6

25.4

Kerala

9.1

27.9

Himachal Pradesh

8.5

38.5

Jammu & Kashmir

11.5

GoI

Additional

Poverty

Coverage

Estimate

under
NFSA
49.5

Andhra Pradesh

11.0

51.0

Uttarakhand

11.6

50.4

Tamil Nadu

15.8

48.2

Rajasthan

16.1

50.0

Maharashtra

24.2

43.8

Gujarat

21.5

47.5

Karnataka

24.5

49.5

West Bengal

22.5

60.5

Uttar Pradesh

30.4

54.6

Madhya Pradesh

35.7

50.3

Assam

33.9

56.1

Bihar

34.1

57.9

Odisha

35.7

56.3

Chhattisgarh

44.6

48.4

Jharkhand

40.8

52.2

0
10
20
30
40
50
60
Source: NSS 68th round and poverty estimates of the Planning Commission of India.

70

Further, to provide a transfer requires a delivery system, which

has a cost associated with it. So the cost of transfer programmes
(the transfer amount plus the delivery cost) is always greater
than the transfer amount alone. However, providing economic
support (in the form of food) to very poor households is a valuable outcome. The value of this outcome may well be such that
it outweighs the cost, even with the inefficiencies.
Having stated the above, in this exercise we make use of the
benefit-to-cost ratio (BC ratio), a term from the costbenefit
literature.10 We do this because both our outcomes are measured
in monetary terms and can be compared in that sense. The analysis is also restricted by a lack of scientifically arrived at indicators of PDS benefits. In essence, this method of analysis is not a
costbenefit analysis so much as it is an exercise examining the
efficiency of the delivery system, under different assumptions.
The inefficiencies in the current system are amplified by persisting corruption, and the BC ratio is sensitive to the level of leakages
in the system. Thus, our exercise is an attempt to visualise how
the costs per unit transfer behave in the presence of leakages.
Before concluding this section, the limitations of this study
as well as possible extensions of this analysis need to be stated.
First, this study only focuses on the efficiency aspects of the
PDS and does not include the other welfare schemes under the
NFSA umbrella of interventions. Second, we do not factor in
the general-equilibrium effects of the policy change. Third,
cost estimates do not include costs of setting up new institutions stipulated by the law (that is, state- and district-level
mechanisms for redressing grievances), of strengthening the
existing institutions that manage food procurement and civil
supplies. That being specified, we now proceed by describing
the implications of the act.
Coverage of NFSA and HLC Recommendations

The NFSA envisions that 66% of Indias population will buy just
under half (5 kg) of their monthly cereals requirements (10.5
kg) from the PDS. Coverage under the NFSA will be highly
86

Cereal Quantity

For the 201112 status quo, we estimate that at the national

level, 2.7 million MT of cereals per month will be procured by
households from the PDS, out of which 79.5% will be rural
demand and 20.5% will be urban demand. In the NFSA scenario,
approximately 4.9 million MT of cereals will be procured per
month from the PDS, which is 1.8 times the quantity that
households currently procure from the PDS. Implementation of
NFSA could result in an additional planned household procurement of approximately 2.2 million MT of cereal per month at
the aggregate level.12 For HLC, the planned target household
procurement would be around 3.6 million MT.
In theory, the impacts of the NFSA and HLC differ in the following way:
NFSA implies higher coverage but less quantity per beneficiary (+ extensive margin
[EM], - intensive margin [IM]).
HLC implies constant coverage but more quantity per beneficiary (+ IM, - EM).

