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Direct transfers are set to rid the subsidy system of its ills

Direct transfers are set to rid the subsidy system of its ills

Direct transfers are set to rid the subsidy system of its ills.

What is proposed: With the task force on subsidy reforms having submitted its interim report, the government finally has a roadmap to streamline its subsidy mechanism. The panel, headed by Unique Identification Authority of India, or UIDAI, Chairman Nandan Nilekani, has suggested a host of measures: doing away with the dual pricing mechanism (which makes goods available at both market and subsidised rates); financial inclusion of the poor; direct transfer of subsidies, including a cash equivalent through banks and ATMs; giving beneficiaries the right to choose the mechanism of subsidy they want; and the creation of an online subsidy management system. The report paves the way for the rollout of a pilot project in Tamil Nadu, Assam, Maharashtra, Delhi, Rajasthan and Orissa, the results of which will be included in the final report of the task force to be submitted in December.

What will change: At present, the system of dual pricing provides an incentive for illegally diverting products and profiting from the difference in their prices. This, along with the inability of the poor to enforce their rights fully, has led to many legitimate beneficiaries being denied subsidies. The new delivery mechanism seeks to remove these anomalies by compressing the layers of the distribution chain, which will eventually lead to direct transfer of subsidies to beneficiaries. Initially, direct cash transfers will be made only for kerosene, cooking gas and fertiliser, using an electronic back-end and Aadhar-enabled bank accounts.

Aadhar is a 12-digit identity number being issued by the UIDAI which is linked to basic demographic information and biometric details of beneficiaries. "The idea is to make subsidy better targeted and more efficient," says D.K. Srivastava, Director, Madras School of Economics. "Direct transfers are far better than the current system." Subsidies make up between 11 and 13 per cent of government expenditure. For 2011/12, the budget has pegged subsidies at Rs 1.43 trillion (one trillion equals 100,000 crore), or 11.4 per cent of the government's expenditure.

Challenges: The finance minister in his budget speech said the recommendations of the task force in its final report would be implemented by March 2012. However, the task force has suggested streamlining the system in phases as cash transfers will hinge on scaling up bank penetration with the help of Aadhar. "Aadhar will be an important piece of identity," says Anirban Roy, Managing Director, SEED Financial Services, which functions as a business correspondent for banks. "Eventually, Aadhar will become KYC (know your customer)," he adds, explaining that the number will be a single source to meet a bank's verification needs. Moreover, the success of an exercise of this magnitude will depend a lot on political will, as well as on "good governance… a structured transition plan, meticulous project management, effective supervision, audit and execution", in the words of Nilekani.

Global experience:
Cash transfers have been extensively tried in Central and South America. Mexico, a few years ago, experimented extensively with conditional cash transfers, or CCTs, where cash payment to the beneficiary was linked to fulfilling some conditions. The Janani Suraksha Yojana, a government programme to incentivise women to use a modern health facility for childbirth, runs on the concept of CCT. Recently, Brazil was held up by economists as an example of a country that has made extensive use of CCT to cushion its economically-vulnerable sections without interfering with the price mechanism.

Published on: Aug 04, 2011, 12:00 AM IST
Posted by: Navneeta N, Aug 04, 2011, 12:00 AM IST