Food security: time to move to cash transfers

Food security: time to move to cash transfers

After the deadlock at Buenos Aires, India should hasten the implementation of a cash-transfer programme and preserve political capital for future diplomatic battles

The impasse at the recently concluded 11th ministerial conference of the World Trade Organization (WTO) in Buenos Aires is casting doubts over the future of developing countries’ food procurement programmes. International disputes have often had an impact on domestic policy, and the present controversy has the makings of another instance where trade rules will significantly affect the direction of domestic policy.

The bone of contention at the conference was that the US allegedly reneged on its promise to not block food stockholding policies in return for India, the country with the world’s biggest stockholding programme, signing the trade and facilitation agreement (TFA). The TFA aims to reduce administrative barriers and harmonize customs rules and regulations around the world, thereby saving transaction costs and ensuring the smooth flow of goods and services across borders.

US support is important because India’s Food Security Act, passed in 2013, ran into WTO rules that keep a country’s domestic policies from distorting international trade. The law forced a significant ramping up of food procurement by the government to provide coverage to two-thirds of its population. Simultaneously, the government supports farmers through minimum support prices. The cost of these programmes—basically a country’s food subsidy bill—says the WTO, must not exceed 10% of the value of production based on the reference price of 1986-88.

At the Bali conference in December 2013, India secured a ‘peace clause’ that protected it from legal action should it breach the 10% limit. However, the concession was limited to programmes running in 2013 and it comes with onerous reporting requirements about food subsidy levels.

India’s vote for the TFA is vital because, unlike the World Bank or the International Monetary Fund, the WTO is a member-driven organization where, historically, decisions are arrived at through consensus. India’s stand aims to ensure food security for its people, a stand it fears developed nations will not heed once the TFA becomes WTO law.

The WTO rules are tilted in favour of developed nations; there isn’t much that India can do about that. In 1995, rich countries had significant subsidy schemes, which were allowed to continue on the condition that they would be phased out eventually. Meanwhile, poorer countries were barred from introducing new subsidies above a certain minimal level. Given that this is calculated at 1986-88 prices, many countries are limited to less than 10% of production in practice on account of inflation. Finally, due to the obligation to reduce trade-distorting subsidies, rich countries have redesigned their programmes to give unconditional cash transfers to farmers—a policy that does distort trade by lowering international prices.

As this paper has consistently argued, India can utilize this situation to make a virtue out of a necessity. Government policies have increased bank account coverage to 99% of households, and more than 90% of adults are linked to the UID scheme, Aadhaar. A move to cash transfers, for both consumers and producers, is more practical today than it was four years ago.

The government is considering the option seriously, as demonstrated in the report of the high-level committee on reorienting the role of, and restructuring, the Food Corporation of India, suggesting a significant shift from procurement to cash transfers. It signed on the Abdul Latif Jameel Poverty Action Lab (J-PAL) for a cash-transfer pilot in three Union territories, conducted from January 2016, that showed progress towards implementing the programme even as significant challenges remain. The programme’s report showed that 20% of the beneficiaries reported not receiving the transfer, even though the government reported 99% success. Beneficiaries spent more time and money in obtaining the cash and food from the market. Also, grievance redressal mechanisms are inadequate.

The key takeaway was that despite these implementation glitches, the initial user-survey response of 39% of the beneficiaries preferring cash transfers had changed to 65% by the survey’s third round. Why was this so? The report says that the beneficiaries preferred the flexibility as well as convenience and choice in terms of quality of food; they could now buy better quality grains than what they got through the PDS or could diversify their diet by adding dairy products or local grains.

The biggest risk in making a transition, however, is that people losing out in the set-up period could delegitimize the idea of cash transfers before its net welfare-improving effect truly has a chance to shine. The report, therefore, favours a choice-based transition to cash transfers so that people continue to have the option to remain in the present system until they’re comfortable with the quality of implementation in their region. This could continue for a couple of years after the capability of starting universal cash transfers is achieved.

India’s current food and farmer support programme is distortionary, leaky and unsustainable. If the currency appreciates or either one of MSP or procurement increases, India could breach its 10% limit and face hostile litigation by other countries for violating WTO rules. It is, perhaps, wise to keep our food-support schemes under WTO-prescribed limits and gradually transition to a cash-based transfer for both consumers and farmers. That way, we will preserve our political capital for other issues like trade rules on electronic commerce, services trade, fisheries and the TFA.

Should the government start working towards cash transfers rather than continuing with the public distribution system?