Capital Calculus | UPA’s gamble with disintermediation

The political fallout of the gamble depends upon how efficiently it delivers on promises underlying cash transfers
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First Published: Sun, Nov 11 2012. 05 32 PM IST
A file photo of officers issuing unique identity cards to people in Karnataka. Photo: Hemant Mishra/Mint
A file photo of officers issuing unique identity cards to people in Karnataka. Photo: Hemant Mishra/Mint
Updated: Mon, Nov 12 2012. 12 04 AM IST
On Friday, the Prime Minister’s office (PMO) gave a fresh nudge to its grandiose plan to move to a system of cash transfers for making subsidy payments directly to the beneficiaries equipped with a unique identity issued by the Unique Identification Authority of India (UIDAI). In the process, it has signalled unequivocally that there is no turning back on its intent to initiate a regime change in subsidy payout.
The political economy of this initiative is compelling as in the establishment it is being perceived as a policy and political masterstroke.
Essentially, the new regime will bypass the various intermediaries through which payments are presently routed (a process known as disintermediation) and engage directly with beneficiaries by transferring the money into their bank accounts. While it is indeed a smart move that will shake up the status quo, given that the ruling United Progressive Alliance has but 18 months to reach the end of its tenure, it makes the project risky. Success depends upon how quickly a lot of the supporting infrastructure is in place. More importantly, international experience suggests cash transfers do not work for all subsidies.
But on the face of it, not only will the move to transfer cash, restricted initially to pay out the subsidy on cooking gas, help contain leakages and ensure better targeting of subsidy payments, it will also deliver a feel good moment to the beneficiary as the payout will not be in kind but in cash. This can achieve political wonders. Something similar to what the Congress-led UPA had pulled off with the launch of its Mahatma Gandhi Rural Employment Guarantee Scheme (MGNREGS) in 2005; designed as a back-stop facility to mitigate conditions between crop seasons, it has in some states become a primary source of employment, and the additional cash flow to households has boosted consumption in rural India.
The idea is undoubtedly a game changer. It will alter a regime that has been in place for over six decades, which was originally designed as a state-sponsored redistribution mechanism. The initial idea was sound but the implementation went sour as the benefits—whether it be food grains through the public distribution system or fertilizer subsidies to farmers—barely trickled down to the ultimate beneficiary they were intended for; leakages and misuse were rampant in the case of fertilizer and fuel subsidy that it even incentivized smugglers to move these items for sale in neighbouring countries such as Bangladesh.
And since it was such a politically sensitive issue, each government that came to power made no serious effort to fix the problem. As a result, the subsidy Bill bloated and the distortions in the economy—as it introduced dual pricing—worsened. It has now come to a point of break. A near bankrupt government cannot sustain this any further. This is where the rub lies.
The UPA is working backwards. Cash transfers are being sold in a section of the government as the magic wand and the way out of the fiscal mess. The argument is simple. Since it is established that there are huge leakages from the system and the distortions are becoming unsustainable, a move to cash transfers will kill two birds with one stone.
Unfortunately, reality rarely emulates theory. Also, the motivation should have been the other way round. The UIDAI experiment had provided the right platform to test this out. Unfortunately, bickering within various arms of the government meant that the UPA’s showpiece has spent the better part of its tenure fighting off its critics rather than focusing on the job. In fact, a year back it was running the risk of being nixed or at the least made irrelevant. Thanks to some deft political manoeuvring, this was avoided.
As it is, the UIDAI was restricted to 18 states and was excluded from the two most populous states in the country, Uttar Pradesh and Bihar. To ramp up from scratch may prove difficult and politically, the UPA cannot afford leaving anybody out; especially since the cash-transfer regime is linked to holding a unique identity.
Tardy implementation of cash transfers and push back from some of the powerful political intermediaries could derail the initiative and generate their own political consequences. And now the electoral clock has begun ticking; if political buzz is to be believed, then the next general election is likely to be advanced.
It means there will be a greater sense of urgency from an administration that is yet to prove its efficiency. As the ongoing experiment with the subsidy on liquified petroleum gas shows that while it has shaken up the system, it also created unnecessary confusion—relating to the quota of subsidized cylinders and whether the government will relax the cap once the ongoing elections to the assemblies of Gujarat and Himachal Pradesh are concluded and so on.
It is clear then that the UPA has indeed embarked on a game-changing move. Whether it will achieve the desired objectives is still unclear. Similarly, the political fallout of the UPA’s gamble with disintermediation depends upon how efficiently the new regime delivers on the promises underlying cash transfers.
Anil Padmanabhan is deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at
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First Published: Sun, Nov 11 2012. 05 32 PM IST