India's PDS Should Use Food Vouchers

Typically, most economic activity and production occurs outside of the public sector. However, I am always amazed that in spite of the good intentions used to justify government-led schemes, there is the tendency to repeat proven errors and thereby reduce the overall effectiveness of such initiatives.

An illustration of the theme of good intentions hampered by poor design and execution is the Public Distribution System aimed at helping households who fall below the poverty threshold in India. The aim is to provide them with a subsidy which enables them to purchase grain at a subsidized cost. Grain purchased by the government is physically transported from the Food Corporation of India's warehouses,these are transported to designated shops. Predictably, the drivers see an opportunity for making a gain from the price differential hence they divert a portion of the grain. In response, the government of New Delhi proposes to install GPS systems on each truck in order to ensure that the trucks are perpetually under surveillance.

From first principles, this diversion is expected because a subsidy for a good creates a differential which provides an obvious incentive for diversion into the real market. While the concern for India's poor is altogether laudable, I see that the better response is to review tested principles about the design of a cost-effective subsidy. The addition of GPS and requirement for SMS communication merely adds to the administrative burden and makes the entire scheme more costly than it should be. In short, the ration cards should be replaced by a voucher system that simply sends the cash to the identified households. there would be no need for trucks and sophisticated equipment. The only monitoring would be of the use and eligibility for the support. Perhaps the increased tinkering with a poorly designed system is because Delhi's bureaucrats have either not read or do not agree with this paper by Ahmed Tritah.