Reducing the 'True Cost' of Public Procurement: Evidence from India's National Food Program

• In Event: Agricultural Policy, Climate Adaptation and Welfare: International Perspectives

Abstract

Public procurement of food plays a crucial role in enhancing incomes for farmers and ensuring food security for low-income households. Although public procurement helps provide access to subsidized food, it is also responsible for hidden costs associated with producing food items, such as staple grains. Some of these costs include greenhouse gas emissions, soil erosion, scarce water use, and pollution resulting from crop residue burning. While these costs have various environmental, health, economic, and livelihood impacts, they are rarely accounted for when designing and implementing food-based safety nets.

We estimate the ‘true cost’ of food-based safety nets by examining the case of India’s Public Distribution System (PDS), which provides highly subsidized rice and wheat to over 800 million people every month. The government procures approximately 40 percent of the rice and wheat produced in India at guaranteed prices to distribute through the PDS. This results in the overproduction of rice and wheat in certain states that also end up bearing a large share of the ‘hidden costs’ associated with producing these crops for the PDS.

We use true cost accounting (TCA) to estimate the true cost of the current PDS food basket, which provides all PDS beneficiaries five kilograms of food grain (a combination of rice and wheat) every month. In 2021-22, the Indian government and PDS beneficiaries spent US$16.5 billion and US$0.9 billion, respectively, on the PDS. However, accounting for hidden costs associated with the production of PDS food grain reveals that the true cost of the PDS is more than twice its financial cost. A majority of these hidden costs are attributed to scarce water use (US$13.8 billion) and GHG emissions (US$6 billion).

Using true cost estimates for distributing rice, wheat, and millets through the PDS, we find that replacing one kilogram of rice with one kilogram of millets for a quarter of PDS beneficiaries every month has the potential to reduce the true cost of the PDS by US$1.2 billion annually. This change not only results in a significant reduction in the true cost associated with producing PDS food items but also helps increase the nutritional value of the PDS food basket.

Author

• Raghav Puri, Cornell University
  Presenting Author