GS Notes

6. Economics Notes 34

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Elaborate Notes

Public Distribution System, PDS

The Public Distribution System (PDS) is a government-sponsored chain of shops entrusted with the work of distributing basic food and non-food commodities to the needy sections of the society at very cheap prices. Its genesis can be traced back to the system of food rationing introduced by the British during the Second World War in 1942. Post-independence, it was retained as a deliberate social policy and has evolved significantly over the decades.

  • Terms related to PDS

    • Food Corporation of India (FCI): Established in 1965 under the Food Corporations Act, 1964, the FCI is the nodal agency of the Government of India for procurement, storage, and distribution of food grains. Its establishment coincided with the onset of the Green Revolution, making it a critical institution for managing the subsequent food surpluses.

      • Objectives of FCI:
        1. Distribution for PDS: FCI is the primary agency that procures food grains (mainly wheat and rice) from farmers at Minimum Support Price (MSP) and allocates them to state governments for distribution under the PDS and other welfare schemes.
        2. Maintaining Buffer Stocks: It is responsible for maintaining a satisfactory level of operational stocks (to meet monthly distribution needs) and buffer stocks (to ensure food security during periods of crop failure, natural calamities, or price volatility). These buffer stocking norms are determined by the government. For instance, the total minimum stock required on April 1st of any year is 21.04 million tonnes.
        3. Price Support Operations: By procuring grains at MSP, FCI ensures that farmers receive a remunerative price for their produce, safeguarding them from price fluctuations and distress sales, particularly after a bumper harvest.
        4. Emergency Management: The strategic reserves maintained by FCI are crucial for responding to emergencies, ensuring a stable supply of food grains across the country.

    • Central Issue Price (CIP): This is the subsidised price at which the Central Government sells food grains from the central pool (held by FCI) to the State/UT governments. The states, in turn, distribute these grains to the beneficiaries through Fair Price Shops. The difference between FCI’s ‘economic cost’ and the CIP constitutes the food subsidy borne by the Central Government.

      • Economic Cost: This is the total cost incurred by FCI. It comprises the procurement price paid to farmers (MSP), procurement incidentals (such as mandi charges, handling, bagging), and the costs of distribution (freight, storage, interest charges, and administrative overheads).
      • The CIP is set significantly lower than the economic cost, especially for beneficiaries under the National Food Security Act (NFSA), 2013, such as Antyodaya Anna Yojana (AAY) and Priority Households (PHH).

    • Fair Price Shops (FPS): Also known as ration shops, these are the final link in the PDS chain. They are licensed entities, typically privately owned, responsible for distributing essential commodities like rice, wheat, sugar, and kerosene to ration card holders at government-fixed prices. Their functioning is governed by the Essential Commodities Act, 1955.

  • Minimum Support Price, MSP

    • MSP is a form of market intervention by the Government of India to insure agricultural producers against any sharp fall in farm prices. It is announced at the beginning of the sowing season for certain crops.

    • Recommendation Body: The MSP is recommended by the Commission for Agricultural Costs and Prices (CACP), an attached office of the Ministry of Agriculture and Farmers Welfare, established in 1965. The final decision on the level of MSP is taken by the Cabinet Committee on Economic Affairs (CCEA).

    • Factors Considered by CACP: The CACP considers a comprehensive set of factors, including the cost of production, changes in input prices (seeds, fertilizers, labour), inter-crop price parity, demand and supply situation, and the likely impact of MSP on consumers and the wider economy.

    • Benefits of MSP:

      • Income Security: It provides a guaranteed price and a safety net for farmers, protecting them from price volatility, especially in years of bumper production.
      • Supply Stability: A stable and assured income encourages farmers to continue production, ensuring a stable supply of food grains for the nation.
      • Investment in Agriculture: Higher and stable returns can enable farmers to invest in better technology, machinery, and inputs, potentially boosting agricultural productivity.

