I recently came across two very interesting papers by Robert Jensen and Nolan Miller, where they discuss the effect of providing price subsidies on essential food items to poor consumers. I find the papers particularly interesting in the context of the recent discussions on the ‘Right to Food’ and the ‘National Food Security Bill’.  These debates thus far have mainly concentrated on the following aspects- 1) whether food security should be provided through ‘in kind’ subsidies or cash or some other mechanism 2) the cost implications of each of these mechanisms and 3) feasibility of this mammoth responsibility being carried out by the moribund PDS system and the ill-equipped administrative machinery.

These papers throw a light on a completely different and more fundamental question- even if adequate subsidies are provided and are properly implemented, will the intended beneficiaries consume in the quantities we expect them to? And consequently, will these subsidies improve nutrition?  

This approach, thus, questions the very basis of ‘Right to Food’/ ‘National Food Security Bill’- that poor people (more specifically, ‘poor’ people) are not consuming enough since they lack purchasing power. Thus they have to reduce their consumption involuntarily.

Intuition

The basic intuition is quite simple. Let’s assume that there are two goods- staple food (like rice, wheat) and a ‘fancy’ good (like meat, sweets). The staple food offers a high level of calories at low cost, while the fancy food though tasty and hence more preferred provides fewer calories per unit of currency. The poorest consumers will eat a lot of staple food to obtain required calories and other nutrients. The leftover money is spent on buying the fancy good. Thus, a higher fraction is spent on staple food. Now assume that a substantial price subsidy is provided on staple food. What would be the implication?

The subsidy reduces the cost of staple food, which free up substantial funds which can be spent in myriad other ways-this is the wealth effect. If consumers care for non-nutritional aspects of food (like taste) in addition to nutritional ones, the effect of subsidy will depend on how consumers substitute among food (or between food and non-food items). If substitution towards less-nutritious food is large enough, consumers might in fact consume less nutrition than before. Thus, there is no straightforward prediction that subsidies will definitely improve nutritional outcome for poor consumers.

Experiment

Jensen and Miller conducted a field experiment in Hunan and Gansu provinces of China in 2006, where randomly selected households were given vouchers entitling them for price reduction ranging from 8% to 30% on staple items- rice in Hunan and wheat in Gansu. These were ‘urban poor’ households as defined in China. On average, 70% of their calorie consumption came from staple food such as rice and wheat.

In addition to standard income- expenditure survey and household demographics, each household member completed a 24-hour food recall diary, in which the respondents were supposed to note everything they ate or drank the previous day, whether inside or outside their house, by specifically listing the components of all food eaten. Data was gathered in three rounds- April (before the experiment began), September (during the experiment) and December (after the experiment was over).

Results

The results are astonishing- whether it is calories, protein, minerals or vitamins- subsidy doesn’t seem to have any impact on consumption of these nutrients. If anything, the subsidy seems to have negative effect but it is not statistically significant. Results differ slightly if we look at two provinces separately.   For Hunan, the coefficients for all the nutrients are negative (though significant only in case of calories thus indicating decline in calorie consumption).  In Gansu, the coefficients are positive for calories and protein, and negative for minerals and vitamins. But again, none of them are statistically significant.

So even in the situation where the subsidy is properly targeted and up-take is universal, consumption of nutrients has not improved, even for these poor households.

In fact, they show that if

a) households are poor enough that they face subsistence nutrition concerns, and

b) households consume very simple diet, including a basic (staple) and a ‘fancy’ good, and

c) the basic good is the cheapest source of calories, comprise a large part of diet/ budget, and has no ready substitute, and

d) households can’t be so impoverished that they consume only the staple good,

then it is very likely that lowering the price of staple food would cause households to reduce their demand for that staple food (i.e. positive relation between demand and price as against usual negative relation between the two)

Implication for Right to Food Act

What does this mean for ‘Right to Food Act’? The Act is supposed to provide a minimum of 7 kg of food grain per person per month, at a price not exceeding Rs. 3 per kg for rice, Rs. 2 per kg for wheat and Rs. 1 kg for millets for ‘priority’ households. For ‘general’ households, the provision is for minimum of 4 kg of food grains per person per month, at a price not exceeding 50% of the minimum support price.

Assuming good implementation, these price subsidies will generate huge wealth effects. Further, the conditions mentioned above are applicable for a significant fraction of households in India, who are the intended beneficiaries of this act. Then it is not unimaginable to have a situation where the households are not consuming enough calories (compared to the norm) as it is happening today,  even after the implementation of ‘Right to Food Act’.

References

Jensen, Robert and Nolan Miller (2010), “Do Consumer Price Subsidies Really Improve Nutrition?”, NBER Working Paper 16102.

Jensen, Robert and Nolan Miller (2008), “Giffen Behavior and Subsistence Consumption?”, American Economic Review, 98:4, 1153-1577.

National Food Security Bill, 2011