Combating Poverty Through an Attack on Calorie Deficits: A Mechanism Design Approach

Abstract

This article tries to add some more value to the discussions on food security taken up by Jean Dreze and recently by Reetika Khera and other authors such as Indira Hirway and Madhura Swaminathan through a series of articles. It marshals information on availability and requirements for food grain with emphasis on the ‘Below Poverty Line’ (BPL) households and ‘Vulnerable but Above Poverty Line’ households. The latter are those below the World Bank’s $2 at PPP (purchasing power parity) per capita per day threshold but above the poverty line of $1.25 PPP per capita per day threshold when the reference year is 2005 (or in other words earning an income in India inadequate for buying a consumption bundle that $2 would have bought in the United States in 2005 but more than adequate for purchasing a reference consumption basket that $1.25 would have bought). The mentioned information is supplemented by that on diversion of food grain from the Targeted Public Distribution System (TPDS) in India at the national as well as state level; errors in targeting the poor through the TPDS, as revealed by region specific studies; the design of various public distribution programmes at the state level; the national income distribution which has important implications for the potential magnitude of fiscal resources that can be generated for running a Public Distribution System (PDS) which offers greater food security for the poor and vulnerable; and finally the difference in the nature of urban and rural poverty with its implications for food subsidy policy. It reveals that the nation produces enough food grains to meet the food grain requirements of the country’s entire population and the problem is therefore essentially one of improper distribution and leakage rather than of inadequate production. It then goes on to point out that while the use of the TPDS to provide subsidized rations to certified BPL card holders and unsubsidized rations to others might be well intentioned and meant to target scarce fiscal resources and essential calories to the needy, such targeting has left much to be desired with a large number of BPL cards being appropriated by the APL population (and we have no way of knowing whether these families belong to the vulnerable category or non-vulnerable category) to compound the large physical diversions which can be largely be attributed to corrupt practices by transporters and dealers of TPDS outlets. However, there is hope as certain states have shown reasonable success in implementing the public distribution system – one primary example is Tamil Nadu which has universalized the system to overcome the problems of wrong identification of the poor, intentional or otherwise, and at the same time minimized diversions. The above information is collated and analysed to recommend a very simple solution: entitling every household to subsidized rations on the basis of its ration card but almost ensuring that the rich and the affluent, without any need for the mentioned subsidies and used to consuming fine varieties of grain, not avail of these for self consumption by providing only coarse and nutritious rice, wheat or millets through Fair Price Shops (in economic theory this principle is known as ‘mechanism design’, so christened because those “who need a particular scheme” and those “who do not” identify themselves, thus rendering identification by an under informed and error prone external source unnecessary). Of course, the possibility of the rich and affluent using their ration cards to avail of their entitlements of coarse grains for profitable resale still exists even if they themselves prefer to consume finer varieties of grain. Similarly, there is the very real possibility of TPDS outlet managers coercing the vulnerable to accept provisions that are below their maximum entitlements and then diverting the rest to the open market for sales to these very sections of the population. All these problems can be solved if the TPDS outlets deal in provision of only certain coarse varieties of food grain and the sale of these varieties is banned in the open market. Information regarding the banned varieties can be distributed to the civil society and the population at large through an information dissemination programme. Thus, it would be highly probable that any open market sale of a variety distributed through the TPDS would get reported and punished and therefore diversion would be minimised. Therefore, errors in targeting of subsidies would be avoided and the food requirements of the vulnerable population would be met at minimal fiscal cost to the government.