Benefits and costs of food distribution policies : the India case

Benefits and Costs of Food Distribution Policies The India Case SWP509 Pasquale L. Scandizzo Gurushri Swamy WORLD BANK STAFF W7ORKING PAPERS Number 509 PUs HG 3881.5 .W57 W67 no. 509   WORLD BANK STAFF WORKING PAPERS Number 509 Benefits and Costs of Food Distribution Policies The India Case Pasquale L. Scandizzo Agriculture and Rural Development Department Gurushri Swamy Econornic Analysis and Projections Department The World Bank Washington, D.C., U.S.A.  Copyright g 1982 The International Bank for Reconstruction and Development / THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America This is a working document published informally by The World Bank. To present the results of research with the least possible delay, the typescript has not been prepared in accordance with the procedures appropriate to formal printed texts, and The World Bank accepts no responsibility for errors. 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Both booklets are updated annually; the most recent edition of each is available without charge from the Publications Distribution Unit of the Bank in Washington or from the European Office of the Bank, 66, avenue d'Iena, 75116 Paris, France. L,ibrarY of (Congr-Ne" Cataloging in Publication [lata Scandizzo, Pasquale L. Benefits and costs of food distribution policies, the India case. (World Bank staff working paper ; no. 509) Bibliography: p. 1. Food supply--Government policy--India--Cost effectiveness. 2. Food relief--Government policy-- India--Cost effectiveness. I. Swamy, Gurushri. II. Title. III. Series. HI9ol6.i42S335 1982 338.413363856'0954 82-8543 ISBN 0-8213-0011-3 AACR2  ABSTRACT BENEFITS AND COSTS OF FOOD DISTRIBUTION POLICIES: THE INDLA CASE This paper analyzes some of the characteristics and the main con- sequences of the food distribution policies followed by the Indian Govern- ment and provides a quantification and a cost benefit analysis of their effects on: (i) consumers, (ii) producers, and (iii) the government btudget. Despite a leakage of the benefits to unintented beneficiaries and procurement and distributLon costs, the analysis shows that even a moderate concern with the nutritional status of the poor makes the schemes a worthy economic and social intervention, although it is possible that other poli- cies would achieve the samne effects more efficiently. Elowever, there appears to be little scope for expanding the distribution system beyond its present size unless substantial gains can be made either by extending it to the rural areas or by cutting its costs.   BENEFITS AND COSTS OF FOOD DISTRIBUTION POLICIES: THE INDIA CASE Table of Contents Page No. I. Introduction . ................ , II. Some Basic Charac;teristics of Indian Food (Distribution) Policies ....... ............... . 3 III- Price and Income Iffects of the Food Distribution Program 7 IV. Consumption and Market Prices With and Without Interventioi. 10 V. Estimation of Soctal Gains ................................ 14 VI. Net Government Cost/Revenues ......................... .... 18 (a) Import Costs ........................................ 20 (b) Marketing and Administrative Costs .... I ............. 21 VII. Estimation of Costs and Benefits ...............I............. 26 VIII. Assumptions anti Limitations of the Study .33 IX. Conclusions .35 APPENDIX ..37 BIBLIOGRAPU ....43   PREFACE The benefit-cost analysis is made for the year 1974 Eor three reasons. It was a year of unusually high world prices for grain so that consumers benefited substantially from the ban on private exports of food grains that has been in effect for more than a decade. Producers surplus loss was correspondingly large. Second, substantial quantities of grain were distributed through the rat,ion system. Third, the N.S.S. Sample Survey on Consumer Expenditures for the year 1973-74 was used in an earlier study to estimate private and social demand elasticities for India as well as the numbers of undernourished and the nutritional gap. These estimates were essential for the estimation of social gains. However, procurement pc,licies have changed in a major way since 1974. Upto 1977, food distributed through ration shops was partly procured from farmers and millers at a price below the open market price. Surplus areas were cordoned off and private inter-state movement of grain was greatly restricted in order to facilitate the Government s procurement operations. In 1977 houever, food zones were abolished and procurement is no longer compulsory as a matter of routine. This situation has continued and procurement prices have become essentially support prices at harvest time. The control over external trade that characterized the period up to 1974 houever continues, making possible a diversion between domestic and international prices. Procurement prices for rice have remained below international prices since 1974, while wheat procurement prices have on occasions been higher than international prices. The authors are grateful to D. Bigman, H. Binswanger, L. Harbert, 0. Knudsen, C. Lewis, E. Lutz, S. Reutlinger, and T.N. Srinivasan for helpful discussion and comments. All remaining errors are the sole responsibility of the authors. The World Bank is not responsible for the views expressed in this paper.   