The FCI reported its offtake at 3.9 million MT per month in

201314. This implies that even if the NFSA is implemented in
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its entirety and works as envisioned, it re- Figure 2: Possible Pathway for Leakage Reduction through Increase in Demand
sults in the offtake of an additional
Increase in total
Reduction in
Increase in people
Increase in value of
Increase in price
grain procured by
amount of 1 million MT of cereal grain per
leakage
accessing the PDS
implicit transfer
of cereals
households
month by states (not including any strateSource: Adapted by authors from Drze and Sen (2013), Kishore and Chakrabarti (2015) and Himanshu and Sen (2013a).
gic buffer stock). If NFSA is implemented,
consumer benefit escalations would likely Figure 3: Possible Pathway for Leakage Reduction through Improvement in Supply
be the result of an expansion at the exten- Re-identification
Reduction in
Reduction in
Reduction in quota
Increase in BPL
of beneficiaries
cardholders who
leakage
for APL
sive margin, that is, increase in overall
cards issued
through surveys
do not use PDS
coverage expansion by 23%, coupled with
Source: Adapted by authors from Drze and Khera (2015), Kishore and Chakrabarti (2015) and Svedberg (2012).
an increase in the per unit financial subsidy (the reduction in PDS issue prices). Costs would primarily as Jammu and Kashmir, Himachal Pradesh, and Tamil Nadu
increase due to an increase in the per unit subsidy and only are states with high transfer per household per month. Housesecondarily due to coverage expansion because states already holds in Gujarat, Karnataka, Jharkhand, Uttarakhand, and the
north-eastern states could save around Rs 400Rs 500 per
pick up large excess amounts than they deliver.
At the state level, when NFSA is enacted, Uttar Pradesh household per month if they bought cereals from the PDS after
(16.9%) will procure the largest share of cereals followed by NFSA is implemented.
Bihar (10.2%), Maharashtra (8.3%) and West Bengal (7.4%)
We estimate that the current national total implicit transfer (in 2014) is around
due to increased coverage. All these states with substantial
$9.1 billion per year (62.6% rice and 38.4% wheat). Under the NFSA this transfer
could potentially amount to $17.5 billion per year, which is almost twice the current
increase in coverage could see an increase in monthly houseconsumer subsidy. This would be a very large consumer gain. In comparison, if HLC
hold procurement of cereals to above 200 million kg from currecommendations are implemented, total implicit benefit to consumers would be to
the tune of $12.8 billion, which is more than the subsidy under the pre-NFSA system
rent levels, if households do respond to the incentives put forbut less than what the NFSA would deliver.
ward by NFSA. After comparing our NFSA estimates with FCI
offtake data in 201314, for the five largest states, we find that
Another important consideration here is that, HLC recomat the current offtake levels (excluding Bihar), states should mends that the PDS price be half the MSP. Trends in the MSP
already have enough grains in storehouses to deliver improve- show that it has been increasing steadily over time (Sharma
ments at the extensive or intensive margin at no additional 2012). If the PDS price is linked to the MSP, one of the largest
procurement cost (Table 2).
incentives that households haveinflation protectionmight
Table 2: Additional Procurement through PDS as a Result of NFSA in Highly
also wither away. On the supply side, perhaps opening up the
Populated States
system by adding BPL beneficiaries from higher monthly per
State
Current Household
Offtake NFSA Entitlement
Actual Additional
capita consumption expenditure quartiles and allowing these
Procurement (Million kg) (Million kg)
(Million kg)
Required
201112
201314
Full Coverage (% of Current Offtake)
more economically powerful agents to access the PDS allows
Uttar Pradesh
3,003
6,827
9,959
46
consumers to keep a better check on entitlements (Figure 3).
Bihar
2,508
3,452
6,016
74
Himanshu and Sen (2013a) also note that there is an average
Maharashtra
2,078
4,331
4,904
13
1% decline in leakage associated with a 1% increase in PDS
West Bengal
1,431
3,648
4,391
17
access.13 On the demand side, Drze and Sen (2013) suggest
Madhya Pradesh
1,501
2,520
3,596
43
that rising prices imply that households have a greater stake in
Source: NSSO 68th round and FCI offtake data.
the value of entitlements sold through the PDS (Figure 2).
The NFSA desires a more loosely targeted PDS with a net 23% expansion in coverage.
Kishore and Chakrabarti (2015) note a decrease in leakage as
While, HLC desires a more narrowly targeted scheme and a net reduction in PDS
the price difference between open market and PDS cereals
coverage by 3%. NFSA does not exert very high additional pressure on cereal grain
procurementa maximum of 1 million MT of cereal grain per month. A large portion
(arbitrage) increases. This does support the proposition put
of the expansion in coverage resulting from NFSA can be absorbed through the current
forth by Drze and Sen. If inflation is the primary reason, more
levels of grain offtake. It should be viewed as a transfer of grain to households that
would otherwise lie unused in the FCI storehouses or leak out to the black market.
consumers are moving towards social protection, then what
really matters is how much the transfer is worth to households
Implicit Transfers and Cost Estimates
after controlling for income and inflation. Leakage has been
An implicit transfer in the form of the money saved by house- the central point in the current debate between advocates of a
holds is a result of the difference between the prices of cereals larger, more inclusive PDS, and those who wish to freeze the
at fair price shops versus the prices consumers would PDS or even reduce its scale.
Table 3 (p 88) shows calculated costs and implicit transfers
otherwise pay if they bought cereals in the open market. The
market price of cereals in a state will bear heavily on the without any leakagesif the system would function without
transfer as a result. To illustrate, the market price of rice in waste. The net cost to government due to subsidisation of cereTamil Nadu is, on an average, close to Rs 24 per kg in rural als under full-coverage of NFSA (that is, intended and uninareas and the magnitude of the implicit subsidy per kg is Rs 23. tended beneficiaries) will be to the tune of $21.3 billion. At the
In contrast, Uttar Pradesh has lower market prices for rice and state level, Uttar Pradesh would account for the largest share
thus, its rural implicit subsidy per person is also lower than in additional cost to the government for implementation of
Tamil Nadus by about Rs 11 per kg on average. States which NFSA (22%), followed by Bihar (12%) and West Bengal (12%).
have high rural offtake of cereals from the PDS currently, such Our estimates also show that the HLC will cost the government
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87

