Govt bites the bullet on subsidies

Govt bites the bullet on subsidies

New Delhi: In a reformist move long recommended by various economists and panels, the government has set up a task force to create a way to directly transfer cash to the ultimate beneficiaries of various subsidy schemes, which are, at best, messy and, at worst, ineffective.

The task force will be headed by Nandan Nilekani, chairman of the Unique Identification Authority of India. A pilot will be rolled out in the next four months. This will be reviewed by the end of the year, setting the stage for a possible move to cash transfers in next year’s budget.

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) increased by 245% to Rs1.09 trillion. Economists, including Raghuram Rajan—former chief economist of the International Monetary Fund and honorary economic adviser to Prime Minister Manmohan Singh—have long recommended this course of action. Nilekani himself is an advocate of the move and has written about it in his book Imagining India.

The move to replace subsidies with cash transfers is likely to be opposed by the National Advisory Council (NAC), headed by Congress president Sonia Gandhi. In the past few months, the government and NAC have disagreed over the contours of the right to food legislation and on the definition of wages for the Centre’s job guarantee scheme.

The other members of Nilekani’s task force will be the heads of government departments looking after expenditure, financial services, food, fertilizers and agriculture. It will seek to operationalize direct transfers in kerosene, fertilizer and cooking gas.

The tenure of the task force will run parallel to an elaborate exercise being currently carried out through the 15th Census to issue smart cards to residents.

“We will be issuing the national population register card to every usual resident," C. Chandramouli, registrar general and census commissioner, said last week. “That will be the basic identity document, which will be a smart card and this will be used for various purposes of the government."

The economic rationale for moving to direct cash transfers was spelt out in the 2009-10 Economic Survey. “A common mistake is to suppose that a subsidy scheme has to be coupled with price control," it said.

The government has previously flirted with direct transfers. Last year, the oil ministry launched a pilot project for the purchase of kerosene using smart cards through the public distribution system (PDS) in Pune, Bangalore and Hyderabad. A National Council of Applied Economic Research study says 35% of kerosene meant for PDS is diverted. Of this, 18% is used to adulterate diesel. The government’s statement on Monday said “there is overwhelming evidence that this policy (on subsidies for kerosene) is resulting in waste, leakage, adulteration and inefficiency".

The idea of direct transfers is not popular. Some believe that these subsidies also ensure access, and protect the interests of producers and suppliers.

“I strongly believe it is disastrous to convert the PDS subsidy into direct cash transfer because the PDS is also meant to ensure a minimum support price for protecting the farmers’ interests and stabilizing access to food," Harsh Mander, a member of NAC said, commenting on the general principle of cash transfers. “All these objects would not be possible if it’s just a cash transfer."

Utpal Bhaskar and Liz Mathew contributed to this story.