BENEFITS AND COSTS OF FOOD DISTRIBUTION POLICIES: THE INDIA CASE by Pasquale L. Scandizzo and Gurushri Swamy - I. Introduction 1.01 The views held by economists on food distribution schemes in developing countries are often slightly contemptuous. While it is admitted that political considerations make the abolition of the schemes a practical impossibility, it is maintained that food distribution policies (i) are harmful to agricultural producers, (ii) reach only a small number of the malnourished while mainly btenefiting government bureaucrats and the urban middle class, (iii) are a source of inefficiency and corruption, and therefore (iv) have large administrative costs. 1.02 As for similar strong tenets of conventional wisdom, it is difficult to find quantitative studies supporting these views. While the inefficiency of the schemes is often the object of anecdotes documenting special cases, no comprehensive cost benefit analysis has been presented, to our knowledge, even for the largest programs. 1.03 The reason why the evidence on food distribution remains non- quantitative is basically threefold. First, it is difficult to measure the impact of the schemes on the intended beneficiaries. Second, while food procurement costs may be easy to measure, opportunity costs, administrative inefficiencies and leakages are difficult to systematically quantify. Finally, methodologies to estimate the benefits of the schemes are only now becoming available and are only slowly being applied to the evaluation of social projects.  -2- 1.04 The price and income effects of food distribution programs, par- ticularly large ones, are complex and difficult to identify except in a general equilibrium framework. Indeed, these programs are often a combination of a number of policies, which include trade policies, domestic procurement, and rationing of food. The last cannot be studied in isolation, because although it is the centerpiece of the system, it is supported by and exists within a larger set of policies affecting food consumption and production in general. These policies create large transfers between producers and consumers and substantial government outlays, all of which need to be evaluated. 1.05 This paper provides a cost-benefit analysis of food distribution policies in India based on the Social Demand Framework developed by Scandizzo and Knudsen.l/ In essence this framework suggests that there is a special value that society as a whole attaches to increased food consumption of those who are likely to be malnourished. This value is reflected in a shadow price for calories which is (a) higher than the market price and (b) is higher the greater the extent of malnutrition in the society. The consumers' surplus gain of the malnourished which results from either the general or the specific (to the target group) income and price effects of food distribution policies can then be evaluated with reference to this shadow price as a "social" surplus. 1.06 The evaluation is made for the year 1974. This year was selected because of three reasons. It was a year of unusually high world prices for foodgrains so that consumers benefited substantially from the export ban on foodgrains (see 2 below) while producers surplus loss was large. Second, substantial quantities of foodgrains were distributed through the ration system. Third, the N.S.S. Sample Survey on Consumer Expenditures for the year 1973-74 /1. P.L. Scandizzo and 0. Knudsen (1980).  -3- is at the base of the Scandizzo/Knudsen estimates of private and social demand elasticities which are used to estimate the social gains in this paper. II. Some Basic Characteristics of Indian Food (Distribution) Policies 2-01 Since independence, India has m'aintained a ban on private exports of foodgrains. Although the government can export food on its own account or specially license some private exports, Table 1 shows that such exports have been small. Whether grain exports would be larger in the absence of the export ban is not very clear. T.W. Schultz I/ shows that between 1961 and 1972, the domestic price of rice (wholesale price of coarse variety of rice in Sambalpur, Orissa converted to US$ at the unofficial black-market rate) was, on average, 50% of the border price o-L rice where the latter is the unit value of Indian rice imports. (Clearly, i:he latter is a C.I.F. price, and the relevant price for Indian farmers would be lower by the unit value of international freight and insurance charges, and the unit cost of transportation within the country.) During the same! period, the domestic price of wheat (wholesale price of Moga wheat in PurLjab) was almost equal to the world price i.e. to the C.I.F. unit cost of Indian wheat imports. He argues that without government intervention and controls in trade and production, India would have increased production (and presumably exports) of rice. 2.02 However, this evidence on prices is insufficient to settle the question. First, as pointed out above, the C.I.F. unit cost of imports of rice needs to be adjusted for the international and domestic freight charges to make the price comparable to domestic price. The freight charges for transporting wheat from Canada and the US to India is quoted to be $16.4 per ton in 1972-73, i.e. about 18.3% of the F.O.B. unit value of wheat imports into India.2/ If this rate could be applied to the price of rice imports, /1 T.W. Schultz (ed) (1978). /2 FAO Trade Yearbook, Vol. 31, 1977.  -4-- Table 1 INTERNATIONAL TRADE IN CEREALS Exports Imports _- Total Total Cereals Rice Cereals Rice Wheat --------------- (million metric tons) ---------------- 1961 0.001 0.001 3.495 0.384 3.092 1962 0.001 0.001 3.640 0.390 3.250 1963 0.003 0.003 4.556 0.483 4.073 1964 0.003 0.003 6.226 0.645 5.621 1965 0.005 0.003 7.462 0.783 6.583 1966 0.009 0.002 10.358 0.787 7.784 1967 0.007 0.004 8.678 0.453 6.348 1968 0.006 0.003 5.694 0.446 4.766 1969 0.026 0.015 3.872 0.487 3.090 1970 0.052 0.027 3.631 0.206 3.425 1971 0.027 0.016 2.054 0.240 3.425 1972 0.027 0.015 0.445 0.131 0.314 1973 0.024 0.018 3.614 - 2.414 1974 0.045 0.041 4.874 - 4.203 1975 0.020 0.019 7.407 0.130 7.016 1976 0.043 0.038 6.483 0.117 5.832 1977 0.120 0.019 1.031 0.125 0.859 1978 0.972 0.245 0.396 0.071 0.321 1979 1.186 0.492 0.434 0.107 0.317 Source: Bulletin on Food Statistics, Government of India publication, various issues, and Food and Agriculture Organization, Trade Yearbook, Vol. 33.  -5- then the opportunity cost of not exporting rice would be reduced by 18.3% and the domestic (wholesale) price of rice would, on average, have been 70% of the world price, and not 50% as quoted by T.W. Schultz, (and the domestic price of wheat would be higher than. the world price). 2.03 While this may constitute a sizeable incentive, we must also consider the problems of different varieties of rice. The unit value of rice imports (the total quantity imported has been small as can be seen in Table 1) reflects the price of Burmese NSMS (Ngasein Small Mill Specials) variety and the price of Thai par-boiled rice, and the 45% broken variety.!' Although comparable varieties are grown in India, the world price of these varieties may understate the effective opportunity cost for Indian farmers since rice exports from India, to the extent allowed, have been of high quality rice. 2.04 Along with an export ban, India has imported on government account, quantities of wheat (and some rice) in deficit years (see Table 1). A substantial quantity of these imports (particularly of wheat) were on concessionary terms during the 1960s, and data for the early 1970s shows that even during 1970-72, concessionary imports and gifts (from the US and Europe) formed 70% of total imports. Nevertheless, in 1974 (which is the year of our study) only 3% of imports were on a concessionary basis. 2.05 The central and most state governments have also organized a system of public food distributicon through ration shops and fair-price shops. These shops have sold limited quantities of rice and wheat (and until recently, sugar) at prices below the open market price. Some of the relevant data are given in Table 2. The system has operated largely in big metropolitan /1 V.A. Sukhatme (1977).  -6- Table 2: IMPORTS AND PUBLIC DISTRIBUTION OF FOODGRAINS IN INDIA % of Foodgrain Consumption Contributed by the Public Imports as % Per Capita Public Distribution Year Procurement Imports Distribution Distribution Availability System (mil. ton) (mil.ton) (mil. ton) (grmss/day) 1951 3.82 4.80 7.99 60.0 367 N.A. 1956 0.04 1.44 2.08 66.7 417 3.32 1961 0.54 3.64 3.98 87.9 468 5.26 1962 0.48 3.64 4.37 83.2 462 5.71 1963 0.75 4.56 5.18 88.0 442 6.92 1964 1.43 6.27 8.67 72.3 453 11.05 1965 4.03 7.46 10.05 74.0 526 11.92 1966 4.01 10.36 14.09 73.5 410 17.83 1967 4.46 8.67 13.17 65.8 401 19.17 1968 6.81 5.69 10.22 55.6 460 11.77 1969 6.38 3.87 9.39 41.2 446 10.96 1970 6.71 3.63 8.84 41.0 457 9.88 1971 8.86 2.05 7.82 26.2 470 8.29 1972 7.67 0.45 10.48 4.2 467 10.89 1973 8.42 3.61 11.40 31.6 424 12.80 1974 5.68 4.87 10.79 45.0 453 10.90 1975 9.56 7.41 11.25 66.0 408 12.50 1976 12.85 6.52 9.17 71.0 457 9.00 1977 9.96 0.55 11.74 0.04 437 11.81 1978 /1 11.00 0.95 9.90 0.0 473 9.09 /1 Provisional Source: Bulletin on Food Statistics, various issues.  -7- and urban areas. Apart from location which favors urban and small-town consumers, there have been no attempts to target food towards low income consumers. The regional distribution of the quantity rationed suggests further that deficit and politically senisitive states received priority, ceteris paribus, over poliitically stable and/or surplus states.l/ 2.06 The quantity disjtributed was partly procured from farmers and millers at a price which is below the open market price. In order to facil- itate this procurement, the country-s surplus states and districts were cordoned off to prevent inler-state private movement of grain. This measure depressed the open market price in the surplus areas, and facilitated procure- ment operations. Imports have also been channeled through the public food distribution system, i.e., imported grain has not been sold directly on the open market. 2.07 Procurement prices are fixed by the central government on the basis of recommendations made by the Agricultural Price Commission which is influenced not only by the costs of production but also by the political strength of the farmers lobby.