Price subsidies versus income transfers

Abstract

The impact of the price subsidy under the National Food Security Act on consumption of cereals, and, therefore, welfare, will be different from that of an unconditional direct income transfer equal to the cost of the price subsidy only if the price subsidy is regressive among the set of people covered. This note argues that restricting the subsidy to an inferior good such as coarse grains alone may work better from both the fi scal and equity points of view. It recommends raising the entitlement for coarse grains to 7 kg a person per month, but keeping it unchanged for wheat and rice at 5 kg a person per month.