Cash To The People

Though not foolproof, the system of direct cash transfers should prove more efficacious than the government’s current subsidy mechanism. The way the government of India currently delivers subsidies (on food, fuel and fertilisers) to its people is riddled with problems. The subsidies are poorly targeted so that the undeserving corner the benefits while the deserving are deprived of them. Leakages are rampant: it is estimated that the government spends around Rs3.65 in order to be able to deliver Rs1 of benefit to the deserving. Moreover, the subsidy regime places a heavy burden on the government’s fiscal situation, which will only get more onerous with time. Despite its rusty delivery mechanism, the government now wants to enlarge the scope of its welfare activities by passing the Food Security Bill. Before it does so, it needs to overhaul its subsidy delivery mechanism. Otherwise, if it passes the Food Security Bill but is unable to fulfil its promise, it will only engender a culture of disrespect for the laws of the land (as Kaushik Basu, chief economic adviser to the Finance Ministry, says in a recent paper). Against this backdrop, the government’s decision to set up a task force under the Unique Identification Authority of India (UIDAI) chairman Nandan Nilekani, which will look into the modus operandi of direct cash transfers to beneficiaries, comes as a welcome move. First, let us take a closer look at the problems of the current subsidy mechanism. (Owing to space constraint this piece talks only about the food subsidy regime, but many of the problems hold true for the fuel- and fertiliser-subsidy regimes as well). Poor targeting: Fudging of the below-poverty-line (BP

This article was originally published on March 18, 2011.