approximately $15.8 billion to deliver foodgrains to the intended beneficiaries of the PDS.

Figure 4: PDS Allocation in Current Year versus Offtake in Previous Years

(000 MT)

Elephants in the Room

Centres allocation in current year

SPECIAL ARTICLE

Large differences between aggregate implicit transfers and costs in large states
(Uttar Pradesh, Bihar, Madhya Pradesh, West Bengal and Odisha) show that even if all
leakages are eliminated, the PDS will still be inefficient in those states. The primary
driver of implicit transfers is the market price of cereals.

y = 1.2845x + 302.34
12,000

R = 0.6844

10,000
8,000
6,000
4,000
2,000
0
0

2,000

4,000
6,000
8,000
States offtake in the previous year

10,000

12,000

Source: FCI.

Figure 5: PDS Offtake in Current Year versus Household Procurement in

Previous Years (000 MT)
9,000
y = 1.5245x + 305.74

8,000
States offtake in current year

Much of the debate around the NFSA has been fixated on the
fact that states like Chhattisgarh and Tamil Nadu managed a
revival in their PDS by implementing policy measures to mimic
a new style PDS. The HLC recommends that cash transfers be
tried instead of the food transfers, first in cities and towns, and
then to cereal-surplus rural areas where they might work better. Such a recommendation has been based on the premise
that the PDS is more costly per unit transfer, compared to a
cash transfer, and that in many regions the PDS works much
like a cash transfer. Our analysis of the difference between
costs and transfers in a zero leakage scenario gives us insights
on this matter. The larger the difference between the two, the
costlier the PDS of a state is per unit transfer. While the gap is
small for most states, it is quite large in others, many of which
are coincidentally densely populated cereal-surplus states.