-/ Issue prices are presumably administered welfare prices, but in recent years they have been set too low to cover the /1 For detailed description, see G. Swamy, AGREP Division Working Paper 1979. In recent years, there have been attempts by state governments to locate ration shops in rural areas and even in surplus states and supply adequate quantities of grain to them. /2 Although the procurement price fixed by the commission is mandatory for the states, it has been pointed out that many states actually paid a much higher price to the farmers. In the year 1973-74, the average price paid to farmers of wheat was 3% higher than the recommended price, while the price paid for rice is computed to be 12% higher. It is difficult to assess the reliability of these figures, since different varieties for rice have different recommended prices, and the paddy-rice conversion ratios are also different. See R. Krishna and G.S. Raychoudhri (April 1980).  -8- costs of procurement and distribution so that the central government finances a substantial subsidy to consumers, particularly of wheat.-1/ III. Price and Income Effects of the Food Distribution Program 3.01 The food distribution program can be interpreted as equivalent to a cash subsidy to urban consumers of a value (P - Pd)AR where P is the open market price, Pd is the ration price (which has been typically set at 66% of the open market price) and QR is the quantity distributed. Because the income transfer occurs through food, it has been suggested by at least one empirical study-/ that a form of food illusion occurs which induces an increase in consumption over and above the increase that would be produced by a cash subsidy. However, for the purposes of this paper, we assume that the marginal propensity to consume out of food income is the same as out of cash income. 3.02 In addition to the income transfer which benefits only those con- sumers who receive the rationed food (and would, ceteris paribus, raise domestic prices) there is a general price decline for all consumers because imports (which are also distributed through the ration shops) add to domestic supply. 3.03 The effect of the food distribution policies on producers prices and their welfare cannot be unequivocally predicted. While the income transfer raises demand and prices, ceteris paribus, the export ban and imports reduce them. On the other hand, at any open market price, the compulsory procuring of /1 For details see G. Swamy (1979). The subsidy from the central government has been paid to the Food Corporation of India, which handles imports, procurement and distribution (to states) of grain for the central govern- ment. In addition, state governments operate their own Civil Supplies Corporations; the latter have not been known to receive financial assist- ance from the state government. /2 Shubh Kumar (1979).  -9- a certain fraction of the production at a price which is below the open market price reduces the (weighted) average producers price that farmers face. Producers' welfare is also reduced by a loss in income since procurement is essentially a tax on their production.l/ A reduction in their income reduces their demand for food, thus affecting consumer prices. 3.04 The basic relationships representing the way the different variables interact are put together in a simple mathematical model relating the effects of procurement, imports and distribution on the open market price of grain, and on the weighted average producers' price that farmers face. The model, which is described in the Appendix, is used to predict these prices in the presence of an export and import ban on private transactions that permits domestic prices to differ from world prices. The model's predictions are then used to evaluate the effects of the export ban and the food distribution system. 2/ 3.05 In general, the model shows that both open market prices and producers' revenues are likely to be depressed by the government policies, even though this is not necessarily the case in every year and for other countries. The income effects of the rationing system, however, are multiple /1 It can be seen that procurement of a fraction X of supply at price P < P where P is the market price is equivalent to a tax of (P - r)S(ir) where Xt = XP + (1 - A)P and S(n) is total supply. /2 T.N. Srinivasan and M.S. Alhuwalia (mimeo), have modeled the effect of procurement and/or distribution on producers' prices. In spirit and basic formulation, our model is similar. However, their model does not specifically consider imports and emphasizes the differential effects on surplus states (where most of the procurement was made) and deficit states (where most of the grain was distributed with little or no procurement). Because of restrictions on inter-state movement of grain, market prices varied among states as well. Admittedly our assumption of a single market price for grain is a simplification and the distributive impact of both procurement and distribution among states is assumed away. Nevertheless, the major relationships and broad magnitudes are brought out even with this level of aggregation.  -10- and intricate and much less easy to predict. While the distributed grain creates an income transfer to urban consumers, procurement taxes rural residents' incomes and their consumption falls, thus offsetting the former effect. Imports depress prices for all consumers and producers, but increased procurement tends to raise the open market price. The net effect on rural incomes is also difficult to predict, since it depends: (i) on the effect on the open market price, (ii) on the quantity procured, and (iii) on the impact on employment and supply. Nevertheless, for a wide range of "typical" parameters the effect tends to be negative under the circumstances considered. IV. Consumption and Market Prices With and Without Intervention 4.01 Table 3 shows the values of the parameters for evaluating the model presented in the Appendix. The model is used to predict the hypothetical market price that would have prevailed in the absence of imports, distribution and procurement. While most of these parameters have one observable value for the year, the income elasticities and the budget shares, particularly for the rural sector, have to be chosen carefully. This is because the effect on price of the income transfer between rural producers and urban consumers depends quite critically on which income classes in the rural areas finance the transfer and which in urban areas receive it, so that the corresponding income elasticities (and budget shares) are quite important. 4.02 We have assumed in this paper that all urban consumers receive the food ration and that therefore it is appropriate to use an average (urban) income elas- ticity and budget share. However, on the procurement side, it is not very clear whether an average elasticity (and budget share) is appropriate. This is because the organization of the procurement system tends to concentrate on the larger and richer farmers.  -11- Table 3 (OBSERVED) QUANTITY AND PRICE DATA FOR 1974 AND THE ASSUMED PARAMETERS OF THE MODEL 0 = quantity distributed 10.8 million metric tons D = total demand for grain 96.8 million metric tons = 0/D .1116 a = S/D 0.9463 S = quantity procured 95.68 million metric tons X = S /S, where S = supply .062 m = the budget share of food in urban areas 0.68 mu = the budget share of food in rural areas 0.75 (0.62) nry = rural income elasticity for calories 0.50 (0.43) nuy = urban income elasticity' for calories 0.45 np = average price elasticity for calories -0.38 n = supply elasticity 0.2 S- d_ d P 0.37 P-P Pc 0.42 tTr P-', where ir = X P + (1-X) P 0.026 xr pc Note (a) All quantity data refer to the calendar year 1974. (b) Budget shares from N.S.S. Sample Survey on Consumer Expenditure 1973-74. (c) Income and price elasticities from the calorie demand equation in O., Knudsen and Scandizzo "Nutrition and Food Needs in Developing Countries" 1979, adjusted for rural-urban differences. (d) Information on (a) the ratio of procurement price to market price and (b) the ratio of issue price to procurement price are used to derive tEl, tc and tr: Source: F. H. Sanderson and S. Roy, Food Trends and Prospects in India, 1979 and Agricultural Prices Commission, India, "Report on Price-Policy for Kharif and Rabi Cereals, 1978.  -12- 4.03 Although the methods of procurement have varied from state to state, the principal means of procuring rice has been through a levy on the millers of rice.l/ (A graded levy on farmers has been used by five states, but none of these have contributed substantially to total procurement.) In effect therefore, this does not affect farmers who grow largely for self-consumption and/or mill their own paddy with traditional means. Again, the principle means of procuring wheat has been through open market purch.ases and is unlikely to have affected all the farmers. 4.04 It is for this reason that two alternative values for the budget share and income elasticity of rural consumers are given in Table 3. The first is a set of values implying the assumption that all rural producers finance the transfer. The second (in parenthesis) is a set of low income elasticity and budget share based on the assumption that only the richer farmers suffer an income loss. 4.05 That the model used is quite sensitive to these assumptions can be seen in Table 4 showing consumption and supply levels (in cereal equivalents) consistent with two hypothetical prices and at the world price. If we assume average elasticities for the rural population, absence of intervention would, it appears, raise the market price but would not affect total consumption much (136.4 million tons of cereal equivalents compared to 137 million tons with intervention). This is because while urban consumers face both a price increase as well as a loss in income, rural consumers would have an increase in income large enough to offset all the other price and income effects. 4.06 On the other hand, if we assume that the rural income loss is financed only by the wealthy farmers, the ensuing hypothetical market price would be lower /1 See G. Swamy (1979) for details - pp. 14-18.  -13- Table 4: SENSITIVITY ANALYSIS OF PRICES, CONSUMPTION AND SUPPLY Consumption Supply Exports and Price Changes in Stocks US$ ----------------million tois