Cash vs. in-kind transfers: the role of self-targeting in reforming the Indian food subsidy program

Abstract

Historically, India has relied on subsidizing staple food as a major instrument in improving food security. Recently, however, cash transfers have entered the debate as an alternative, as they are associated with lower market distortions, leakages and fiscal costs. This study contributes to this debate by analyzing India’s Targeted Public Distribution System (TPDS). Our main objective was to explain the under-purchase, or low take-up, from the TPDS, which is typically attributed to ‘leakage’, i.e. the diversion of food grains from eligible consumers. We provide an alternative solution based on self-targeting; while poorer households increase their consumption from the TPDS, wealthier households restrain from consuming subsidized commodities. Using a large household dataset, we estimated that such a voluntary opt-out system, based on income, would save a minimum of 6.5% of grains released through the TPDS. Besides these demand-driven aspects, our analysis indicates that poor regions perform better at lowering the diversion of grains and that large targeting errors exist among female-led households. Finally, we find substantial regional price differences that would benefit the poor and rural population under a uniform cash-transfer system that does not correct for regional price levels.

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Notes

  1. 1.

    Fair Price Shop is a shop which has been licensed to distribute essential commodities to the ration card holders under the Public Distribution System.

  2. 2.

    The FSUs are villages for rural areas and blocks for urban areas.

  3. 3.

    Selection of household is random on the FSU-level.

  4. 4.

    Antyodaya Anna Yojana (AAY) is a Government of India scheme targeting the poorest families among the below poverty line population.

  5. 5.

    There were no significant differences in the estimated coefficients for rural and urban sector separately, consequently, we present results of the estimation based on the full sample.

  6. 6.

    Expenditure below the Rangarajan poverty line (Planning Commission 2014)

  7. 7.

    This means that on average a rural household can afford 1.9 kg of rice or 2.2 kg of wheat if they receive cash as compared to the in-kind food distribution.

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Correspondence to Marta Kozicka.

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Kozicka, M., Weber, R. & Kalkuhl, M. Cash vs. in-kind transfers: the role of self-targeting in reforming the Indian food subsidy program. Food Sec. 11, 915–927 (2019). https://doi.org/10.1007/s12571-019-00942-x

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Keywords

  • Food security
  • Policies
  • India
  • Targeted public distribution system
  • Self-targeting
  • Cash transfers