The government has announced that direct cash transfer of subsidies to the bank accounts of the recipients would start in 51 out of India’s 659 districts from January 2013 and would be gradually extended to the rest of the country by April 2014.

What NREGS was for UPA-1, direct cash transfer of subsidies is expected to be for UPA-2. The question is: Is it going to be the “game changer” as projected by the UPA spokespersons?

The two main pillars on which the scheme stands are the UID or Aadhaar biometric identity card and financial inclusion.

It is proposed that the cash equivalent of all subsidies, such as kerosene, LPG cooking gas, food, fertiliser, scholarships, old-age pensions, NREGS (there are some 42 government schemes), would be eventually transferred directly to the Aadhaar-based bank accounts of all the recipients.


What are the possible benefits? 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 (‘revenue-neutral’) by the government, 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 from private traders. 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.

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.

With an Aadhaar-based centralised data base, which can be accessed by different government agencies, the cost of duplication of efforts by both 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.

This would save money for the oil companies while reducing the pollution caused by adulterated fuel.


What are the possible pitfalls? Possibly the biggest problem is how to change the cash subsidy amount when the market prices of grains or kerosene or cooking gas or fertiliser change. The market price can also be manipulated by collusion, especially in areas where only a very small number of private sellers exist. The same cash amount would buy less if prices go up.

Can the government bureaucracy change the cash subsidy amount quickly enough?

Another fear is that the cash to buy food can be used for other purposes, such as entertainment or liquor.

The purpose of the subsidy, tackling malnutrition, for instance, would then be defeated.

One may take the position that if a family decides to spend its entitlement this way, why should others object.

This argument would not be valid if the decision is taken by, say, the male head of the family without considering the welfare of the wife and the children who have no voice in the decision-making process.

The spread of education, the awareness of the rights of women and children and the role of social activists would be crucial here.

Studies undertaken by organisations such as SEWA in areas where cash subsidy has already replaced kerosene subsidy (in pilot projects) indicate that the instances of cash being blown up in liquor is almost non-existent.

The availability of banks or ATM nearby is also a big problem for people in remote rural areas, even when they are able to open a no-frills bank account. The cost of visiting the bank to withdraw money may eat up a large part of the subsidy, which amounts to another form of ‘leakage’.

This can be tackled by the use of the bank correspondents (or commission agents from banks), 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 distant tribal areas with scattered populations, no private shop to sell grains or kerosene may exist. Moreover, the chances of one or two sellers manipulating the price would be quite high.

The potential benefits from a greater choice provided to the beneficiary by cash transfer would be illusory. 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 for large parts of the country, they may be able to devote their energies to managing their limited storage and distribution capacities better for some specific pockets.

Anther point raised is that implementing the Aadhaar system nationwide has its costs, just as administering the PDS.

Here, one has to remember that the costs of putting the Aadhaar system in place, though large, are mostly one-time in nature, whereas the PDS involves a recurring annual expenditure, apart from the leakages. Moreover, the Aadhaar system and database, once built, can be used for many other purposes.

Cash transfer is not a panacea to cure all ills of the subsidy system. It may plug some leakages but not all (such as 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).

The upshot is that the government needs to proceed very carefully. It must study the difficulties faced by the intended beneficiaries in the pilot areas — that too for a small number of items (kerosene, scholarships, pensions, NREGS) to start with — and make the system foolproof, before extending it to more items and more areas.

It must be ensured that every eligible person receives the Aadhaar card and the bank account before the scheme is launched in a particular area. The existing system may need to continue in some pockets for a while.

Fortunately, the government seems to be fully aware that any large-scale goof-up in administering the new subsidy system would backfire on the UPA in the 2014 elections.

Incidentally, districts chosen for the pilot experiment are outside the States that would go to polls in 2013.

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