'Make new system foolproof before launch'

Ideally, there are several benefits of the proposed cash transfer of subsidies.

This should reduce, if not totally eliminate, the enormous leakages by getting rid of ghost and duplicate ration cards and layers of middlemen  who siphon off a part of the subsidy by taking ‘cuts’ at different levels. Therefore, even if the same amount of subsidy is paid out by the government (‘revenue neutral’), the final targeted recipient should get more.

The disbursement should also be quicker and not depend on the physical availability of subsidised kerosene, food or fertiliser in the PDS or government shops.  The cash can be used to buy kerosene or food or fertiliser at market prices. This would mean less scope for local corruption as the local boss can no longer decide who will get subsidised kerosene or fertiliser in short supply at government outlets. Further, under the existing system, the recipient has to establish his/her eligibility many times by producing documents which then have to be verified by the multiple authorities since the different schemes (there are some 40-odd schemes) are administered by different government agencies. With an Aadhar-based centralised data base which can be accessed by different government agencies, the cost of duplication of efforts by the recipients and the government agencies can be avoided. Buying kerosene and LPG at market prices would also reduce the incentive to adulterate diesel/petrol with (cheap) kerosene and diversion of (subsidised) domestic LPG cylinders to commercial use.

However, several precautions need to be taken to make the system work. First, the cash subsidy amounts need to be inflation-indexed to take care of the problem of rising prices. Otherwise, the poor will suffer.

Second, the availability of banks or ATM nearby is a big problem in rural areas. This can be tackled by the use of the bank correspondents (or commission agents) who would regularly visit the villages with their hand-held  machines linked to banks which would transact  both authenticated deposits and withdrawals with proper receipts. But this needs to be implemented before the cash subsidy replaces the existing system in such areas.

Third, in places like distant tribal areas with scattered population, no private shop to sell grains or kerosene may exist. Moreover, the chances of manipulating the price by one or two sellers, if any exists, would be quite high. The only realistic solution is to improve the existing PDS system in such areas. If the government machinery and FCI are freed from the task of storing and distributing grains and kerosene, it may well be able to devote its energy to manage its (limited) storage and distribution capacity better for some pockets.

Not a cure-all

It should be made clear that cash transfer is not a panacea to cure all ills of the existing subsidy system. It would plug some leakages but not all (like issuing BPL certification to non-poor by local politicians in exchange for bribes, crediting some people for work and cash subsidy under NREGS even when they do not work and so on). 

Basically, the government needs to proceed very carefully to implement the new system. They must study the difficulties faced by the intended beneficiaries in the pilot areas and  make the system foolproof. In particular, it must be ensured that every eligible person receives the Aadhar number and the bank account before the scheme is launched in a particular area.


(The writer is a former Professor of Economics, IIM, Calcutta.)

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