Delivering Food Subsidy - The Oxford Topic of Food, Politics, and Society - page 317

Challenges to Cash Transfers: Inflation
An infusion of cash in a local area could give rise to a sudden increase in prices. In an
environment where the markets are not well developed, the rise in prices may not trig-
ger imports from other areas to bring down the prices in a short time. In-kind transfers
of food may induce an increase in demand for nonfood items but will not cause food
price inflation. Clearly, this is a real concern about cash transfers, and it suggests that
cash transfers are more appropriate for the areas where the markets are well developed.
Challenges to Cash Transfers: Price Fluctuations
The most serious objection to any sort of cash transfer is that food prices fluctuate
and that a commitment to the poor in terms of a certain quantity of food per person
cannot be maintained very easily. Consider the logistics of the problem. Suppose it is
decided to give each household 25 kg of grain each month at a subsidized price and the
subsidy amount required for a recipient to purchase that much grain is deposited into
her account at the beginning of the month. If the market price has risen by 10% by the
time the recipient goes to buy the grain, the subsidy amount would fall short of what is
required. The subsidy amount should therefore be adjusted as the market price changes.
It is, of course, expensive to adjust the subsidy amount too frequently, and the cost of
not adjusting it frequently enough will be borne by the poor.11 This can be an objection
against any cash transfer scheme.
In-Kind Transfers and the Market Price of Food
What happens to the market price of grain under cash and in-kind transfers, respec-
tively? The question is important because, in practice, it is difficult to devise a perfect
safety net. Some of the poor could be left out even if the coverage was meant to be uni-
versal. Moreover, if a policy intervention causes a rise in the market price of grain, the
nonpoor who are not entitled to a food subsidy would be adversely affected, and this
would make the scheme politically difficult to implement.
Grain markets have a well-defined seasonal pattern. Price levels are at their lowest at
harvest time and then rise through the year to cover the costs of carrying stocks. Grain
prices can be higher either because of a higher harvest price or because of greater mar-
gins of storage and distribution.
When governments procure, the initial harvest price is determined not by the forces
of supply and demand but by the support price set by the government. For politicians,
the demand for a higher support price affords an opportunity to mobilize a constituency.
In India most of the grain is procured from two states—Punjab and Haryana. These
two surplus states have a powerful farmers' lobby that the local governments must pla-
cate. As a result, the support price, and hence the harvest price, is typically determined