    • Challenges/Issues of MSP:

      1. Calculation Methodology: This is a major point of contention.

        • Currently, the government’s MSP is based on the A2 + FL formula. ‘A2’ includes all actual paid-out expenses incurred by the farmer in cash and kind on seeds, fertilizers, pesticides, hired labour, fuel, irrigation, etc. ‘FL’ is the imputed value of unpaid family labour.
        • Farmers’ groups and the National Commission on Farmers, chaired by Dr. M.S. Swaminathan (Report submitted in 2006), have long demanded that MSP be calculated based on the C2 formula. ‘C2’ is a more comprehensive cost that includes A2+FL plus imputed rent on owned land and interest on fixed capital assets. The Swaminathan Commission recommended that MSP should be at least 50% more than the C2 cost.
        • According to the NSSO’s 77th round survey (2018-19), awareness of MSP was low, and only a small fraction of farmers, primarily in states with robust procurement infrastructure like Punjab and Haryana, actually benefit from it. The figure often cited is that only 6% of farmers benefit from MSP for paddy and wheat.

      2. Skewed Cropping Pattern: The effective implementation of MSP and procurement is largely confined to wheat and rice. This has incentivised farmers to move away from other crops like pulses, oilseeds, and coarse grains, leading to a cereal-centric production system, depleting groundwater tables (especially for paddy), and hindering crop diversification.

      3. Market Distortion: Dominant procurement by government agencies (FCI procuring up to 70-80% of market arrivals in some states) crowds out private traders. This hinders the development of a competitive private agricultural market and can lead to inefficiencies.

      4. Role of Middlemen: In many states, farmers are forced to sell their produce to commission agents or arthiyas in the APMC mandis, who often exploit them by charging high commissions and manipulating weighing scales, thus diluting the intended benefits of MSP.

  • Issues associated with the PDS system

    • Identification of Beneficiary: The shift from a universal PDS to a Targeted PDS (TPDS) in 1997 introduced the problem of correctly identifying the poor. This system is plagued by:

      • Inclusion Errors: Non-eligible households receiving benefits (estimated at around 25%).
      • Exclusion Errors: Genuinely eligible households being left out (estimated to be as high as 60% in some studies). This issue has been extensively documented by economists like Jean Drèze and Reetika Khera.

    • Leakage of foodgrains: This refers to the diversion of subsidized food grains from the PDS supply chain into the open market for profit. A Planning Commission study in 2005 estimated leakages at 36%. Data for 2011-12 suggested that leakages for wheat and rice combined were around 46.8%. This occurs during transportation and at the level of the Fair Price Shop.

    • Procurement Issues: The “open-ended” procurement policy (where the government buys whatever quantity is offered by farmers at MSP) leads to the accumulation of excessive buffer stocks, often far exceeding the strategic norms. This places an immense fiscal burden on the government in terms of procurement costs, storage, and distribution, and also creates a scarcity of these grains in the open market, potentially fueling inflation.

    • Issues with Storage: A performance audit by the Comptroller and Auditor General (CAG) has repeatedly highlighted the inadequacy of scientific storage capacity with FCI. Grains are often stored in open plinths under tarpaulins (CAP storage), leading to spoilage, pest infestation, and quality deterioration due to exposure to rain and moisture.

    • Inconsistent Quality: Beneficiaries often complain about receiving poor quality, and sometimes inedible, food grains from FPS.

    • Corruption: The PDS system has been marred by corruption at various levels, from the manipulation of beneficiary lists to the diversion of grains by FPS owners who may sell them in the open market and record ghost entries in their books.

  • Measures taken to reform PDS

    • One Nation One Ration Card (ONORC): This scheme aims to ensure intra-state and inter-state portability of ration cards under the NFSA. Migrant beneficiaries, using their existing ration card with Aadhaar authentication on an Electronic Point of Sale (ePoS) device, can access their entitled foodgrains from any Fair Price Shop in the country. This is particularly beneficial for migrant labourers and their families.

    • Technology-based Reforms: As recommended by the Justice D.P. Wadhwa Committee (2009), technology is being used to plug leakages and improve transparency.

      • End-to-end Computerisation: This involves digitisation of beneficiary data, online allocation of food grains, and GPS tracking of trucks transporting grains. States like Chhattisgarh and Madhya Pradesh have been pioneers in implementing such IT measures.
      • Automation of FPS: The installation of ePoS devices at ration shops, linked with Aadhaar, ensures biometric authentication of beneficiaries, preventing impersonation and bogus entries. This also provides a real-time record of transactions.
      • Smart Cards: Some states have introduced smart cards in place of traditional ration cards, which store beneficiary details and entitlements electronically.

