New Delhi: The government moved a step closer towards effecting a radical overhaul of the present subsidy regime by replacing it with direct cash transfers after a task force created to implement the change submitted a blueprint for a phased roll-out.
Initially, direct cash transfers will be restricted to kerosene, fertilizer and cooking gas, which together accounted for a little over half of the government’s annual subsidy bill of Rs 1.64 trillion crore in 2010-11.
Also See | Step By Step (PDF)
The report was formally accepted by finance minister Pranab Mukherjee, clearing the way for the roll-out of pilot projects, learnings from which will serve as inputs in the final report to be readied by December. This will set the stage for a possible roll-out of cash transfers in the Union budget for 2012-13.
Analysts point out that the big challenge for the government will be to summon the political will to push through such a radical makeover of the subsidy regime. Mukherjee had announced the creation of the task force in his last budget speech.
Significantly, the task force headed by Nandan Nilekani, chairman of the Unique Identification Authority of India, admitted as much: “Eventual success will hinge upon political will, good governance, incentive-compatible solution design, judicious use of technology, a structured transition plan, meticulous project management, effective supervision, audit and execution.”
The core of the strategy proposed by the task force suggests doing away with the present system of dual pricing and pressing for financial inclusion, which will allow for cash transfers directly to the bank accounts of the beneficiaries.
“A subsidy, by its very nature, introduces two or more prices for the same good, and creates incentives for pilferage and diversion. As a result, the underprivileged suffer the most. Ensuring that goods move in the supply chain at market prices can minimize the incentives for diversion,” the report said.
Accordingly, it has recommended the creation of a Core Subsidy Management System that will serve as the central repository of information and bookkeeping for pilot projects. “It will help in real-time transfer of funds to the bank accounts of the targeted beneficiaries and integration of all form of subsidies,” it added.
Direct cash transfers have been recommended by different government panels over the years to remove price distortions, get more for the poor out of every rupee spent and control government spending, even as India moves towards an era of greater redistribution and entitlements. In the five years ended 2010-11, the cost of major subsidies (excluding oil) rose by 245% to Rs 1.09 trillion. The report has also suggested that the finance ministry “fund the subsidies in advance to the implementing ministries” for real-time transfers.
In the case of fertilizers, the report has proposed direct subsidy transfer to the farmers, bypassing the manufacturers. In the present structure, subsidy is given by the government directly to fertilizer manufacturers and importers, who in turn sell the product to the farmers at subsidized rates.
The road map has three phases. In the first phase, the government will map the movement of fertilizers along the supply chain—from the manufacturer to the retailer by December. In the next phase, it will transfer subsidy to the bank accounts of 230,000 retailers. In the final phase, to be implemented by June 2012, the subsidy will be transferred directly to the bank accounts of farmers. However, only those farmers deemed eligible for receiving subsidy will be reimbursed, as against the present system where all farmers buying fertilizers are subsidized.
In the case of domestic liquefied petroleum gas (LPG) cylinders, the report has suggested the politically sensitive decision to cap the number of cylinders per customer in the first phase followed by the direct subsidy transfer. In the third phase, it recommends restriction of cash subsidy to the targeted customers.
To streamline the Rs 20,000 crore subsidy on kerosene, the report has recommended direct cash transfer based on actual usage.
Analysts say the implementation of the task force’s report will enable better targeting of subsidies and at the same time prevent leakages. A study by the National Council of Applied Economic Research claims that 35% of kerosene meant for the public distribution system is diverted. Of this, 18% is used to adulterate diesel.
The report has also suggested giving the state governments time till April 2012 to put in place institutional mechanisms to ensure targeted subsidies. These measures in the petroleum sector will help in decreasing the losses of government-owned oil marketing companies such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd from selling fuel at a price that is lower than the cost price.
While such a move will help in the better targeting of the intended beneficiaries, it will also help in reducing the growing subsidy burden of the government. The report comes at a time when the government has been under attack for its inability to contain inflation.
“Direct cash transfers may work in some situations and may not work in some other situations like public distribution system. The problem is to identify the poor, which obviously machines cannot do. If the wrong persons are identified because of corrupt officials, then obviously the cash transfers will not reach the target audience. But one should not have an ideological position on cash transfers. After all, pensions are given in cash. It has to be experimented through pilot projects and implemented wherever it is found to be working,” National Advisory Council member N.C. Saxena said.
Graphic by Yogesh Kumar/Mint
Asit Ranjan Mishra contributed to this story.