Food subsidy as economic tool to fight poverty

Parsa Venkateshwar Rao Jr

Senior journalist

Pro-market economists show through statistical sophistry that extreme poverty in India has been eliminated before 2019, and one of the main reasons they think this is so is because of food subsidy, especially the in-kind one adopted by the Modi government since 2020. The authors, Surjit Bhalla, Arvind Virmani and Kamal Bhasin, argue in their paper, “Pandemic, Poverty, and Inequality: Evidence from India”, an International Monetary Fund (IMF) Working Paper published on April 5, that the World Bank estimates of poverty do not account for the food subsidy component to get at the right figure for household expenditure. Their argument is that through the in-kind food subsidy, India has eliminated extreme poverty going by the World Bank baseline for poverty as $1.9 per day. They admit that for countries like India, $1.9 is inaccurate, and it should be the upper limit of $3.2 per day. And their general argument is that this has been achieved through the food subsidy.

They arrive at the general conclusion: “According to the ‘official’ MMRP (Modified Mixed Recall Period) method, poverty in pre-pandemic 2019 was just 1.4 percentage points or a decline of 10.8 percentage points since 2011-12. What deserves emphasis is that the PPP (Purchasing Power Parity) of $1.9 poverty line is no longer appropriate for India; nevertheless, it is accepted as the extreme poverty line around the world and used as a reference standard for claims about the elimination of extreme poverty. By this standard, India can reasonably claim that pre-pandemic India was on the verge of eliminating extreme poverty.”

At any other time, the authors would have argued against subsidies of any kind, seeing them as inefficient tools for combating poverty. But in this paper, they turn themselves into ardent proponents of food subsidy. Or are we mistaken? They can argue that this paper of theirs is not about the rationale or rationality of food subsidy, but it is an important factor that is missing from estimation of poverty levels. It is possible they may argue in a separate paper about the usefulness of food subsidy in fighting and eliminating extreme poverty. But they do make the general observation in the latter half of their paper about the usefulness of food subsidy and claim they (the authors) might be the first ones to do so: “This paper is the first paper (at least known to us) to measure the direct explicit effect of in-kind transfer and subsidies on poverty in India (and elsewhere). In turn, our results document the dramatic effect that foodgrain subsidies can have on poverty rates in normal years and especially during a major shock like the pandemic.” And they are so taken in by the magical effect of food subsidies that they think it is a better option than the uniform basic income!

But it remains a surprise that these anti-subsidy economists consider the food subsidy as a positive factor in eliminating extreme poverty. And they also draw the very interesting conclusion that the levels of poverty declined much more in the low-growth GDP period of 2014-19 than in high growth GDP period of 2004-11 and that this is mainly due to decline in inflation in the 2014-19 compared to 2004-11. Is this paper then a robust defence of the welfarism of Prime Minister Narendra Modi government? Apparently so. The authors do point out that corruption has been eliminated and therefore the foodgrains marked for the poor people are reaching the beneficiaries.

But food subsidies, like any other welfare measure, including minimum support price (MSP) for farmers, or the Productivity Linked Incentive (PLI) for the micro, small and medium enterprises (MSMEs), can only be an alleviatory measure, and they cannot be the essential element of a vibrant economic system. Subsidies are fallbacks. Nothing more than that! The economy must stand on its own feet, and subsidies, however efficient, do not help to make an economy efficient and competitive. But the authors argue eloquently for the food subsidy: “The expansion of India’s food subsidy programme, rather than increasing cash transfers, enabled the government to provide for free food as per the average monthly requirement to all those who were entitled to purchase the same from the PDS system.” And they do not say whether this should be a permanent feature of the system, or whether there is a need to taper it.

Modi seems to have pulled off an impressive trick by making subsidies into an acceptable economic tool. Had these subsidies been part of a leftist-oriented government agenda, then the authors of this paper would have proved with much zeal how wrong-headed the subsidy economy really is.

The authors do not also calculate the cost of the subsidy which is what they would have done if a leftist government had done what the Modi government has done. They also fail to mention India’s foodgrain output, the overflowing buffer stocks and the costs of the buffer stocks.

Most importantly, there is not much discussion of ‘inequality’ that figures in the title of the paper, and whether inequality per se is an economic dampener. Most free market economists have argued that the removal or management of poverty should not be linked to the issue of inequality, and that poverty and inequality are entirely different things. And they viewed the talk of poverty and inequality in the same breath as due to the muddled thinking of the leftists.

What we find in this paper is the authors’ strained argument that the Modi government had done well in dealing with the pandemic through the in-kind food subsidy, which amounted to the government not spending a penny excepting for the distribution of free ration to 80 crore people. And it does not occur to the authors that if 80 crore people — more than 60 per cent of the population — are dependent on free ration, then that economy is indeed vulnerable. 

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