It was in the Union Budget 2011 when the government announced its movement away from the existing price subsidies to direct tax transfer to the households below the poverty line. The earlier system involved directly paying the manufacturers who were required to charge a low price to the targeted below poverty line consumers.
The main problem in such a system is with regard to delivery system. A report by the Planning Commission established the inefficiency of the Public Distribution system stating that almost 60% of the subsidised food grains are diverted from reaching the targeted consumers.
What direct transfer payment does is that it mitigates the involvement of layers of middlemen, who take a cut from the subsidy at each level, thus reducing leakages in the process. It also eliminates the problems of duplicate ration cards and thus the increasing subsidy bills. The cash transfer would speed up the distribution system as the disbursement won't be affected by the availability of LPG, kerosene or food at discounted rates in ration shops.
The direct electronic transfer linked to a person's Aadhar bank account encourages a single bank account to avail all services. This may also promote the financial inclusion and the establishment of digital infrastructure.
Though the scheme has been rolled over in a few states such as Andhra Pradesh, Puducherry, Chandigarh, Punjab and Jharkhand, the following challenges remain.
Possible Challenges underway
A major challenge for the coming government is to identify the beneficiaries under this scheme and make sure that money reaches them. A problem in this regard is that the transfers are linked with Aadhar cards which has covered only about half of the population till now. With a huge proportion of population without Aadhar cards, it is unlikely that the direct transfer mechanism will reach the desired audience.
Another concern for the coming government will be to ensure that the money that is transferred is used for the desired purpose. Often free money like this is used by men for alcohol consumption and gambling, thus calling for regular monitoring by the government. One solution in this case could be to ask the people to submit a bill of their expenses before they get their next transfer. However with a huge un-organised sector in the country may be this solution would also not be of much help.
Analysis of countries such as Brazil and USA, who have successfully implemented the scheme, shows that to reap the benefits from such a program in terms of reduction in the subsidy bill, the country has to get rid of the existing corruption and has to promote good governance practicing in terms of regular monitoring of the disbursed funds. Corruption which is said to be engrained in India threatens the effectiveness of the plan. Frauds in terms of forged signatures and incomplete payments to the beneficiaries may make the scheme as inefficient as the one with price subsidies.
Poor financial inclusion is a major issue
A bigger issue that India in particular faces is that penetration of the banking system is not deep enough to implement such a plan. As fancy as it sounds on paper, the success of the scheme rests on the inclusion of the rural population in the banking system. Until we ensure that there are enough banks are set up and bank accounts are easily accessible to the rural poor, we cannot go ahead with the scheme. In many cases the lack of proximity to bank accounts or ATMs force people to travel in order to withdraw the transferred cash, thus eating up a major portion of the subsidy. Even though the scheme is implementable by the use of business correspondents (usually small micro-finance institutions), there scarce numbers do not offer any hope.
Apart from this the incentive offered to banks is not good enough for them to expand in rural areas and offer such services. A report from Andhra Pradesh states that the banks haven't found it profitable to offer such services as the 2% government service charge is not enough for them to cover their costs. This is a huge problem as the scheme not only hopes to reduce the subsidy levels but also include the rural population in the rapid expansion of the financial system in India. Maybe the importance laid on financial inclusion by the RBI in giving out banking licenses will partially help in mitigating these issues.
In effect the government have to back the direct benefits scheme with deeper penetration of the Aadhar card system, access to financial services by all and more importantly a transparent and corruption free monitoring and implementing committee. Though at present cash subsidies do not look like the best solution to eliminate poverty in India, the current government must realise that it certainly has potential to better serve the poor households given the elimination of the private traders (the middle-men) and improved access to a bank's services.
- Jasmine Makkar
Jasmine Makkar is a first year PGDM- Finance Student at SPJIMR. She has completed her graduation in Economics(H) from Lady Shri Ram College, DU. She enjoys writing, dancing and is a theatre enthusiast.
Follow Jasmine at jasminemakkar.insideiim.com
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