    • Universal PDS: Some states, notably Tamil Nadu, have opted for a near-universal PDS instead of the targeted approach, which significantly reduces exclusion errors, although it involves a higher fiscal outlay for the state government.

  • Shanta Kumar Committee recommendation on PDS The High-Level Committee on Restructuring of FCI, chaired by Shanta Kumar, submitted its report in 2015. Key recommendations included:

    • Procurement:
      • FCI should hand over procurement operations in states that have gained sufficient experience (e.g., Punjab, Haryana, Andhra Pradesh) to the state governments themselves.
      • Shift from an open-ended procurement model to one that procures only the grain needed for buffer stocks and TPDS.
      • Introduce robust quality checks and popularize negotiable warehouse receipt systems to help farmers get credit from banks.
    • Transportation & Storage:
      • Shift to containerised movement of grains to reduce transit losses.
      • Outsource stocking and transportation activities to private players or other agencies like the Central Warehousing Corporation.
      • Promote the construction of modern storage facilities like steel silos through Public-Private Partnership (PPP).
    • Distribution:
      • Reduce the coverage under the NFSA from 67% of the population to a more targeted 40%.
      • Increase the food grain entitlement for priority households from 5 kg to 7 kg per person.
      • Introduce a system of Direct Benefit Transfer (DBT) of food subsidy in cash to the beneficiaries’ bank accounts, particularly in large cities.

  • Criticisms against Recommendation

    • WTO vs Welfare: Reducing PDS coverage was seen as a move to align with WTO’s ‘Amber Box’ subsidy limits, potentially at the expense of the food security of millions.
    • Opposition from Stakeholders: The recommendations for outsourcing and privatisation were strongly opposed by FCI trade unions.
    • Privatisation Concerns: Handing over food security operations to private players could increase costs and might not be reliable during crises.
    • Data Reliability: The committee’s recommendations were based on NSSO consumption data, the accuracy of which has been questioned by some economists.

  • Open Market Sales Scheme, OMSS

    • Under OMSS, the FCI sells surplus stocks of wheat and rice from the central pool at pre-determined prices in the open market from time to time.
    • Objective: To enhance the supply of grains in the market, especially during the lean season, and thereby moderate open market prices.
    • Mechanism: FCI conducts weekly e-auctions for bulk buyers (traders, flour mills) on the platform of commodity exchanges like the National Commodity and Derivatives Exchange Ltd (NCDEX). State governments could also procure grains through this scheme for their needs beyond the TPDS.
    • Recent Change: In 2023, the Central Government discontinued the sale of rice and wheat under OMSS to state governments to manage the central pool stocks and control inflation, a move that affected states running their own food security schemes.

LAND REFORMS

Land reforms refer to institutional measures directed towards altering the existing pattern of ownership, tenancy, and management of land. At the time of independence, the agrarian structure was feudal, semi-feudal, and exploitative, acting as a major impediment to agricultural growth and social justice.

  • Pre-Independence Land Tenure Systems:

    • Zamindari System: Introduced by Lord Cornwallis in 1793 through the Permanent Settlement Act, it was prevalent in Bengal, Bihar, Orissa, and parts of modern-day Uttar Pradesh. Under this system, zamindars were recognized as owners of the land and were responsible for collecting rent from the cultivators and paying a fixed sum to the British government. This system created layers of intermediaries and led to severe exploitation of the actual tillers. About 57% of the land was under this system.
    • Ryotwari System: Introduced by Thomas Munro in the early 19th century, it was prevalent in parts of the Madras and Bombay Presidencies. The government made a direct settlement with the ryots (cultivators), who were recognized as proprietors of the land, subject to the payment of land revenue. However, high revenue demands often forced ryots into the clutches of moneylenders.
    • Mahalwari System: Introduced by Holt Mackenzie in the 1820s in the North-West Provinces, it later extended to Central India and Punjab. The settlement was made with the village community or a mahal (estate) as a whole, which was jointly responsible for paying the land revenue.

  • Types of Tenants: A common feature across systems was the prevalence of tenancy.

    • Occupancy Tenants: Had permanent and heritable rights to the land as long as they paid rent. They enjoyed security of tenure.
    • Tenants-at-will: Had no security of tenure and could be evicted at the landlord’s discretion. Their position was extremely precarious.
    • Sub-tenants: These tenants leased land from occupancy tenants and their position was as insecure as that of tenants-at-will.

