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ARD/AWD Viability Study
National Food Security Act (NFSA) passed in 2013 ensures food and nutrition as a legal entitlement, and offers immense opportunity to improve the targeting, supply-chain and food delivery mechanisms to ensure that the most needed get the benefits under Targeted Public Distribution System (TPDS). To ensure this efficiency, the Government of India promotes end-to-end computerization and the Government of Kerala is committed to implement this initiative. In the process, the Fair Price Shops (FPS) called Authorised Retail Dealers (ARDs) in Kerala, form an important step in the overall supply chain of TPDS. However, Planning Commission (2005) has estimated that only 38.9 percent shops across India earn profit through commission.
Several other studies have highlighted the issue of financial viability of FPS in conjunctions with the diversion and leakages. There is, however a gap in deep understanding of actual drivers of the revenues and costs, intensity of the problems and potential solutions. The ARD Viability Analysis in Kerala is an effort to use a nuanced understanding gained through the in-depth analysis to inform TPDS reforms process in Kerala. The study analysed information for all ARDs in the state and used primary data collected through a survey to fill the information gaps and validate the assumptions. The interactions at the field level helped to understand the qualitative aspects and context to formulate the conclusions and recommendations. Breaking the existing patterns is difficult, but the study gave an opportunity to look at various dimensions and possibilities of improving the ARD viability, which forms the backbone of the TPDS reforms process. While the report discusses the analysis and findings in details, the key conclusions from the report are as follows:

i. Only 1.2 percent of ARDs earn profit with the current commission structure. This calls for an urgent action to improve the revenue, especially in light of commitment to TPDS reforms. Hence, viability of the ARD operations shall be a necessary pre-condition for the sustainability of the TPDS computerisation, making the dealers important participant driving the reforms process.

ii. Door-step Delivery is mandated by NFSA and will be implemented. This will improve the profit of the ARD as transport and related costs will be paid by the government. However, this improvement or the profit will not be sufficient to ensure financial viability of the ARDs. Therefore, the following revenue models were analysed in order to determine how to achieve the financial viability:
ARD/AWD Viability Study

Increase the Commission rates (Double or triple of existing rates and assess the viability vs. cost to the state).

Maintain the existing commission structure and add base payment.

Maintain the existing commission structure and add incentives per transaction at various rates.

Combinations of above scenarios.

iii. A best suited viability threshold (monthly minimum profit earned by ARD to meet monthly financial needs) is equivalent to the semi-skilled nonagricultural daily wage rate that the ARD owner would have earned as opportunity cost, i.e.Rs.600 for urban areas and Rs.500 for rural areas. This translates into a monthly income of Rs.12,500 and Rs.15,000 for ARDs in rural and urban areas respectively.

iv. Despite several options and models for revenue, even at the best viability vs. cost scenario, ARDs operating with less than monthly 75 quintals of food grains (including sugar and fortified wheat flour) are not viable. This necessitated a separate analysis for the “ARDs handling >75 quintal” category alongside the analysis of all ARDs. It also therefore implies that the revenue models should be applied to ARDs handling monthly commodities more than 75 quintal and a separate strategy should be applied to the unviable ARDs. Detailed revenue options and comparative advantages are discussed in the report. The scenarios v. can be many, such as increased commission, providing base-payment, incentives linked to transactions to a combination of these options. The most economic scenario would be the “gap filling approach” of a base payment of Rs.11,000 and Rs.15,000 for rural and urban ARDs respectively combined with the existing commission structure. However, this may serve as a disincentive to those who operate with large number of cards and larger volumes of commodities. Other scenarios that offer promise are the ones with double commission rate, base payment of 50 percent of viability and incentive of `1 per transaction; and with existing commission rate, base payment of 70 percent of viability threshold and `3 per transaction (incentive

ARD/AWD Viability Study
can be linked to desired behaviour to facilitate computerization). vi. While selecting from the best option of viability for shops handling commodity less than 75 quintals, an in-depth assessment of the shops which are still unviable need to be undertaken. Small shops which are in urban location can be combined with bigger shops without impacting beneficiary convenience. Small unviable shops that are remotely located or are in a difficult to reach area may be categorized as Special Dispensation Shops to ensure a special consideration or manage these locations through mobile shops.
 The analysis indicates that small shops are not profitable. It is a dilemma because the small shops are often in the vicinity of the beneficiaries and add to their convenience. This trade-off between the size of shop and convenience of beneficiaries need to be resolved effectively to arrive at an optimum sustainable solution. In order to make TPDS a client oriented efficient food delivery system, following is the way forward towards long term sustainable goals of reforms:

  1. Consider the re-distribution of beneficiaries to the shops: There are about 1000 ARDs handling commodities less than 50 quintals remaining perpetually unviable and other 65 ARDs handling commodities more than 250 quintals earning most of the profits. While equal distribution of cards to all ARDs may not be possible, a practical decision on permissible range (for example 75-200 quintal per month) with provisions for case-by-case deviation should offer better solution.
  2. Alternative means of earnings/ employment: If small shops are essential for beneficiary convenience, they clearly do not have a workload to justify wages for a month. In such cases, it is important to encourage other options such as sale of non-

TPDS food items, linking with other employment generation schemes and giving more flexibility by fixing days and hours of operations. ARD owners will have a positive attitude towards this as indicated through a few interactions. This option can be further explored and developed as a strategy for unviable shops as well.

  1. Alternate strategy for unviable shops: Rather than running unviable small shop in a difficult to reach area for all days of month, it is much more economical to have mobile shops visiting with certain frequency. This possibility can further be explored as a part of improved efficiency of supply chain.

d. Contextualising the ARD viability to NFSA: The scheduled launch of NFSA provides an opportunity to realign the ARD remuneration structure within the framework of NFSA. 

Since the number of cards in various categories, and the entitlements thereof and the number of cards to be attached to ARDs shall change with the implementation of NFSA in the state, the final decision on the revamping of the commission/ revenue structure should be linked to the monthly allocation of ration to the ARDs. This is important especially in the context that the number of beneficiaries covered by cards currently in circulation is higher than the total population of the state (Census-2011). Therefore, strict guidelines/ criteria should be fixed for selection of beneficiaries to benefit from the NFSA.
ARD/AWD Viability Study

  1. Reclassification of ARDs: As per the latest data from Census 2011, coverage areas of some ARDs would have been reclassified from rural to urban. Given the findings of the study that the operational costs of urban ARDs is higher as compared to rural ARDs. The reclassification will thus have additional cost implications on the proposed viability scenarios and revenue models.

Overall purpose of the study was to carry out viability analysis of– AWDs & ARDs – in the context of delivery of essential commodities within Kerala and to come up with options to make them economically viable. Study focused on understanding the role of government storage and distribution

network like Supplyco in the TPDS distribution network and the key factors in their viability.

The specific objective of the proposed study is to carryout viability analysis:

  • To analyse the existing TPDS framework in the country and the secondary data supported by primary data and state level consultations of key stakeholders
  • To analyse the impact of potential NFSA implementation on overall TPDS and its implications

on viability of private players in distribution network; and

  • To develop options for ARDs and AWDs viability for GoK’s consideration / discussion that will help to formulate a strategy.