Saturday, December 1, 2012

Direct Cash Transfers

(I am not often drawn into writing about matters of government policy or, indeed, into lapsing into the esoterica of my working days. Having worked for a long while in the area of fertilizer subsidies and having been considered something of an expert on those policies, I am somewhat obsessed about this area – even unto typing this with my left hand!)
The GOI sees direct cash transfer of subsidies as means to avoid leakages of subsidy en route to the beneficiary. In the current system – with specific reference to the PDS, LPG, Kerosene and fertilizers – the material is subsidized at the manufacturer level and material is sold at subsidized prices to the customer. This, in effect, means that the people in the distribution chain can sell the material at a premium to those who are not intended as beneficiaries of the subsidies and reduce/deny supplies to the intended beneficiaries.
When the subsidy amount is directly transferred to the beneficiaries and the material is to be sold at market prices to all comers, there is little point in diverting supplies to non-beneficiaries – unless there is a significant difference between the MRPs at these outlets vis-à-vis the market prices. Thus it would appear that there is validity in the GOI claim that subsidy leakages would be significantly reduced.
The system also seeks to ensure that the subsidy does not get diverted to other uses. To ensure that, the GOI seeks to monitor whether a beneficiary has indeed purchased the intended material and, if not, to deny the subsidy to him going forth. This measure would have been deemed necessary in order to avoid, say, usage of LPG subsidy for the purchase of intoxicants etc.
The problems in the system would be related to (a) Identification of beneficiaries and possible corruption at the stage of adding your name to the beneficiaries list (b) Identification of defaulters – those who fail to use the subsidy as intended – removal of their names, re-addition and attendant possibility of misuse of the powers by concerned officials (c) Addition of unintended people as beneficiaries (d) Errors and rectification in the cash transfers and attendant issues of corruption. (e) Treatment of itinerant work-force.
Two strong future possibilities exist, however, and it cannot be denied that the GOI could well be considering them. The first relates to reducing the number of beneficiaries. At the moment quite a few goods are sold at subsidized prices regardless of the income of the recipient. Going forth, it may be sought to restrict subsidy to only people below a cut-off income level. This move may, in itself, not be objectionable. After all, it is difficult to argue that a family which goes on an annual foreign jaunt, say, would be significantly impoverished by paying an additional Rs.10000 per annum for LPG. The prescription of the cut-off will, however, need debating if and when the GOI does come out with it.
The second is a more serious possibility. Hitherto, the subsidized price of the goods has been fixed – varied only by Government diktat – and, thus, any increases in the market price increased the subsidy bill. Now, it is likely that the quantum of subsidy shall be fixed – and varied only by Government diktat – and thus any increase in market price will be to the cost of the customer. Unless the Government links the subsidy amount to an appropriate inflationary index or is swift to increase the amount by diktat, there is a definite possibility of increased burden on the consumer.
Overall the system does have its advantages. It may be best for opponents to address themselves to procedures that redress the perceived flaws – behind closed doors at least – while maintaining their rhetorical opposition.

Go here for the other part


  1. I think the success of the program will be dependent on how it is implemented and what control mechanisms are put in place. Other challenge will be to find out where the money is actually being spent. What will stop a drunkard to buy liquor in place of food for his family?