14,000

R = 0.7226

7,000
6,000
5,000
4,000
3,000
2,000
1,000

FCI Grain Allocation and Implications for Leakage

Critics may argue that the central governments commitment

to the states is to provide enough grains for the target population, if there are leakages, it does not necessarily imply that
the state/centre will have to continue to procure even if it is a
legal right. In order to examine this argument we use historical data from FCI from 2003 to 2013 to analyse the relationship
between allocations, offtake, and household procurement
Table 3: Statewise Costs and Implicit Benefits under Three Scenarios
($ billion) with Zero Leakage
Cost

Jammu and Kashmir

Himachal Pradesh
Punjab
Uttarakhand
Haryana
Rajasthan
Uttar Pradesh
Bihar
West Bengal
Jharkhand
Odisha
Chhattisgarh
Madhya Pradesh
Gujarat
Maharashtra
Andhra Pradesh
Karnataka
Kerala
Tamil Nadu
North-East states
Others
India

0.26
0.11
0.08
0.14
0.08
0.28
1.12
0.91
0.53
0.32
0.79
0.52
0.54
0.13
0.66
1.36
0.71
0.45
1.68
0.52
0.07
10.62

Current PDS
NFSA
HLC14
Implicit Benefit Cost Implicit Benefit Cost Implicit Benefit

0.22
0.15
0.13
0.13
0.12
0.50
0.90
0.74
0.48
0.22
0.50
0.32
0.58
0.16
0.70
1.14
0.60
0.44
1.76
0.31
0.07
9.13

0.26
0.13
0.28
0.16
0.23
0.91
3.36
2.13
1.70
0.69
0.94
0.55
1.16
0.88
1.67
1.73
1.12
0.59
1.66
1.00
0.25
21.27

Source: Calculated from NSS 68th round and Census 2011.

88

0.23
0.13
0.24
0.14
0.20
0.64
1.97
1.46
1.37
0.50
0.59
0.33
0.77
0.79
1.51
1.44
0.99
0.57
1.74
0.70
0.26
17.53

0.09
0.04
0.07
0.08
0.09
0.54
3.57
2.31
1.46
0.74
1.06
0.65
1.24
0.50
0.84
0.68
0.68
0.16
0.66
0.86
0.06
15.80

0.08
0.03
0.06
0.06
0.07
0.34
2.11
1.58
1.14
0.54
0.66
0.40
0.81
0.43
0.70
0.56
0.59
0.15
0.68
0.59
0.06
12.75

2,000
4,000
6,000
8,000
Household procurement in previous year
Source: FCI data for years 200506, 201011 and 201213 and NSS data for 200405,
200910 and 201112.

over time. We gain insights about the planning processes followed by the central and state governments, through the manner in which they allocate grains.
We find that the central government plans allocation based
on the offtake made by states in the previous year. Figure 4
shows that on average the central governments allocations in
the current year are 20% higher than the offtake of the previous
year. Further, the variability in excess allocations increases as
the allocation amount increases. This seems to suggest, it becomes harder for the centre to allocate accurately, as total entitlements increase. Put another way, the central government
packs in more slack into allocations for states with more entitled beneficiaries.
Next, we compare the offtake with actual household
procurement in the previous year (Figure 5). Some states pick
up multiples of the amounts being procured by households in
the previous year. Again, the larger the quantity of cereal
grains the larger chances of over allocation. Consider for
example that Uttar Pradesh has a population of around
200 million. In 2011, the allocation for Uttar Pradesh was over
8.4 million tonnes which is enough to fulfil the 5 kg NFSA
quota for 70% of its population. The states offtake was 80% of
the quantity allocated by the centre and eventually households
procured an estimated 35% of allocations. That is an erroneous
over allocation for 70 million beneficiaries by the centre in
Uttar Pradesh alone going by NFSA entitlements. Drze and
Khera (2015) attribute this slack to the above poverty line
(APL) quota.
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SPECIAL ARTICLE

