The recently released World Bank report entitled Addressing Inequality in South Asia, based on various studies, has found that illegal diversion and leakages from the public distribution system (PDS) in India declined from above 50 percent in 2004-05 to about 44 percent by the end of 2007-08 and further to nearly 35 percent in 2011-12.

However, the Report of the High level Committee on Reorienting the Role and Restructuring of Food Corporation of India, written under the chairpersonship of BJP MP Shanta Kumar, considers the leakage figure to be much higher (almost 47 percent), based on calculations of offtake from central pool and the National Sample Survey (NSS) Organisation's 68th Round consumption data from PDS.

The High Level Committee (HLC) report further says that in certain states, leakage ranges between 70 percent and 90 percent and based on these figures, suggests that the PDS needs to be radically restructured and replaced gradually with cash transfers.

It also suggests that the coverage under the National Food Security Act 2013 (NFSA) should be confined to just 40 percent of the overall population instead of 67 percent, as entitled under the original Right to Food Act.

Ration being weighed at a Fair Price Shop in Chhatisgarh. Pic courtesy: Rhythm Gupta (India Together files)

Varying estimates on PDS leakages and diversion

It is important to note that figures on PDS leakage that emerge from various studies and sources are far from uniform.

A micro-level survey done under the auspices of Dr Reetika Khera of IIT Delhi and development economist Jean Dreze during 2013 in 10 states, popularly known as the PEEP survey, shows improvements in the functioning of the PDS in certain states such as Odisha, Chhattisgarh etc. in the last few years.

The Public Evaluation of Entitlement Programmes or PEEP survey focused on two of the poorest districts in the 10 states and covered five entitlement programmes, namely, ICDS, MDMS, PDS, MGNREGA and social security pensions. The PEEP survey in Bihar found that leakages from the below poverty line (BPL) quota of PDS was 31 percent during 2013, while based on the National Sample Survey (NSS) data, Khera and Dreze found leakages to be as high as 75 percent for the overall PDS in Bihar during 2009-10.

The HLC report, on the other hand, finds that the overall diversion of foodgrains (wheat and rice) from the PDS amounted to 46.7 percent in 2011-12, which contradicts the declining trend of diversions as shown by other studies.

It must be mentioned that the HLC has not calculated this figure on its own, but rather relies on the estimate given in a paper by Ashok Gulati and Shweta Saini, titled Leakages from the Public Distribution System (PDS) and the way forward, which got published from the Indian Council for Research on International Economic Relations (ICRIER) earlier this year. It may be noted that Ashok Gulati was also a member in the HLC on FCI reforms.   

Gulati and Saini's paper also shows that in the five states of Uttar Pradesh, Bihar, Madhya Pradesh, Maharashtra and West Bengal – where 58.3 percent of India's poor live – one can find diversions to the tune of nearly 51.6 percent of the total grain during 2011-12.

In preliminary findings from a forthcoming paper by economists Dreze and Khera, it is shown that the leakages from the PDS have been to the tune of 41.7 percent in 2011-12 and not 46.7 percent. In this paper, the duo shows how methodological differences are leading to two different estimates regarding PDS leakages.

Please check the chart below to get a comparative picture of leakages in the PDS estimated by two different studies.

Please note that some of the states/ Union Territories for which leakages have been calculated by Gulati and Saini are not shown in the above chart. 

Khera and Dreze, by using the data of the India Human Development Survey by the National Council of Applied Economic Research (NCAER), show an even lower level of leakages and diversion from the PDS: around 32 percent in 2011-12, as against 49 percent in 2004-05. They have argued that the biggest source of continuing leakage in the PDS is the APL (above poverty line) quota and also the ad hoc quotas, due to which leakages could be found for even southern states like Kerala.

It has been observed that the share of APL quota in PDS offtake from FCI by states has increased during the last one decade without any commensurate rise in the purchase of PDS grains under this quota by APL consumers. The quota has simply acted as a dumping ground for excess food stock during the 2000s. There has been no proper mechanism in place to match rising procurement on APL quota with distribution. APL consumers rarely have an idea of their entitlement from the PDS. Corrupt dealers take advantage of their ignorance and in some states, the APL quota grains gets siphoned off to black markets.

One calculation by Khera and Dreze based on NSS data shows that while leakages from the BPL/ Antyodaya Anna Yojana (AAY) quota was to the tune of 30 percent, it was nearly double (i.e. 67 percent) in the case of the APL quota during 2011-12.

It must be noted here that earlier the Independent Evaluation Office (IEO) that was created at the Planning Commission in August 2013 found that approximately 40 percent of the foodgrain allocated under PDS did not reach the intended beneficiaries, which too is a much lower figure than the HLC's.

