Cash To The People | Value Research The direct cash transfer system should prove more efficacious than the current subsidy mechanism…
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Cash To The People

The direct cash transfer system should prove more efficacious than the current subsidy mechanism…

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 (BPL) list for cornering benefits is rampant. Lower-level officials often do not issue BPL cards to those at the bottom of the income ladder because the latter cannot afford to pay them bribes.

Leakages: Under the current public distribution system (PDS), subsidised grain is first handed over to ration shop owners who then sell it to BPL households at pre-specified prices. Often these ration shop owners sell the subsidised grains in the open market at higher prices. Then they either turn away the poor or adulterate the PDS grains. Recent studies show that as much as 67 per cent of the wheat meant to reach the poor misses its target.

Costly: As mentioned earlier, subsidies place a heavy burden on the government’s fiscal situation. For 2010-11 the government had budgeted Rs56,460.7 crore for meeting its obligations regarding food subsidy (including storage and warehousing). If the Food Security Bill becomes law, this figure will only bloat further.

The proposal
Instead of purchasing grains and supplying them to the poor through PDS shops, the government is examining the feasibility of directly transferring cash to the poor, which the latter can then use to buy food. Then the government would by and large dismantle its elaborate PDS mechanism. What would the advantages of such direct cash transfer be?
Savings: If the government dismantles the PDS system, losses on account of siphoning would disappear. The government also incurs a massive cost on buying grains at the minimum support price (which is higher than the market price) and then in storing it in godowns (where a lot of it rots). If the system of direct cash transfers is implemented, these costs would decline substantially, since the government will then only maintain buffer stocks for emergencies (like harvest failures). Recent computations done by the Ministry of Consumer Affairs, Food and Public Distribution show that switching over to a cash subsidy system could save the government as much as Rs12,700-15,500 crore from its PDS-related expenditures.
Power to the people: Under the cash transfer mechanism, the poor will have the option to buy from any shop instead of only the PDS shops. They will be able to choose the shop that offers them quality grains at attractive prices.
Currently the ration shop owner often turns away the poor. Direct cash transfers will mean economic power in their hands. Since the poor will offer cash, private traders will compete for their custom.

Will it work?
What are some of the possible problems that the direct cash transfer mechanism could run into?
Identification problem: Identifying the deserving beneficiaries has been the bane of social welfare programmes in India. Despite the UID (which will be backed by sophisticated information technology systems and tools), this problem may not vanish entirely. One will have to wait and see how effective the new mechanism proves to be in reality.
Under the new mechanism, beneficiaries will have the UID card, which will allow them to be identified based on some biometric parameter, say, fingerprints. The benefits will be directly transferred into their bank account from where they could withdraw the money by presenting their UID card. To access their money they won’t actually have to visit banks; the identity authentication and payment will be possible even at neighbourhood kirana stores (using a fingerprint scanner and a mobile phone).
One point is not yet clear. Will beneficiaries (BPL families) be identified using data captured during the survey for UID? Or will the BPL list be prepared separately via household surveys? In either case, fudging income-related data during these surveys will still be possible. After all, the same official machinery that today refuses to issue BPL cards to the poor will gather the data for UID cards.
What is true, however, is that monitoring and reviews will make it easier to identify undeserving beneficiaries. But will such monitoring be carried out with due diligence?
Opposition from farmers: The government and civil society at large should be prepared for opposition from powerful farmers’ lobbies. High minimum support prices, which have been increased regularly and quite generously by the government in the past, are among the factors that have contributed to growing rural prosperity. Farmers will be loath to see this benefit disappear overnight if the government dismantles PDS.
Farmers’ protests will also not be entirely without economic rationale. No less a person than M S Swaminathan, the pre-eminent agricultural scientist, is opposed to direct cash transfers. In the past, high MSP (and government support in the form of massive grain offtake) has helped fetch the desired supply response from farmers by providing them an incentive for producing more food grains.
Nonetheless, these kind of trade-offs have to be made (in this case, between farmers and consumers), provided the net gain to society is positive.
Money could be mis-spent: One oft-stated objection to direct cash transfers is that the poor might misuse the money. Instead of buying food grains, they could spend it on liquor.
This objection can, however, be overcome. One way the government could minimise misuse is by handing over the benefits to the woman of the house. Experience in many scieties demonstrates that when money is transferred to the woman, the chances of it being mis-spent get reduced. Another by-product of this development will be the enhancement of women’s status in society.

Not perfect, but better
The system of cash transfers may not be entirely foolproof. Even if some leakages continue owing to the identification problem, on balance it does appear to be superior to the existing subsidy-delivery mechanism.
Let’s hope that Team Nilekani designs an intelligent system that is robust enough to withstand the onslaught that will inevitably come from the corrupt, whether it be the lower bureaucracy or the above-BPL people who want to corner the benefits. One also hopes that the government will be able to muster the political will required to push these momentous changes through. After all, given India’s high current fiscal burden arising from subsidies, not taking any action would be a criminal sin of omission.
Finally, though this column is written primarily in terms of food subsidies, once the system is operational the government will be able to use it to achieve better targeting of all kinds of subsidies: kerosene, LPG, diesel, fertilisers, and so on. So the cumulative savings will be very high.

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