For the fiscal year 2011-12 India poured in a total of 2.16 lakh crore
rupees (USD 39.7 billion) in subsidy. The three major heads under which this
subsidy is rolled out are food, fertilizer and fuel. All three heads have equal
share in the booty. The total cost of subsidy is three times the planned outlay
for ministry of health and family welfare or just bit lower than the total
planned outlay for defense at USD 40.44 billion. It’s not too difficult to get
a perspective on how much money is spent on subsidy. Most of the subsidy under
all the three categories either fails to reach the true beneficiary or is
misused. The public distribution system (PDS) (barring in Madhya Pradesh and
Chattisgarh) is highly corrupt and inefficient. Food grains are siphoned off
and sold in the open market. Grains meant for PDS rots in open due to lack of
proper storage. Cheap fertilizer has lead to indiscriminate usage and reduced
soil quality and has made food unsafe. Free power and subsidised fuel has also
done little benefit to the farmers. A report by Central Ground Water Board has
indicated sharp decline in water table in Northern India. Most of the decline
can be attributed to overdrawing of ground water due to free access to
electricity and fuel. A big hole is burnt in the national budget with little
benefit to show.
 |
| Cash or kind? |
The government has finally woken up to the fact and will roll out the
first direct cash transfer scheme in the country. It will start in the New Year
beginning 1st January 2013. The idea is to transfer cash directly
into the accounts of entitled families and selling the food grains in open
market. The argument given by the government is that this will increase the
supply in open market (food which was held back to be distributed through PDS
will now enter the market) and hence bring the prices down marginally. People
will have a choice to buy what they want and when they want. Corruption in the
system will be put to an end. These arguments seem plausible, given that such
schemes have benefited poor people in other countries as well. The move is also
seen as a trump card by the central government for the general elections due in
2014. The scheme is intended to be fully operational by that time. Some states
are however unhappy about the scheme. The chief minister of Chhattisgarh has
written to the prime minister to withdraw direct cash transfer. He has a valid
reason. The credit for good governance will no longer go to the local
government, which streamlined the PDS system in Chhattisgarh.
Subsidies are bad for an economy and are worse the way they are handed
out at the moment. The new step is indeed a much needed change. The government
however should not make it easy for the beneficiaries to get the money. The
idea of subsidy is to help the poor balance their budgets so that they can come
out of poverty over a period of time. Handing out cash without any conditions
will not bring about that change. Proven systems of conditional cash assistance
exist in the developing world. The most effective and recognized being the “Bolsa
Familia” of Brazil. It is aimed at reducing poverty by direct cash transfer.
The aid is linked to the beneficiaries sending their children to school and
getting them vaccinated as per the schedule. The cash assistance helps them to
top up their limited incomes and schooling and timely vaccination of their
children helps in creating a healthy and educated workforce for future.
The Indian system should learn from such schemes and implement some checks
and balances. First step would be to set a limit to such assistance. People
should not be given lifelong subsidies. Once they know it is unlimited the
incentive to work towards it is gone. The benefit should be set to last a
certain number of years and after that it will automatically cease. This will
ensure that the beneficiaries will utilize the money judiciously. The benefit
should also be tied to milestones like in the Brazilian system of children
attending school or regular vaccination. Demographic measures like population
control and balancing the sex ratio too can be incorporated in the system. Biometric
identification (which will be linked to each bank account) of all family
members should be used to verify the claims. There is a whole lot which can be
done to pull millions out of poverty. The government should be judicious the
way it uses public money and make its welfare schemes sustainable rather than
populist.