Methodological issues

One way to indicate where and why the different estimates for leakage and diversion have cropped up is to look at how the alternative figures have been derived.

Khera and Dreze first took the state-wise and national-level NSS data on per capita PDS purchase and multiplied that by corresponding 2011 population figures to arrive at total PDS purchase figures. After getting the total PDS purchase data at the state and national levels, they compared it against corresponding FCI data on offtake for the same period (agricultural year), sourced from the Monthly Foodgrain Bulletin, so as to arrive at the leakage figures.

Gulati and Saini, however, multiplied average per capita PDS purchase by an independent estimate of the number of persons with a ration card to arrive at total PDS purchase figures. This method, according to Khera and Dreze, is an incorrect one since the NSS average is over all households and not just households with ration cards. Adoption of the allegedly wrong method deflated the estimate of total PDS purchase.

It is further alleged that Gulati and Saini wrongfully include offtake for four "other welfare schemes" (OWS) and also include the inflated figures under "ad hoc allocations". As a result of this, the total PDS offtake estimate from the FCI gets inflated.

So, after comparing total PDS purchases against total PDS offtake, Gulati and Saini arrive at a higher leakage (nearly 47 percent) figure as compared to Khera and Dreze (nearly 42 percent) at the national level.

How to improve PDS functioning?

The difference in estimates notwithstanding, it is a fact that leakages do exist within the PDS. In order to plug these leakages, the recently released HLC report has recommended that the government should defer implementation of NFSA in states that have not done end-to-end computerization, not put the list of beneficiaries online for anyone to verify and not set up vigilance committees to check pilferage from the PDS.

In a large number of studies on PDS done previously by various researchers, it has been shown that apart from end-to-end computerisation, there are many factors that are crucial for the success of PDS in various states such as:

  • de-privatisation of fair price shops;
  • “doorstep delivery” of grain to fair price shops;
  • political will;
  • universal and affordable PDS;
  • modest budgetary allocations for PDS; strict action against corruption and corrupt individuals;
  • proper mechanism for grievance redressal (such as toll free numbers for making complaints);
  • constant monitoring;
  • provision of other essential commodities like iodized salt, edible oil, pulses etc. apart from foodgrains;
  • fixing a role for gram panchayats for accountability/ transparency of the fair price shops / PDS;
  • GPS to track vehicles carrying PDS foodgrains;
  • naming and shaming households that availed Antyodaya facilities despite not being eligible; 
  • introduction of the system of tracking coupons (such as in Bihar);
  • transparency of BPL lists;
  • SMS alert about available PDS stocks on request etc.

In fact, states such as Bihar, Odisha and Chhattisgarh which have undertaken such reforms are now showing lower leakage than others, claims the Right to Food Campaign in its press note dated 25 January 2015. According to Khera and Dreze, the extent of leakage in the Bihar PDS has declined from around 75 percent in 2009-10 to 24 percent in 2011-12 (based on NSS data).

In a previous PDS survey done in nine states during 2011, which covered two districts in each state and a total of nearly 1200 households, Khera and Dreze found that the sample households had received 85 percent of their official “quota” of PDS grain (measured as purchase-to-entitlement ratio) during the three months immediately preceding the survey, which contradicted the widely held perception that most of the grain meant for poor households got sold off in the open market.

PDS entitlements under the Food Security Act

One recommendation of the Shanta Kumar Committee that has come under particular scrutiny relates to the coverage of the Food Security Act. While the NFSA 2013 entitles 67 percent of the Indian population to receive subsidised grains from the government every month at the rate of Rs. 3/2/1 per kg for rice/wheat/coarse cereals, the Committee’s report on FCI reforms considers that 67 percent coverage of population is a bit too high.

Therefore, it recommends that the coverage should be brought down to around 40 percent so that each person's food entitlement (originating from BPL household) can be raised from 5kg to 7kg. However, much of Khera and Dreze's recent work shows that universalisation of PDS works better than targeting in states such as Tamil Nadu, Andhra Pradesh and Himachal Pradesh.

Based on the Shanta Kumar Committee recommendations that NFSA should cover only 40 percent of the population, the Right to Food Campaign secretariat has calculated how this is likely to reduce PDS coverage in various states. For example, according to calculations made by the Campaign, it has been found that in Delhi, PDS coverage will get reduced to nearly 26 percent from 44 percent (earlier) if the HLC recommendations are implemented.

The chart below shows the NFSA coverage vis-à-vis the proposed coverage under the recommendations of the Shanta Kumar Committee.

The HLC has also suggested that pricing for priority households must be linked to the Minimum Support Price (MSP), say 50 percent of MSP, while the Antyodaya households can be given foodgrains at Rs. 3/2/1 per kg for the time being.

