Delivering Food Subsidy - The Oxford Topic of Food, Politics, and Society - page 310

Why Cash Transfer

Countries other than India have also had to face up to the corruption in in-kind food
transfers. Olken (2006) estimates that minimum leakages in Indonesia are of the order
of 18% of the supply of subsidized rice. More realistic assumptions lead to estimates of
around 30%. For the Philippines, Mehta and Jha (2009) report a 54% gap between the
NFA rice supply and reported consumption. While they acknowledge that some of the
discrepancy could be because of timing issues in sample survey data, the gap is too large
to be due to these errors alone. They conclude that the figure “indicates possibly signifi-
cant pilferage.”
Similarly, Jha and Ramaswami (2012) show that excess costs comprise about 8% of the
government costs in supplying rice in the Philippines. Figure 12.2 is a decomposition of
food subsidy expenditures in the Philippines. The pie chart is not very different from the
similar chart for India (Figure 12.1). Most of the subsidy is lost to illegal diversions and
excess costs.
By their very design, a direct cash transfer eliminates the corruption and excess costs
of the PDS. As the food subsidy is transferred as cash to households, there is no separate
marketing channel for government grain. The dual price system of in-kind transfers that
offers possibilities of illegal arbitrage and profit does not exist anymore. Grain moves
through the usual market channels of the private sector, so subsidy is not lost to excess
costs either.

Philippines

Income transfer to poor
21%

Excess cost
22%

Income transfer to non-poor
14%

Illegal diversion cost
43%

Figure 12.2 Decomposition of Subsidy—Philippines

Source: Jha and Ramaswami (2012)