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Making cash subsidies work

Making cash subsidies work
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First Published: Tue, Apr 05 2011. 09 11 PM IST
Updated: Tue, Apr 05 2011. 09 11 PM IST
Two important events that have transpired in recent months have the potential to transform subsidy administration in India. In mid-February, the government of India announced the formation of a task force, headed by Nandan Nilekani, to explore the possibility of transferring subsidies on kerosene, cooking gas and fertilizers directly as cash to the Aadhaar-linked bank accounts of the beneficiaries. Subsequently, in the Union budget for 2011-12, the finance minister declared that the government would move to a system of direct transfer of cash subsidy on these products in a phased manner from March 2012.
As expected, the decision has generated an intense debate on the merits of replacing subsidies with direct cash transfers. The major objections to subsidy transfers into the Aadhaar-linked accounts are threefold. One, it leaves the critical issue of beneficiary identification, or targeting, unresolved. Aadhaar-based identification can eliminate only duplicate and ghost beneficiaries. Second, the potential for price volatility associated with the subsidized products means that subsidy amounts may have to be frequently calibrated. Its administration poses entirely different, seemingly insurmountable, challenges. Third, there is an apprehension that the cash transferred will be frittered away on wasteful expenditures.
Any cash transfer should be designed keeping in mind these concerns. There are also important design and implementation issues that need to be addressed for each product separately.
First, there is the basic question of whether the subsidy should be delivered as a direct cash transfer to the beneficiary’s Aadhaar-linked account or be provided in the form of a voucher. Second, given concerns about wasteful expenditures, would a debit card that can be used to purchase only certain commodities be more effective than cash? Third, whether the subsidy should be back-ended and reimbursed to the manufacturer (as is currently the case with fertilizers) or the retailer. Fourth, in case of the latter, who among the various local retailers should be registered so as to enable the widest reach? Fifth, if vouchers are proposed, the details of their administration need to be carefully addressed.
Finally, there is the nature of the Aadhaar-linked savings bank account. The fertilizer cash transfers for each family are not small amounts, and will be disbursed in bulk once or twice a year. A family receiving wages under the Mahatma Gandhi National Rural Employment Guarantee Scheme as well as cash transfers on fertilizers and cooking gas would have substantial cash inflows. It is possible that these multiple and often lumpy inflows into a single account would be diverted for other purposes, especially wasteful ones, defeating the purpose of such transfers. In this context, insights from recent research in behavioural economics show that use-directed sub-accounts (say, a fertilizer sub-account) within the main one, designed to consider people’s “mental accounting choices”, may be more effective at optimal management of multiple inflows.
It is clear that there are several operational uncertainties that need to be resolved to some reasonable level of satisfaction before we can arrive at a final implementation strategy. In fact, the strategy for each item will have to be designed based on the specific nature of its market, usage patterns, and proposed subsidy administration. The strategy will also vary across geographical areas, especially between rural and urban centres. Hence it is important that the mechanics of such transfers for each product be comprehensively addressed in its finer details before the programme is fully rolled out.
Many of these questions can be answered with an acceptable degree of certainty only after rigorous field evaluation of pilot projects with different design details. No amount of theoretical analysis, however rigorous, can be a substitute for such evaluations. However, governments rarely have the time to conduct elaborate pilots and assess the respective impacts of minute design and implementation details through them.
One way to resolve this is to simultaneously evaluate some of these issues through small pilots over short periods—for example, how and who to deliver the subsidy to. The results of each such pilot can be rigorously scrutinized, and the most appropriate strategy for transferring the subsidy for each product finalized. The impact of the finalized subsidy administration can then be evaluated through a randomized control trial with an adequately sized sample and over a sufficient time period.
Most often, in their hurry to roll out new initiatives, governments implement programmes without paying adequate care to the details of implementation. The programme, when finally evaluated, inevitably falls short of its objectives. That the particular experiment went wrong because of specific failures in the implementation strategy, and not because of any fundamental flaw in the idea itself, is easily lost in the recriminations and post-mortem that follow.
Any cash transfer programme implemented without resolving these design issues are certain to result in delivery failures. Critics will invariably seize on them as proof of the inadequacy of the idea of cash transfers and demand its rollback. In the aftermath of such a high-profile failure, it will become politically impossible for any new government to try cash transfers in the foreseeable future.
Gulzar Natarajan is a civil servant. These are his personal views
Comments are welcome at theirview@livemint.com
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First Published: Tue, Apr 05 2011. 09 11 PM IST