than they did before the NFSA was enacted (assuming full
coverage). It therefore appears that openness in targeting is a
strong pillar of the NFSA. However, if shortfall persists at
30%, then the BC ratio actually deteriorates further to 0.60.
This implies that the expansion in the scale of the PDS without
the necessary removal of corruption might actually make
Figure 6: Efficiency Gains and Coverage Shortfall under NFSA
matters worse.
2
Going by this framework, some might
further
argue that inclusiveness of the
1
NFSA may lead to much lower leakage
8% shortfall= zero net monetary gains
0
than 30%. We account for losses with dif0
10
20
30
40
ferent levels of shortfall in Figure 6. The
-1
figure shows how welfare (or consumer
Coverage shortfall
-2
NFSA PDS
(%) leakage proxy
benefit) changes, when coverage varies
NFSA PDS
efficiency
break-even
-3
maximum
under the NFSA. The vertical axis measures
gains or losses in billions of dollars.
-4
Region of net
The horizontal axis measures percentage
PDS monetary
Region of net PDS monetary losses
-5
of shortfall from full coverage. The figgains
ure shows that the region between 0%
-6
Source: Calculated by authors.
and 7% shortfalls is the net efficiency
gains region for the NFSA. At 8% shortCosts vs Implicit Transfers: Factoring in Leakage
fall, the NFSA breaks even, with additional costs equalling
Going by the trends in allocation, we assume that from the additional transfers. Regions with shortfall greater than 8%
planners perspective, the total cost of cereal grains cannot be are all points of net efficiency loss for the PDS. Thus, if the
less than what it would cost to deliver cereal grains to all NFSA can bring down leakages to a level close to 10%, it would
intended beneficiaries. Any shortfall from full coverage of indeed be a success in terms of economic efficiency compared
intended beneficiaries under NFSA is used as a proxy for leak- to the status quo.
In Table 5 we compare 30% leakage estimates across the
age in order to model them in a costing framework. To put it
another way, we proceed by linking leakages with shortfall from current PDS, NFSA and HLC. We arrive at these estimates
full coverage under NFSA. Linking leakages with coverage has because it is likely that without the removal of quotas like APL
other merits as well. Himanshu and Sen (2013a), have demon- combined with stricter targeting, under HLC offtake and allostrated that there is a strong statistical correlation between cations would be planned with slack as in the past. However,
coverage and leakage. That is, for every 1% increase in cover- since HLC will not add new beneficiaries, the ones currently
age of access, they report a reduction in leakage of about accessing the system will get more benefits than before. Thus
0.85% in 201112, albeit with variation at the state level. We leakages in HLC inflate costs but do not deflate benefits. Howpresent both unadjusted and adjusted estimates, but refer to ever, grain allocations under NFSA are extremely high; and
the adjusted estimates, as they are a better reflection of reality. any further slack beyond this allocation is difficult to imagine.
Therefore, costs would not likely escalate beyond the full covOverall PDS Efficiency
erage point. Benefits on the other hand may not be as high,
Table 4 shows how the PDS functions with different scenarios and hence are deflated by 30% to accommodate leakage. The
of shortfall. In the first row, we display the BC ratios for the estimates show that with the current level of 30% leakage, the
shortfall unadjusted PDS and in the second row for 30% short- NFSA will cost about a billion dollars more than HLC. Under
both systems additional costs could range between $6.5 and
fall adjusted PDS.
$7.5 billion per year approximately, from the 201112 system.
Under
full
NFSA
covTable 4: Benefit-to-Cost Ratio: Unadjusted
and Adjusted
erage, the BC ratio is Table 5: Cost and Benefits under the Three Scenarios
($ billion per year)
Benefit-to-Cost Ratio
No Change NFSA HCL
Without Factoring Leakage
Factoring 30% Leakage
0.82, which implies
No Change NFSA
HCL No Change NFSA
HCL
Difference
Unadjusted
0.86 0.82 0.81
that for every Re 1 the
[A]
[B]
[C] [BA] [CA]
30% shortfall adjusted
0.66 0.60 0.62
government spends on Cost
10.6
21.3 15.8
13.8
21.3 20.5
7.5
6.7
Source: Calculated by authors.
the PDS, the consumer Benefit
9.1
17.5 12.8
9.1
12.8 12.8
3.7
3.7
gets Rs 0.82, that is, Rs 0.16 is lost by the system due to pro- Costbenefit
1.5
3.8 3.0
4.7
8.5
7.7
3.8
3.1
curement and distribution costs of the FCI. However, if we Source: Calculated by authors.
compare the NFSA (unadjusted) with the status quo (30%
The differences between costs and benefits presented in
shortfall adjusted) we see an improvement of 0.16 (from 0.66 the table are interpreted as losses that primarily stem from
to 0.82) in the BC ratio as a result of reducing shortfall (leak- the procurement and distribution costs of the FCI, and
age) from the current 30% level to 0%. That is, consumers get secondarily from leakages within the PDS. If the government
Rs 0.16 more on average for every Re 1 spent by the government ensures full coverage, then the NFSA delivers an improvement
US$ billion per year