  • Objectives of land reforms The primary objectives were rooted in the ideals of the freedom struggle and the vision of a just and equitable society as enshrined in the Directive Principles of State Policy of the Indian Constitution.

    • Socio-economic Justice: To eliminate exploitation by intermediaries like zamindars and provide land to the tiller.
    • Agricultural Productivity: To remove institutional bottlenecks to agricultural production and create conditions for higher efficiency and growth.
    • Equality: To ensure equality of status and opportunity for all sections of the rural population.

  • Phases/Aspects of Land Reforms:

    1. Abolition of Intermediaries
    2. Tenancy Reforms (Regulation of rent, security of tenure, ownership rights for tenants)
    3. Reorganisation of Agriculture (Ceiling on land holdings and redistribution of surplus land, consolidation of holdings, cooperative farming)

  • Abolition of Intermediaries

    • Context: This was the first and most widely implemented land reform measure after independence. The Congress Agrarian Reforms Committee (Kumarappa Committee, 1949) had strongly recommended the abolition of the zamindari system.
    • Legislation: Since agriculture and land are state subjects, states enacted their own laws. States like Uttar Pradesh, Bihar, and Madras passed legislation even before the Constitution was adopted. Most of the implementation occurred during the First Five-Year Plan (1951-56).
    • Implementation Challenges:
      • Legal Hurdles: The zamindars challenged the abolition acts in courts, arguing they violated their fundamental right to property. To counter this, the Parliament passed the First Constitutional Amendment in 1951, which introduced Articles 31A and 31B and the Ninth Schedule to protect land reform laws from judicial review.
      • Loopholes: A major loophole was the provision allowing zamindars to retain land for ‘personal cultivation’. The definition of ‘personal cultivation’ was so broad initially that it simply meant the zamindar bore the risk of cultivation, allowing them to evict tenants on a large scale and retain vast tracts of land. The Second Five-Year Plan attempted to tighten this definition by including criteria like personal labour and supervision.
      • Administrative Delays: Poor land records and bureaucratic apathy hampered effective implementation. Zamindars often refused to hand over land records, leading to further delays.
    • Outcome:
      • While the system of intermediaries was officially abolished, leading to about 2 crore tenants being brought into direct contact with the state, the reform was only partially successful.
      • As noted by scholars like P.C. Joshi, the reform did not lead to a radical redistribution of land. The former zamindars used legal loopholes to retain large landholdings and emerged as a class of ‘big landowners’. This, along with the rich peasantry, formed a new dominant class in rural India.
      • Despite its limitations, the abolition of zamindari was a significant step. It weakened the feudal structure, ended the worst forms of exploitation, and paved the way for more investment in land by the new owner-cultivators.

Prelims Pointers

  • Food Corporation of India (FCI) was established in 1965 under the Food Corporations Act, 1964.
  • Minimum Support Price (MSP) is recommended by the Commission for Agricultural Costs and Prices (CACP).
  • The Cabinet Committee on Economic Affairs (CCEA) gives the final approval for MSP.
  • The M.S. Swaminathan-led National Commission on Farmers recommended MSP at 50% above the C2 cost of production.
  • Current MSP calculation is based on the A2+FL formula.
  • Targeted Public Distribution System (TPDS) was launched in 1997.
  • National Food Security Act (NFSA) was enacted in 2013.
  • The Shanta Kumar Committee (2015) was constituted for the restructuring of FCI.
  • The Justice D.P. Wadhwa Committee submitted a report on computerisation of PDS.
  • One Nation One Ration Card (ONORC) scheme provides for the nation-wide portability of ration cards.
  • Open Market Sales Scheme (OMSS) is the sale of surplus food grains by FCI through e-auctions.
  • Pre-independence land tenure systems included Zamindari (Permanent Settlement), Ryotwari, and Mahalwari.
  • The First Constitutional Amendment Act, 1951, added the Ninth Schedule to protect land reform laws from judicial scrutiny.
  • The Kumarappa Committee (1949) was the Congress Agrarian Reforms Committee that recommended the abolition of zamindari.

