Independent Research and Policy Advocacy

Do Consumer Price Subsidies Really Improve Nutrition?

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The National Bureau of Economic Research recently published a working paper by Robert T. Jensen and Nolan H. Miller on this topic. The paper analyses data from a randomised program of large price subsidies for poor households in two provinces of China and finds no evidence that the subsidies improved nutrition. In fact, it may have had a negative impact for some households.

The findings have sparked a discussion on subsidies and its long-term effects.

Cash transfer may work

Dr Nachiket Mor says “…I read this article through and perhaps did not fully understand all its implications. It seems to conclude that people as they get richer make somewhat adverse Taste-Nutrition tradeoffs but it is not clear from the article what can really be done about that.  This is similar to the male-preference issue – it seems to grow with income and since only the rich can afford to get (illegal) sex determination tests done you see the richer districts in the country with much more adverse sex ratios.  Perhaps there is a “J” curve after which people start to make better decisions.  But I worry that perhaps the “J” curve transmission is through a much higher quality of education than is currently on offer in our schools at the moment.”

“There is of course a more micro question as well buried here – do conditional cash transfers add any value relative to unconditional cash transfers?  I am not sure what the research evidence suggests but with the arrival of the UID it is possible that we may be able to finally do targeting (and disbursement) much more accurately and without leakage. Therefore we may be able to dismantle a lot of government programmes and simply hand over the money to poor people to do as they will with it.  Mega schemes such as the Mid-day meal scheme of the government seem to have questionable (if any) benefits and we may all be better off if they were simply dismantled and cash handed over to poor people.”

Invest in Infrastructure

Professor Nilanjan Banik of IFMR adds his views “In terms of agricultural produce there are three main issues: growth of agricultural output, food security and importantly, to make sure that the agricultural produce reach the target group i.e., a proper food management policy.”

“What data suggests is [that] agricultural output in India is very volatile with a coefficient of variation (mean over standard deviation) close to 190. Given this high volatility one also finds capital investment as a portion of GDP is least in the agriculture sector relative to the industry and services sector. In fact, growth of agricultural sector has struggled to keep with the long run target growth of 4 percent, assuming that the economy is growing at 9 percent.”

“Despite this, India has been successful in terms of providing food security by stashing food grains in the government storehouse. Government has been successful in procuring because of higher procurement price of cereals. By doing this, government is however discouraging farmer to go for higher value addition crops like fruits and nuts, and also to venture into milk, poultry and fishery types activities.”

“The other point, and this to me is the big failure of the government, is its inability to distribute these procured items to the target group. I remember seeing some news item carried by CNN-IBN showing how these procured items decay in government storehouses. Also, I think, Mint carried one news item commenting about the fallacy of the public distribution system with most people in Tamil Nadu qualifying as a BPL member.”

“In fact, thinking forward, government will do some justice by reducing subsidies relating to fertilizers, irrigation and power. Instead it will make sense to invest this saved amount in agriculture related infrastructure, like building more irrigation facilities, developing cold storage facilities, better road network etc. A proper irrigation facility will also be beneficial in terms of checking the fall in ground water level because of increase usage of hand pumps.”

“To me in the present context these issues are more important although the change in food type consumption because of government providing subsidy is an interesting read.”

Interventions affect individual choices and behaviour

Niranjan Rajadhyaksha, managing editor of Mint thought this paper was important because, according to him, the government seems to be moving towards a right to food law. He says “The Chinese example cited in the paper may offer a sobering lesson. More broadly, I think that the main debates about the NREGA and the right to food have focussed on broadly macro issues such as how to fund them without creating an unsustainable fiscal deficit.”

“My own view is that the more interesting challenges are of the micro sort, in the sense that these interventions affect individual choices and behaviour. We have, for example, seen that NREGS is creating labour shortages in areas such as Punjab and Haryana as migrant labour prefers to stay at home and subsequent reports that farmers in those states are leaning towards more mechanisation. These are second-order effects. In other words, the analysis may have to go beyond partial equilibrium in one market to a general equilibrium approach that encompasses potential distortions/effects in other markets.”

Dr. Nachiket Mor responded by saying “The Centre for Microfinance has done some good research on NREGA but I think the point you make about labour shortages bears further research – I have heard many people say this.  Are you aware of any debate regarding conditional versus unconditional cash transfers?  I wonder what the longer term implications of moving to unconditional cash transfers might be?  Unless you feel that transfers themselves are not advisable in any form.”

“My own instinct is that unconditional cash transfers combined with concerted efforts at creating high quality public institutions (law and order, land titling, etc.) and basic infrastructure such as health, education and financial access represents a much more sustainable direction for us.  The worry about cash transfers is regarding the labour-leisure tradeoff that it implies – I understand that there is a concern that perhaps one is seeing a much stronger movement towards leisure than was previously anticipated, given the absolute level of poverty.”

“One of the academics at IFMR, Professor Maheswaran believes (this is my interpretation of his arguments, he may not agree) that this maybe because the poor do not have “Markovian Renewal” and “suffer” from “long-memory” (this is also consistent with the more recent work of Professors Abhijit Banerjee and Sendhil Mullainathan).  Perhaps the work on financial inclusion (which includes risk management instruments such as open credit lines, savings and insurance) will help build “Markovian Renewal” and maybe change the labour-leisure tradeoff (Professors Ratul Lahkar and Vishwanath Pingali at IFMR I think are planning to research this question of why the poor don’t save as much further).  It seems too extreme to say that, in the face of extreme poverty, we should not have any transfers at all.”

What do you think?

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