The Right to Food Campaign in its press note dated 25 January 2015, however, has objected to this proposal since it is expected that linking the PDS food prices with the MSP could lead to a three- to four-fold increase in the price of subsidised foodgrains, thereby making the PDS unaffordable for many.

Cash transfers versus PDS

The HLC suggests gradual introduction of cash transfers in PDS, starting with large cities with a population of more than 1 million, extending it to grain surplus states, and then giving an option to deficit states to opt either for cash or physical grain distribution.

The Committee recommends that cash transfers be indexed with the overall price level to protect the amount of real income transfers, given in the name of a female head of the family, and routed through the Prime Minister's Jan-Dhan Yojana (PMJDY), dovetailing Unique Identification (UID) numbers. The mechanism is expected to empower the consumers, plug high leakages in PDS and save resources.

The HLC has calculated that by directly transferring cash to potential beneficiaries of NFSA at the rate of about Rs. 700 per month per family for Antyodaya households and Rs. 500 per month (for a family of 5) for priority households, it can give them a deal that is 25 to 30 percent better than physically distributing grains to them. This restructuring is expected to save public resources to the tune of about Rs. 30,000 to Rs. 35,000 crores, which the HLC recommends, can be ploughed back to agriculture through investments in irrigation and building better roads and market-networks.

It must, however, be noted that the 2011 PDS survey by Khera and Dreze shows that in eight out of nine states, a majority of the sampled households preferred food instead of cash transfers. Overall, more than two-thirds of the respondents expressed a clear preference for food over cash; less than one-fifth (18 percent) were in favour of cash over food.

Given a choice, people were found to prefer food over cash transfers because of erosion of purchasing power with inflation, lack of faith in the ability and intention of the government to index the cash amount to inflation rates, poor access to markets and banking/post office infrastructure, increase in their transaction costs (for example, trips to the bank and market to withdraw cash and buy food) etc. 

Since the PDS has a strong impact on rural poverty, it has been argued that replacing the PDS with cash transfers may not be a good idea. Even the India Human Development Survey cautions that any reforms in the PDS would affect 50 percent of the entire population.

Opponents of cash transfers also argue that leakages will continue to exist even when a system of cash transfers is in place, thanks to the corruption in the banking system. If PDS is replaced by cash transfers, then procurement from the farmers will be adversely affected. Diluting the PDS means more dependence on market food price vagaries, contends the Right to Food Campaign.

It is essential to see what works and what does not before the PDS is entirely replaced by cash transfers. A cash transfer system can be started on a pilot basis in richer regions to gauge its impact. The approach to deciding whether the PDS should be replaced by cash transfers must be people-centric.

Instead of diluting the PDS altogether, the Central Government would also do well to first take a look at the success stories of states such as Bihar, Chhattisgarh and Odisha, and introduce similar measures by taking other state governments into confidence. Even the BJP’s own manifesto during the 2014 Lok Sabha election read: "review the successful PDS models, and incorporate the best practices to revise the existing PDS, for benefitting the common man".

Another question that deserves to be thought through is whether the recommendations regarding the NFSA fell under the HLC's terms of reference at all. Why were opposing viewpoints not given any space at all in the HLC?


Understanding Leakages in the Public Distribution System

Report of the High level Committee on Reorienting the Role and Restructuring of Food Corporation of India, January 2015

Leakages from the Public Distribution System (PDS) and the way forward - Ashok Gulati and Shweta Saini (2015)

India Human Development Survey Research Brief No. 1, 2015

The National Food Security Act 2013

The National Food Security Ordinance 2013

FCI reforms: prescription to cure or kill? Roshan Kishore

Water For The Leeward India: Jean Dreze and Reetika Khera, Outlook March 2014

Public Distribution System Reforms and Consumption in Chhattisgarh -Prasad Krishnamurthy, Vikram Pathania, and Sharad Tandon, Economic and Political Weekly, Vol-XLIX, No. 8, February 22, 2014

At least 40% leakage in our targeted PDS system: Ajay Chhibber

Rural Poverty and the Public Distribution System-Jean Dreze and Reetika Khera, Economic and Political Weekly, Vol-XLVIII, No. 45-46, November 16, 2013

Reforming the Public Distribution System: Lessons from Chhattisgarh by Raghav Puri, Economic and Political Weekly, February 4, 2012

PDS leakage drops to 10-15 percent: Govt, The Indian Express, 12 December, 2011

Trends in diversion of PDS grain: Reetika Khera (2011), Working Paper No. 198, Centre for Development Economics, Department of Economics, Delhi School of Economics

Revival of the Public Distribution System -Reetika Khera, Economic and Political Weekly, November 5, 2011, Vol xlvi, No. 44 & 45

PEEP survey 2013 and PDS Survey 2011