The Government has set up the Expenditure Management Commission to rationalise subsidies, among other expenditure items in India. India incurs nearly one per cent of food subsidy annually, generally utilised under the existing public distribution system (PDS) consisting of Food Corporation of India (FCI) and nearly five lakh Fair Price Shops (FPSs). The public distribution system has been the object of criticism for inefficiency; it is vulnerable to misappropriation, resulting in large-scale losses to the Government. According to some estimates, nearly 40 per cent of foodgrains are lost annually under the PDS.

The price differential that exists between the market price and the subsidised prices of PDS items is believed to be the main reason why this arbitrage opportunity is exploited. The last mile delivery mechanism, involving the owner of the fair price shop, is most vulnerable to the price differential.

Diverting stocks

Various schemes experimented with in different States such as strengthening of monitoring systems initiated by village-level vigilance committees, GPS/GPRS-based tracking of PDS vehicles, use of IT-based centralised solutions to match and monitor the delivery process and make the existing system more efficient, neglect the inherent inefficiencies present in the PDS system due to the price differential.

In all these instances, fair price shopowners have an incentive to divert the PDS grains to the open market, either by misrepresenting the quota available to the end consumers or by offering small cash incentives to the end consumer for forgoing foodgrain requirements.

A major feature of the PDS is the general lack of accountability down the entire supply chain, leaving the leakages that occur at different points completely unaccounted for. Typically, in the case of the distribution network of any fast moving consumer goods of any private sector company, precise accountability is defined at every stage, where the loss or diversion of any product is directly attributed to the immediate possessor.

The supply chain

While it is hard to propose a precisely similar system for PDS, largely because of government ownership and the distribution mechanism, it may be possible to draw some parallels between these two systems to gain some meaningful insights.

The use of technology can help plug the leak in the supply chain of the public distribution system and ensure that at each stage in the PDS supply chain, full market price is paid to the immediately previous stage on acquiring foodgrains. This practice imposes on the supervisors of any stage, ownership and accountability to store and transfer the foodgrains to the next stage.

At the godowns of the FCI, which are government-owned and operated entities, the supervisor's salary incentives would be tied to the losses incurred at the respective godowns. At the fair price shop, which is the end consumer interface, this system tries to tackle the issue of price differential by selling the foodgrains to the end consumers at the subsidised prices; the Government/FCI credits the price differential into the fair price shopowners’ bank accounts once the food is delivered to the target population. This system tries to incorporate the benefits of cash transfer except that fair price shopowners are required to have bank accounts; it avoids the need for bank accounts for every end consumer.

Bringing in bio-metric smart cards on the demand side can help track the foodgrains to be distributed right up to the end consumer. The Aadhar card can be meaningfully used for validating the identity of the consumer.

Managing transportation

While this system clearly defines accountability, transportation management and reconciliation of the payment system can become challenging. To address this issue, efficient implementation of a centralised IT infrastructure (CITF) can be useful.

The centralised system can make use of tracking devices such as the Radio Frequency Identification Number (RFID) on each sack of foodgrain which records the time of delivery/acceptance and the number of sacks delivered at every PDS point, resulting in efficient inventory management. While a GPS system, being experimented with in some States, simply tracks the vehicle, the centralised system goes all the way up to the sack level to ensure delivery.

This type of dynamic tracking helps link inventory management with the payment system so that all such information is stored and accessible at a centralised location. The RFID-CITF system could help prevent possible malpractices such as diversion of the foodgrain while wrongly registering the acceptance of foodgrain by just delivering the RFID tag (and not the actual goods).

In other words, the responsibility of ensuring the receipt of goods in right quantities can be fully attributed to the receiving warehouse or fair price shop through the payment mechanism discussed above. RFID-based tracking ensures time and quantity information, which could help in quantity reconciliation at fair price shop level.

The scheme discussed in this article faces challenges with respect to last mile connectivity in remote villages, in terms of power availability, connectivity and so on. A phased introduction of this scheme starting from already IT-enabled fair price shops down to those in remote villages will surely help in effectively plugging leakages in the public distribution system.

Singh is RBI Chair Professor of economics at IIM-Bangalore. Nair and Shamil are students