DIRECT cash transfers subsidies

DIRECT cash transfers to the poor in lieu of subsidised kerosene, fertilisers and cooking gas are being introduced as an experiment in seven states, including Haryana, Delhi and Rajasthan, on the recommendation of a task force headed by Nanadan Nilekani. The bold experiment will be under watch for six months, and if found successful, it would possibly be announced in the coming Union Budget for a countrywide rollout. A subsidy creates dual prices – the price the targeted beneficiaries pay and the open market price, which is higher. This leads to the diversion of subsidized items. Cheap kerosene, for instance is meant for the poor, but is widely used for adulteration of petrol or diesel. The highly subsidised domestic LPG cylinder is put to commercial use. The subsidy on fertilizers is meant for farmers but is paid to the manufacturing companies.

Under the new scheme the government will transfer cash direct in the bank accounts of kerosene, LPG and fertilizer users, who can buy these items from stores near them at the market rate. This arrangement will help the government eliminate middlemen and make foolproof payments direct to the needy. The undeserving like rich farmers can be denied the fertilizer subsidy. Companies will no longer have assured payments and will have to be efficient and price their products competitively. The government, which pays an annual subsidy of Rs 80,000 crore on kerosene, LPG and fertilizers, will make huge savings.
The move to switch over to direct cash transfers is fraught with risks. The vested interests may resist change. Identifying the poor is a daunting task. The well-connected often grab benefits meant for the poor, who may not have easy access to a bank or a post office. Pensions do land in wrong hands. Rich farmers in connivance with officials may open and operate bank accounts or smart UID cards in the names of illiterate, poor farmers. Challenges are there but these are not insurmountable. The key to the success of the ambitious project is good governance, especially at the state level.