Modi faces hurdles in food subsidy reform

India unprepared to switch to cash transfer programme in place of rations for its poor

PUDUCHERRY (India) • Among the dozens who lined up for rice rations in the seaside town of Puducherry earlier this month, the consensus was clear: India is not ready to give cash instead of food to millions of poor people.

The former French colony has been a laboratory for fixing a US$20 billion (S$27.4 billion) per year food subsidy programme - one of Prime Minister Narendra Modi's most ambitious and politically difficult economic reforms.

Mr R. Dharmaraju, a 67-year-old retired librarian, said a local cash transfer pilot programme that began in February revealed a host of problems before it was cancelled after three months. It took him two trips to the bank and hours of waiting to finally get the cash.

"If the government can pay salaries on time, why is our money delayed?" Mr Dharmaraju said, adding he would have preferred to have received rice.

Getting this policy right is crucial for Mr Modi's plan to overhaul India's economy. In one swoop, it would dismantle a programme riddled with corruption, bring rural Indians into the banking system, improve the country's finances and reduce the government's role in the agricultural sector.

One of Mr Modi's biggest accomplishments so far has been opening 170 million bank accounts, mostly in remote areas. He has filled up about half of them in part with cash transfers for pensions, scholarships and cooking gas. The rest will probably stay empty unless he also starts giving cash instead of food.

On paper, it sounds like a no-brainer. Yet in rural villages, it faces innumerable obstacles - all of which are exacerbated by India's political calendar. While Mr Modi won the biggest Lower House parliamentary majority in three decades just last year, he needs to constantly win a steady flow of state elections to take control of the Upper House.

Two-thirds of the country's 1.2 billion people are eligible for cheap food. Most of them, until recently, never had a bank account and have no experience managing money. Without rice, there is a risk that some villagers will misspend the cash and go hungry.

Moreover, thousands of local politicians, brokers and ration shop owners conspire to siphon off nearly half of the food each year. Cash deposited straight into the bank accounts of India's poor is much more difficult to steal.

Right now, Mr Modi is just trying to get the programme to work in three federal territories. The federal pilot programmes have been delayed until September from this month because the local governments were not ready.

Puducherry is a relatively wealthy area and it accounts for 0.1 per cent of India's population, and half of them qualify for cheap grains under the public distribution system.

In February, Puducherry instituted cash transfers for the 10kg of rice per month it offers in addition to the federal government's food handouts. That led to a chorus of complaints from citizens who said they wasted a whole day going to the bank and then buying grains, rather than just one stop at the ration shop.

The local government finally cancelled the programme, and has no plans to restart it even when the federal government transitions to cash transfers, according to Ms P. Priyatarshny, an official who oversees the Puducherry programme. "Whenever our government officials went to the people, there was a demand that we need rice, not money," she said.

Shortly after taking office, Mr Modi set up a panel to make recommendations on fixing the food distribution system. It proposed introducing cash transfers. That would save US$5 billion a year, it said.

The arguments against cash transfers mostly revolve around the lack of financial infrastructure, said Dr Reetika Khera, a professor at Delhi's Indian Institute of Technology who surveyed the public distribution system across 10 states in 2013. "The banking infrastructure is thin and overstretched and it gets crowded and difficult on payment day," she said. "The transaction costs will rise as they have to miss a day's work to collect their payment."

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A version of this article appeared in the print edition of The Straits Times on July 25, 2015, with the headline 'Modi faces hurdles in food subsidy reform'. Print Edition | Subscribe