The ‘peace clause’ bars WTO member states from raising disputes with India vis-à-vis its food subsidies in return for a legally binding agreement on trade facilitation, but expires in December 2017 with no guarantee of successful closure. And any subsequent agreement may put at risk India’s ability to regulate its minimum support prices for major crops.

The old Public Distribution Scheme (PDS) — which was repealed in 1992 — was a general entitlement scheme that sought to distribute food grains at affordable prices to all consumers without any specific target. Although the food subsidies the government committed to under the old PDS was large, its effects on the poor were minimal.

The PDS was originally used as a rationing device by the colonial government during World War II. Following widespread crop failures in the mid 1960s India needed to import grain — particularly wheat — from the US. However, it did not take long for India to look for ways to be self-sufficient in producing and holding key food supplies.

India’s desire to achieve food self-sufficiency was born of its necessity to import large quantities of wheat from the US and thereby being subjected to political pressures. India’s quest for food self-sufficiency led to a massive expansion of the PDS and the setting up of grain procurement through the Food Corporation of India and developing a nationwide distribution network.

The same impetus to not succumb to external pressures in the matter of its food security shaped India’s position at the WTO discussion in Bali, where India opposed a push by several countries to limit the size of its food subsidy.

However, the ‘victory’ at Bali is only a short-term reprieve and, independently of pressures at the WTO, India must modernise its food security system in order to make it more effective. In 1997 India decided to target its food subsidy program under the new Targeted Public Distribution System (TPDS). The TPDS was expected to deliver food subsidies more effectively to the poor and reduce the program’s fiscal burden on the government.

Although rapid economic growth has sharply lowered the poverty rate in India, malnutrition remains widespread with daily calorie intake declining between 1993–94 and 2009–10. So, in addition to being self-sufficient in producing and holding key food supplies, looking after the welfare of India’s poor is another strong incentive for maintaining food subsidies.

India’s food subsidies have risen sharply in the last few years because of open-ended grain purchases at high minimum support prices, large and costly stock holdings and a food distribution system riddled with inefficiencies and leakages. The government now buys a major share of the marketed grain and is now holding almost 80 million tonnes of grain — more than twice the strategic buffer stock needed. India’s new National Food Security Act, also known as the Right to Food (RTF) Act, will expand the scope and coverage of the TPDS. The government estimates that the RTF will increase India’s annual spending on food subsidies from US$4 billion to approximately US$20 billion.

The Planning Commission reports that 58 per cent of subsidised food grain does not reach Indian families living below the poverty line because of identification errors, non-transparent operations and unethical practices in the implementation of the TDPS. Add to it the high cost of handling food grains, the government spent Rs 8.5 to transfer one rupee to the poor in 2007–08. Thus, the economic costs of providing grains through the TPDS are high — most Fair Price Shops (FPS) are unable to break even with the current structure of TPDS prices.

In 2017 India can successfully defend its food subsidy program only if it can convincingly demonstrate that the TPDS is significantly reducing the incidents of malnutrition in India. To the extent that real income transfers do take place this is actually true for the TPDS.

So far as policy options go universal TPDS can be ruled out because of inadequate subsidies to the poor and issues with targeting. The RTF will place even more pressure on India’s fiscal deficit and disrupt grain markets. India needs to consider two policy options.

First, it is important to increase the margins for FPS dealers. In 2007–08 the shopkeepers received a small margin of 7 paise per kilogram of wheat sold to every household living below the poverty line, as compared with a margin of Rs 1.97 for selling this amount in the open market.

Second, the TPDS performance varies considerably across states. Most southern states consistently do well in this regard; Chatitisgarh and some others improved their performance; and some northern and eastern states lagged behind. Governments that are effectively implementing the TPDS need to communicate with those lagging behind in order to consistency implement the TPDS across India.

These policy changes need to happen immediately since the window of opportunity to get the policy settings right before the ‘peace clause’ expires in 2017 is small.

Raghbendra Jha is Professor of Economics and Executive Director at the Australia South Asia Research Centre, The Australian National University.