Mains Insights

Public Distribution System, PDS

  1. Evolution and Changing Objectives:

    • The PDS has evolved from a universal rationing system during wartime to a universal entitlement scheme in the post-independence era, then to a targeted system (TPDS) in 1997, and finally to a rights-based approach under the National Food Security Act, 2013. This reflects a shifting policy focus from general price stabilisation to targeted poverty alleviation and now to a legal entitlement for food security.

  2. Debate: Universal vs. Targeted PDS:

    • Arguments for Targeting (TPDS): Proponents argue it is fiscally prudent, reduces the subsidy bill, and directs benefits to the most deserving.
    • Arguments against Targeting (for Universal PDS): Critics, like Amartya Sen and Jean Drèze, argue that targeting leads to large exclusion and inclusion errors, creates social divisions, and involves high administrative costs. States like Tamil Nadu demonstrate that a well-functioning universal system can be more effective in ensuring food security. The NFSA, 2013, covering 67% of the population, is a middle path between narrow targeting and full universality.

  3. The Political Economy of MSP:

    • MSP is not just an economic tool but also a highly sensitive political issue. Any attempt to reform or rationalize MSP faces stiff opposition from powerful farmers’ lobbies and political parties.
    • Cause-Effect Loop: The MSP-procurement regime, focused on wheat and rice, fueled the Green Revolution but has now led to unintended negative consequences: ecological unsustainability (groundwater depletion, soil degradation), skewed cropping patterns, and a massive fiscal burden due to overflowing buffer stocks. Reforming this cycle is a major policy challenge.

  4. Technology as a Double-Edged Sword:

    • Positive Impact: Technology (Aadhaar, ePoS, GPS) has undeniably improved PDS efficiency, reduced leakages, and enhanced transparency. The ONORC scheme is a prime example of leveraging technology for welfare.
    • Negative Impact: Over-reliance on technology can lead to new forms of exclusion. Issues like biometric failures, poor internet connectivity in remote areas, and lack of digital literacy can deprive genuine beneficiaries of their entitlements. It is crucial to have robust grievance redressal mechanisms and offline alternatives.

  5. PDS, Food Subsidy, and WTO:

    • India’s large food procurement and subsidy program has faced scrutiny at the World Trade Organization (WTO). Developed countries argue that India’s MSP constitutes a trade-distorting ‘Amber Box’ subsidy that exceeds the permissible limits under the Agreement on Agriculture.
    • India defends its program as essential for food security and has secured a ‘peace clause’, which prevents other members from legally challenging the program until a permanent solution is found. This international pressure is a key factor influencing debates on PDS reforms, such as the Shanta Kumar Committee’s recommendation to reduce coverage.

Land Reforms

  1. Limited Success of Land Reforms: A Historiographical Debate:

    • Nationalist/Official View: Hails land reforms, particularly the abolition of zamindari, as a revolutionary step that broke the back of the feudal order and empowered the peasantry.
    • Critical/Marxist Viewpoint: Argues that the reforms were a top-down process with several loopholes that were exploited by the landed elite. Scholars argue it was a “reform from above” that merely replaced old feudal lords with a new class of capitalist landlords and rich peasants, without fundamentally altering the unequal agrarian power structure. The lack of political will from a ruling class dominated by landed interests is often cited as the primary reason for failure.

  2. Cause and Effect: Incomplete Reforms and Agrarian Distress:

    • The failure to implement tenancy reforms and land ceiling laws effectively across the country is a direct cause of persistent issues like concealed tenancy, insecure tenure for small and marginal farmers, and landlessness.
    • This institutional failure, coupled with other factors like credit dependency and climate shocks, contributes significantly to ongoing agrarian distress and farmer suicides. The absence of clear land titles also prevents farmers from accessing formal credit.

  3. Federalism and Land Reforms:

    • Land being a state subject led to significant regional variations in the design and implementation of reform laws. States with strong peasant movements and greater political will, such as Kerala and West Bengal (e.g., Operation Barga), saw more successful implementation of tenancy reforms compared to states like Bihar and Uttar Pradesh. This highlights the critical role of state-level politics and social movements in shaping the outcomes of national policies.

  4. Socio-Political Impact:

    • Despite its economic limitations, the abolition of intermediaries had a profound socio-political impact. It led to the decline of the traditional absentee landlord class and facilitated the rise of intermediate peasant castes (OBCs) as a dominant political and economic force in many parts of India. This shift in rural power dynamics has reshaped Indian politics over the subsequent decades.

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