The DBT alternative

Reserve Bank Governor >Raghuram Rajan has made what is probably the most cogent case in favour of direct benefit transfers (DBT) to pull the poor out of poverty. He has gone beyond the familiar argument that transferring money into Aadhaar-enabled bank accounts is a less leaky and market-distorting way to help the poor than providing them under-priced grain, fuel and essential public services. In doing so, he has pointed out how DBT can break the current vicious cycle in which the poor rely on the politician to access public goods, the venal politician uses the crooked businessman to fund his elections and ‘buy’ the votes of the poor, and the businessman uses the politician to land lucrative government contracts or concessions. Each constituency is tied to the other in a “cycle of dependence”, which ensures the survival of crony capitalism and does little to improve the lot of the poor.

Rajan’s solution is two-fold. First, give the poor money through DBT. Second — and this is a little counterintuitive — reduce their dependence on public services. This doesn’t mean shutting down fair price shops, government schools and public hospitals, but allowing the poor to exercise the choice of buying these goods and services from private providers. A poor household with cash via DBT can patronise whoever it wants and not just a monopolistic government provider. If the poor can pay for their grain or medicines, there is no need to under-price these either. In the event, not only would the fair price shop owner have less incentive to divert grain, but he will now be forced to compete with the shop across the street to remain relevant. Over time, this would put pressure on government departments to deliver to the poor what are now rights such as education and food but are in reality provided largely through the good offices of politicians who see them only as vote banks.

If the total subsidy bill of ₹260,658 crore budgeted for 2014-15 is transferred as cash to the 10 crore or so poor or vulnerable households in India, it would amount to almost ₹2,200 per month for each. >Those reflexively opposed to cash transfers should mull over this fact. Of course, the process of replacing all subsidies with DBT cannot be done overnight. We are still very far away from providing every citizen with a bank account that is seeded with a unique Aadhaar number. But this shouldn’t prevent the Centre from trying to restore DBT for the LPG subsidy scheme, which has a tremendous potential to reduce diversion of subsidised cylinders. DBT cannot address poverty, but it can definitely provide the poor an alternative to shoddily delivered public services.

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