Quality of Public Distribution System Why It Matters

Abstract

This paper argues that price formation in foodgrains markets cannot be fully understood without reference to consumer switches between the open market and the public distribution system (PDS) induced by quality differences. This is an important aspect of the food economy, for an evaluation of state intervention must consider not only the welfare of its targeted beneficiaries but also the welfare of households without access to the PDS but who may nevertheless be affected if the working of the PDS has a bearing on the open market. ACCORDING to case studies [for ex­ ample, Indrakant 1995, Nair and Sivanandan 1995] and anecdotal accounts some con­ sumers prefer grain from private retail outlets rather than from the public distribution system (PDS). The sizeable literature that has grown around the subject of evaluating the PDS has, however, largely ignored this issue. Our objective in this paper is to remedy the neglect. First, we address the question of whether indeed it is correct that consumers perceive the quality of grain available in the PDS to be lower than that of grain from competing private sources. The technical issue here is how the hypothesis of quality differences can be tested on the basis of aggregate data alone. Second, even if quality differentials exist, how do they matter? The implications for policy form the second part of the paper. As we shall argue, quality differentials can adversely affect the living conditions of the poor. In addition, they also constrain the prospects of containing the budgetary subsidy on food. Restoring efficiency to the PDS restores equity as well as fiscal balance.