Cash Transfers: Effects of price volatility on calorific intake

Effects of price volatilities is one of the issues with cash transfers. In case of in-kind transfers, as is the case with PDS, one receives same quantity of grains despite the increase or decrease in price. However, in case of cash transfers, the quantity of goods that can be bought changes with prices.

Earlier, people like Jean Dreze, argued on these lines, in their overall criticism against cash transfers. Others commented that price variability may indeed benefit the poor because, they can buy when the prices are low, thereby saving the money. This brings up a question - what is the effect of price variability on calorific intake of the poor?

Lucie Gadene, Sam Norris, Monica Singhal, Sandip Sukhtankar explore this question in their recent paper.  They explore the extent to which PDS mitigates price risks. There are two important insights from this paper.

First, they explore the impact of price risk on households of varying income levels. In better off households, price variability shouldn't have much effect on calorific intake, as compared to poor households. The NSS data they used supports this. They find that:
"certain types of households are more vulnerable to price risk. when prices increase 10%, there is a small 2.7% reduction in caloric intake for well-off land-owning households. For more vulnerable, landless households, calories decrease by 6.2%.
Interestingly, the difference in price responsiveness between landless and land-owning households is much more dramatic than the difference between below- and above-median expenditure households (column 3 vs. column 4), who respond similarly to variations in prices. As expected, owning land (and being able to grow food when prices are high) substantially lowers responsiveness to price risk in a way that even being above-median expenditure does not."
Second, the impact of price variability also depends on level of prices. In other words, variability over a base price of Rs. 10/- may have more effects than variability over base price of Rs. 5/-. The researchers cleverly use the change in PDS prices in Kerala to further explore this phenomenon. 

In 2006, Kerala reduced the price of rice from Rs.6.2/kg to Rs. 3/kg. Now that the price is low, one should expect that the effects of price volatility should reduce. In other words, the variability of price over and above base price of Rs.6.2/kg should have more effect on calorific intake than the variability of price over and above base price of  Rs. 3/- kg.  Further, as noted above, this difference should be stark in poor households and less stark in relatively better off families.  The researchers find exactly this.
"for land-owning households, a 10% increase in rice prices reduced calories by the same amount (2.2%) before and after the expansion. For the landless households - one of the groups that the PDS is trying to help - the difference was dramatic. Before the expansion, a 10% increase in prices reduced calories by 7.6%. After the expansion, the same price increase reduced calories by only 2.2%, the exact same amount as the land-owning households."

Overall, this paper suggests that the welfare costs of price variability are real and significant. PDS protects people against these. This variable should now get more attention in the cash vs. in-kind debates. The argument to calibrate cash transfers to general volatility in prices should now get more attention.

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