Public Distribution System vs. Market: Analysis of Wheat and Rice Consumption in India

Despite the large-scale antipoverty programs, especially food and nutrition programs, 15 per cent of Indian population is undernourished. The National Food Security Act (NFSA) aims at reducing food insecurity by granting a right to food to a large share of the population. The implementation of the world largest food aid program, however, is controversially debated: While historically, rationed highly subsidizes staple food have been used to improve the access to food for poor people, cash transfers are considered as an alternative with lower market distortions, leakages and fiscal costs. This study analyzes consumption patterns of wheat and rice delivered through the Public Distribution System in India and investigates targeting errors as well as reasons for leakage, self-selection and under-supply of staples using cross-sectional household data on all-India level. Our findings indicate some serious targeting errors of the current distribution system as migrant workers and female-led households are not well covered. We find that leakage rates are in general very low for poor households and regions with high poverty rates, implying that higher market prices have negative consequences for the poor excluded from the system. Further, wealthier households restrain from consuming subsidized grains. This negative self-selection of wealthier households implies a high potential for cost savings that would be lost under a cash-transfer scheme. Thus, or study provides a subtle and differentiated analysis that is highly useful for improving the current distribution system as well as design and targeting issues relevant for an alternative cash-transfer system.