Is direct cash better than subsidy?

Tue, 5 Jul Pre-Open

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Subsidies in India have a long history and a wide coverage from fuel to food to fertilizers. They were introduced with a noble motive to provide the poor access to basic necessities to improve their standard of living. However, the omnipresent greed and corruption in the country has not left subsidies untouched. The indiscriminate subsidy system has led to wastage, leakage, adulteration, inefficiencies and black markets. For example, as per the World Bank, more than 50% of the subsidized food gets leaked away and does not reach the target households. Similar is the case with diesel. More and more passenger cars and SUVs are getting converted from petrol to diesel. The subsidy on diesel is helping not the poor but middle and upper class.

To take a corrective step in this direction, the Government in the current year's Union budget had proposed to replace the existing system of grant of subsidies through Public Distribution System (PDS) by direct cash transfer in a phased way to the 'right' beneficiaries. The idea finds strong support from eminent people as it reduces the red tapism, middlemen and bureaucratic levels and will ensure that the scheme works for target population. However, for such a radical switch, we need technology and some sort of identification for the masses. Hence, a task force was set up in the month of Ferbruary 2011 under Mr. Nandan Nilekani, Chairman of Unique Identification Authority of India (UIDAI), to come up with a way to handle the project.

The report regarding the same is about to be revealed. While it all looks goods in theory, is India ready for such a shift? First of all, the success of UID, which is the backbone of the new policy, is yet to be tested. It will be the basis to identify the beneficiary and grant him the cash. And then there are challenges like making sure that these benefits reach the target households. The UID system does not help here. It is an exercise to be done by other agencies and hence prone to judgmental error. Another concern is on the logistics part. The system is supposed to work so that cash is directly deposited in the beneficiaries' account. Most of the beneficiaries of such a scheme will reside in rural areas where the penetration of financial services is limited. Hence, there will be a need to use banking correspondents or agents to disburse funds and authenticate beneficiaries. However, once the funds get credited, the beneficiary can buy the item at market prices which will obviate the existence of fair price/ration shops.

To conclude, the direct cash transfers may not be perfect solution. However, once the teething troubles and logistics are taken care of, it should rank higher than PDS that is fuelling black markets and hardly helping the poor.