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So, finally, the Union government is getting ready to launch its ambitious cash transfers scheme to directly give subsidies to citizens. The scheme is to be launched in 51 districts to begin with.

It may, perhaps, be too early to speculate on the possible social impact this mechanism will have in a country as diverse as India. But its potentially deep and liberating effect should not be underestimated. In backward states such as Uttar Pradesh and Bihar—where even well-meaning governments are unable to deliver basic goods such as food, pensions, scholarships and the like—breaking the chain of intermediaries and reaching citizens directly will certainly be a welfare-enhancing step.

But the delivery of substantial choice-enhancing measures—such as delivery of food subsidy so that citizens are free to choose what they want to consume—will have to await political consensus in New Delhi. To begin with, there is a strong lobby that believes that direct cash transfers are socially and economically regressive. It will require some effort to overcome this opposition. More importantly, however, there is an entire chain of intermediaries from state capitals down to the village headman that nibble away bits and parts of these subsidies. This chain of rent-seekers is well-integrated with the political system and very often they play an important role, electorally speaking. Neutralizing this “layer of fat" is a challenging task.

It is perhaps for this reason that more contentious subsidies, such as food and fertilizer, have not been included in the scheme for now, whatever the official reasons may be.

At the same time, this government needs to think further. It is time a blueprint was prepared to reconsider the role of government agencies such as the Food Corporation of India and others, both at the state and central levels. At the moment, running these behemoths is a financial drag on the central government. Once citizens can directly get what they want from markets, the role of these agencies will be reduced. The question is of preparing for the transition—however distant that may be—of a diminished role for these organizations. In the end, the gains for India will be large.

Can direct cash transfers fully replace indirectly administered subsidies?

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