Why cash cannot replace subsidies

The attention paid by the Budget to the subsidies on kerosene, LPG and fertilisers should have provided some relief to those who have been watching the pressures on this account developing into a crisis. A large part of the benefits of these subsidies do not reach the poor; the fertiliser subsidy benefits industry more than farmers, and the subsidy on kerosene has contributed to adulteration. Unfortunately, the Finance Minister's solution of replacing the subsidies with a cash transfer is a remedy that is worse than the disease.

It does nothing to address the problems that destroyed the existing mechanisms of subsidies. As a result, it only transfers the problem from the government's budget to the budgets of the poor and the farmers. Indeed, the Finance Minister, Mr Pranab Mukherjee, may well have done his bit to add to inflationary pressures and to the burden of risk borne by the farmers and the poor.

By placing this move in the context of the battle against corruption, the Finance Minister has implicitly argued that the leakages in subsidies are due to the mechanisms through which they are distributed, and the direct transfer of cash to the poor will be less prone to corruption.

There is also an apparent faith in the use of technology to battle corruption as is reflected in his handing over the task of working out the modalities of the new system to a committee headed by an icon of the information technology industry. But there is enough evidence that payments made through technology-intensive systems, as in the Mahatma Gandhi National Rural Employment Guarantee Schemes, are not exactly immune to corruption.

Cash transfers

Assuming for the moment that corruption will disappear and the scheme will work perfectly, only brings us to the next problem, that of prices. The removal of the subsidy element in the prices of kerosene, LPG and fertilisers will have an immediate inflationary effect on the prices of these commodities.

The government may believe that effective cash transfers will ease the burden of this inflation on the poor. But if it thinks the non-poor will quietly bear the burden of higher prices, it would do well to look at the social profile of those complaining about dhal prices on television.

And it is not as if the shift to cash transfers will leave the poor unaffected. Once the cash is given to the head of the household in lieu of the kerosene subsidy, there is no guarantee that all of it will reach the kitchen. The men who get the cash could spend it on a number of items other than kerosene. This could be a disaster for the women of the poor struggling to find the resources to pay the much higher market price for kerosene.

Impact on market prices

An even greater challenge for the poor would be in dealing with the uncertainties involved. If world oil prices shoot up, it will have an immediate impact on the market price of kerosene. Even if the government decides it will meet the entire burden through an additional cash transfer — and there is no guarantee that a deficit-sensitive government would do that — the fact remains that the impact on market prices will be much faster than governments are known to react. During the interim period, the poor will have to bear the burden. Farmers too would have to bear the additional risk of fluctuating market prices for fertilisers. And this must be seen in the context of their current struggle to deal with market uncertainties. One of the underestimated components of the Green Revolution strategy was the removal of risk to the farmers.

The government ensured the farmers got the credit, had access to the technologies, and then guaranteed the procurement of the final product. In the post-liberalisation era, farmers have been encouraged to move into crops that promise a higher return. But the fluctuating prices of these crops often throw up situations when they are unable to pay back their loans. And it is this inability that prompts poor farmers, and even those who are not the poorest, to commit suicide. By adding the risk of fluctuating fertiliser prices to that of unpredictable crop prices, the Finance Minister has only added his bit to the problem of farmers' suicides.

Search for alternatives

None of this is to suggest that the current subsidy mechanisms are ideal. That is clearly not the case. The leakages and misdirected targeting are there for all to see. While looking for alternatives, one must keep in mind the fact that these subsidies, along with the food subsidy, have played a role in the past, especially in the risk-proofing of farming in the Green Revolution years.

The fact that conditions have changed on the ground over the last three decades has led to the collapse of these mechanisms. But this calls for alternative mechanisms to address risk, rather than the government simply passing it on to the recipients of the subsidies.

The search for such alternatives would take the government and its subsidies in a number of other directions. It could, for instance, link its expertise in procurement to futures markets so that the farmer has the genuine option of knowing what price his crop will fetch before he plants it. Creating such options will not be easy and may even be expensive. But it will be a much more meaningful response to today's challenges than the government simply washing its hands off the problem by throwing cash to the poor and the farmers.

(The author is Professor, School of Social Science, National Institute of Advanced Studies, Bangalore. >blfeedback@thehindu.co.in )

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