There is evidence that there is very little effort made by the centre- or state-level
planners to set allocations or offtake based on real household procurement. Planners
pack in a lot of slack when allocating grains to states. For a system that claims to be
targeted, the manner of allocations appears to be highly counter-intuitive. There is
no evidence of any downward revisions of offtake or allocations even with persistent
leakage. Such a system of planning and offtake encourages leakage and undermines
improvements in household procurement on the ground.

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in net social welfare of $0.9 billion as compared to the status

quo. Zero leakage with HLC delivers a net social welfare
improvement of $1.7 billion. Actual net benefit will vary with
numerous scenarios of possible future leakage. In the end,
they would boil down to which system has better incentives
in place to reduce leakage. As cited above, the NFSA seems
like a better candidate to achieve leakage reductionsbeing
less targeted and delivering higher per unit implicit transfers
offers protection from errors in offtake stemming from
APL quotas.
Cash vs Kind Dilemma

Regional contexts can be crucial when weighing cash versus

food. Thus, it is important to mention that in a country like
India, where regional contexts matter greatly, there are regions which are characterised by markets (financial or food)
that function inadequately. In such regions, cash transfer is
likely to be less effective if one goes by the evidence (Alderman 2014). The current statewise coverage indicators tell the
same story. For example, in regions that are not conducive to
growing cereals, the PDS is extremely effective. States like
Jammu and Kashmir, Himachal Pradesh, Sikkim, Arunachal
Pradesh, Mizoram, Assam, Uttarakhand, Tripura and Meghalaya, all benefit from the PDS. Further, even in southern India,
where market access is not problematic, the PDS performs
well. We attribute this to a higher market price of cereals in
these states and strong political will. In southern states, the
implicit transfer is higher per unit cost and thus the role of the
PDS is quite strong, given a rise in cereal prices. Further, poor
states such as Chhattisgarh and Odisha, have also naturally
gravitated towards strengthening their PDS. This goes to show
that the PDS does provide relief for individuals living in the
poorest areas of India. For the remaining states, however,
there is no clear picture. States such as Uttar Pradesh and West
Bengal are complicated and in these states food and cash may
need to work in a synchronised manner to achieve the fulfilment of entitlements and provide food security.
Conclusions

Before one embarks on a costbenefit analysis or a cost effectiveness analysis, the parameters to gauge both costs and
benefits need to be explicitly explained and agreed upon. The
PDS is a food transfer programme that provides a safety net to
some of Indias poorest households. In doing so, the benefits
it provides to vulnerable households living in destitution
should be valued accordingly. Understanding benefits beckons answering questions that have a certain value judgment
notes
1
2
3
4

90

http://data.worldbank.org/indicator/SP.POP.
TOTL.
http://data.worldbank.org/indicator/AG.PRD.
CREL.MT.
http://povertydata.worldbank.org/poverty/
country/IND.
In 2015, out of total FCI offtake of 2,46,19,270
metric tonnes of rice PDS, MDM and SNP
accounted for 90%, 6% and 1.3%, respectively,
see here: http://fciweb.nic.in/sales/view/29.

