Smarter delivery of subsidies

Updated on: Feb 15, 2011

Mr Nilekani has to take a nuanced view of the various issues involved while designing a direct transfer method for subsidies.

In terms of pure economic theory, all subsidies are bad; but in terms of political practice, they are manna from heaven. As long as politicians and bureaucrats make the rules, there are certain types of outcomes based on simple premises. The politicians want political credit and the bureaucrats want policies simple to implement. But sometimes economists jump into the fray, and in the name of elegant and efficient solutions, they end up creating problems for the bureaucrats who have to implement these solutions. The politicians, of course, continue to hog the credit. The proposal to replace price subsidies on kerosene, fertiliser and cooking gas with income subsidies is a long awaited one, the design of the whole movement from one to the other being entrusted to a technocrat, namely, the Unique Identification Authority of India (UIDAI) chairman, Mr Nandan Nilekani. The Finance Ministry statement says that the task force has been set up “in order to evolve a suitable mechanism for direct subsidies to individuals/families who are entitled to kerosene, LPG and fertiliser and to evolve a model of direct transfer of subsidies on these items by re-engineering existing systems, processes and procedures in the implementation process…” Nice, but will the exercise once again trip on the practicalities? The answer depends on the product and Mr Nilekani has to take a nuanced view of the various issues involved.

Where kerosene is concerned, giving money to the consumer after narrowing or eliminating the gap between the PDS and market price of kerosene is sensible because the gap — which is almost Rs 18 per litre now — encourages diversion and adulteration. So the taxpayer ends up subsidising lorry-owners who don't mind adulterating diesel for their older trucks and the poor get much less kerosene than they are entitled to. Targeting is not difficult since State Governments know all the ration cardholders eligible for kerosene; beneficiaries only need to be persuaded to open bank accounts if they do not have one already. But where fertiliser is concerned, the subsidy is better delivered through the nine crore or so Kisan Credit Cards already issued. Indeed, some years ago the Finance Minister had announced that this would be done. This has the advantage of farmers not having to open new bank accounts and banks not having to service negative return accounts. The problems arising out of verification of land titles can also be avoided. As for cooking gas, there is no case for any subsidy at all and it should be abolished totally. It is morally and economically indefensible.

Finally, there remains the larger issue of the mode of income transfer: if it is to be through a bank account, what will be the load on the banks in operating so many millions of accounts. The banking system needs to be readied to cope with this crush.

Published on February 16, 2011

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