Why cashless PDS may prove more costly for poor

Over the last couple of years, the government of India has been keen to transform its largest social security programme, the Public Distribution System (PDS), which provides food security to 60 per cent of the country’s population.

Demonetisation, and the lack of liquidity across the country over the last two months, has meant an upheaval in the system; ration shops have been looted and many state governments have been forced to provide grain on credit.

This has provided the government the opportunity it has been waiting for to push this agenda - move the PDS from an in-kind transfer to a cash-based one, ie transfer money directly into the accounts of individuals for them to use in the open market instead of providing subsidised grains through ration shops.

But there are problems.

Firstly, cash transfers have been offered as a silver bullet that will reform the PDS where leakages vary from 24-45 per cent. However, recent experiments in Chandigarh and Puducherry - incidentally, Union Territories (UTs) where the central government doesn’t have to deal with state administrations - have produced mixed results.

Independent evaluations suggest the amount transferred was insufficient to buy the grain individuals are entitled to (5 kg per person) from the open market, which meant that consumption of grains was either reduced or funds for other expenses were being moved to food.

Access to banking and mobile infrastructure was also found to be inadequate, and in cases where banks were available, the staff was seen to be unwilling to deal with beneficiaries withdrawing small amounts.

Awareness about the new scheme was low, and people wondered why the government would change a system which, while flawed, worked - gave them if not the full entitlement but a large percentage of it, and was easy, familiar and convenient. Exclusion of the elderly, unfamiliar with technology and unable to adapt to the new system, was also observed.

Secondly, the decision to move to cash transfers is entirely top-down. After the enactment of the National Food Security Act (NFSA), 60 per cent of the country’s population is entitled to food support. Assistance from the government makes up for half to one-third of the monthly consumption of many households in the system.

However, the opinion and therefore convenience of beneficiaries is not taken into account in the existing experiments and cash transfers have been largely implemented in an undemocratic and top-down manner and can potentially hamper food security for millions, in a country where 40 million children are stunted.

States, since demonetisation, are being encouraged to move rapidly to cashless PDS - Karnataka and Maharashtra are in the process of rolling out some versions of it but interviews in the field suggest a general support for the old system, and a resounding no to cash transfers.

Thirdly, the central government’s enthusiasm to move the PDS to cash transfers means that food departments in states and UTs are rushed. There is not enough time to design operating systems that work, check the adequacy of the amount of transfer, test different payment instruments for viability or on-board and educate users.

As a result, haphazard systems are rolled out, with huge burden on the banking and government administration which are not given time to prepare, and increased exclusion of beneficiaries, who spend a lot of time in dealing with badly constructed systems.

That said, the PDS is fraught with corruption, especially at the retail end. Ration shops dealers do adulterate the grains, they do shave off a few kilos off people’s entitlements to sell in the market and where possible, they do insist that their customers buy FMCG goods if they want to access their entitlements.

Automation of the entire supply chain has been implemented in states like Tamil Nadu and it is important to test cash transfers as well as a potential alternative. But, in the right way.

State governments, the implementing agencies for the PDS, should be required to provide evidence on the efficacy of cash transfers and should be required to test the new system before implementation, as seen in Karnataka. The tests should be designed for smaller populations, and gradually scaled up.

A choice should be given to all users of the PDS, to see if they want to participate in the experiment and the option to opt-out should be given every three-six months, in case a household realises that they prefer the older system.

States should make sure there is adequate access to payment infrastructure and payment tools should be tested before large roll-outs. For example, does USSD work better in some areas while payment through the BHIM app works better elsewhere.

The central government should focus on designing reliable systems for authentication, payment transfers that can be adapted by states, to suit their own peculiar needs. Finally, there should be regular, independent evaluations to ensure that nutrition levels are not being compromised as a result of cash transfers.

Moving the PDS to cash transfers isn’t a race to the top, and as tempting as it might seem to the government, for the sake of fiscal efficiency, it really must be given more thought, and more evidence should be created before changing a system that provides food security to over half the population. 

Also read: Can government make India go cashless in 2017?