Distributing through Fair Price Shops (FPSs) has always seen problems of diversion and “leakages”. A high-powered committee appointed under Mr Shanta Kumar, Member of Parliament, estimates that 46.7% of goods distributed through FPSs were lost to “leakage”. Two models suggested in the Shanta Kumar committee report to arrest leakages, are: 1) direct benefits transfer; and 2) automation of distribution channel. In this note, we discuss savings that have accrued to the state of Andhra Pradesh and Telangana (partially) because of automation of FPSs. Based on the findings, we can divide savings (realised/disguised) into three broad types:
1. Savings due to one-time activity of de-duplication;
2. Recurring savings due to beneficiaries willingly not turning up to receive their entitlement; and
3. Savings due to inconvenience ― currently being calculated by states, but which should not be included. These savings are due to transaction denial owing to server failure and/or authentication failure; or closed shop.
Automation of the front-end distribution system in PDS results in very significant savings to the government. The one challenge that we foresee is that profitability of FPSs has come down drastically, as diversion of food grains has stopped. Our calculations show that profitability of an FPS outlet in the automated environment will be down to Rs.1,100 (USD 16.18) per month. State governments will have to relook and work out a commission structure that can ensure the long-term viability and sustainability of FPSs.