6
7

associated with them. Is a Re 1 transfer to a household in the

first quartile worth the same as one in the second? Is a Re 1
cost incurred by the FCI equivalent to a Re 1 implicit transfer
to a PDS beneficiary? Who benefits from the transfer when the
ration shopkeeper conducts backdoor sales (a nearly global
risk with a two-tier price regime)? Would such a large-scale
programme have any distortionary or stabilising effects on
markets and prices? We did not intend to answer these questions with our accounting exercise. Instead, the broader question we sought to answer was, what does it cost to provide a
Re 1 support to the poor?
The answer to this question is not straightforward. Under
the status quo it costs Rs 1.5 to deliver a Re 1 implicit transfers
through the PDS. If the NFSA or HLC can deliver on promises
and ensure negligible levels of leakages, it would reduce
that cost to Rs 1.2. If leakages persist at the current levels,
that cost would increase to Rs 1.7. The question of efficiency of
the PDS boils down to which set of incentivesNFSA or HLC
can plug leakages better? If HLC does not allow states to
increase offtake further from current levels, then with a 7 kg
entitlement with current coverage levels, leakages could
reduce. However, this does not seem likely given past trends
in offtake and the upward revision of PDS prices. NFSAs
low prices and loose targeting seem like the better bet to
plug leakages, but will be more costly than HLC. However,
without the needed administrative reforms, both attempts
may be futile.
Both the centre and the state have a crucial role to play in
making sure they do not encourage excess allocations or
offtake, as has been the experience in the past. The policy
recommendation that comes out clearly is to phase out the
APL quota and freeze allocations and offtake at current levels
till they are first completely utilised by adding new BPL
beneficiaries, or increasing the per capita quantity subsidy
for current BPL households. Moving to cash transfers will not
address the excess supply conditions in the FCI created by the
production-side subsidy.
This prompts urgent research on investigating the issue
from the lens of the FCIthe consumption subsidy is directly
dependent on the production subsidy which requires the procurement of cereal to protect farmers. Quantities procured
should be given to households cheaply rather than allowed to
rot (a dead weight loss for the economy) or end up in untraceable black market channels (a gain for the mafia). Research on
the PDS supply chain, starting from FCI procurement and ending at delivery to households, would also greatly enrich our
understanding of this large safety net.

Total tax receipts were approximately $125 in

2012, http:// indiabudget.nic.in/ub2014-15/rec/
tr.pdf.
http://dfpd.nic.in/?q=node/53.
The derived average annual population growth
rates, provided in the Sample Registration System
Bulletins and the Vital statistics provided by the
Ministry of Home Affairs were also used for
making population projections.
Future prices were projected calibrating the
NSSO unit prices with the commodity specific

wholesale price index figures provided by the

Office of Economic Advisor.
9 Economic costs of procurement and distribution
of foodgrains through PDS have been sourced
from the Food Corporation of Indias official
estimates for 2014.
10 The BC ratio ranges between 0 and 1. System
efficiency increases as the value of the BC ratio
gets closer to 1.
11 We caution readers not to interpret these results as a conflation between poverty and food

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SPECIAL ARTICLE
insecurity. Both may be highly correlated but
do not always imply the same thing.
12 Difference between quantity procured under
scenario 2 (Intended Beneficiary+ Unintended
Beneficiary) and quantity estimated under
scenario 1.
13 y = -0.9736x + 1.3962; R = 0.4248 where y
is change in leakage and x is change in PDS
access on Himanshu and Sen (2013a).
14 These calculations are made by taking prices of
cereals at 50% of MSP.

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Review of Womens Studies

October 31, 2015
Rethinking Violence

Mary E John

Locating Hyderabad for Feminism in the Present Struggle against Violence

Rape as Atrocity in Contemporary Haryana

Tejaswini Madabhushi,
Maranatha Grace T Wahlang, Gitanjali Joshua
Women against Sexual Violence and State Repression

Reporting Sexual Violence in India:

What Has Changed since the Delhi Gang Rape?

Divya Arya

Gathering Steam: Organising Strategies of the Indian Mens Rights Movement

Protection of Women from Domestic Violence

Srimati Basu
Flavia Agnes, Audrey DMello

Some Thoughts on Extreme Violence and the Imagination

V Geetha

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