Tag Archives: Subsidy

Why A Hasty Approach May Derail the Direct Cash Transfer Scheme Completely

The UPA government has announced the Direct Cash Transfer (DCT) scheme, with an eye on the elections. As expected, the opposition has cried foul,  terming it “bribe” to the voters.

That is politics. And not really the topic of discussion here. In fact, this piece is not even about the economics of it. Economists agree that it is more efficient to pass on the benefits to the deserving directly through cash transfer than indirectly through subsidies. In any case, the government has been talking about it for quite some time. The Budget Speech in the last two years have referred to it explicitly. Many studies internationally have shown that they have, by and large, had a positive effect.

The points that I raise here are not about the politics or economics of DCT but the implementation hurdles that remain. Because even with this limited rollout, it could be the world’s biggest such project. Rushing in to implement may create problems that could shake off people’s confidence on the scheme. This could lead the opponents to project it as a faulty idea per se.

So, here are some of the issues.

1. What about those without the bank accounts? India has less than 25% of people in rural areas, who have access to bank accounts. How will they get the benefit? Does it mean that some of them—those who have bank accounts—will get it and others will not get it? That will be as anarchical as it could be. And the backlash could be severe.

2. How will subsidies and DCT co-exist, even if for a limited period? The government says that the scheme will be fiscal-neutral as it will replace subsidies. Practically, how will that happen, especially in fuel (kerosene), food, and fertilizers? Till all the people are in a position to get the benefit of DCT (today, those who do not have Aadhaar or bank account will not be able to get it), the government cannot touch the public distribution system. Which means it cannot effectively cut  subsidies. So, the mechanism has to be in the point of contact (ration stores and the like) to ensure that some beneficiaries do not avail both the benefits, which is next to impossible, as of now. So, the government will continue to run both for the foreseeable future. And surely, it will not be fiscal neutral.

3. What are the alternate channels of supplies? While it is good to say, on paper, that by getting the money directly, the beneficiaries, can opt to buy the products from anywhere, no one is clear what is that anywhere. In many areas, no alternative supply and distribution channel exists. So, how will cash help them?

4. How do you ensure that the money is spent on those products and services for which is intended? How does the government ensure that the money is spent on the products and services that intends to subsidize? In some countries, these subsidies are conditional and are given to women. There is no such plan in India. So, in many families, where men spend a lot of earnings on alcohol and such things,  more cash means more money to get drunk. The possibility is very real in India.

The issues raised here are not meant to argue against the implementation of DCT.

But the fact remains that changing the entire subsidy regime requires a lot of thought and preparation. The government started on the right note by appointing a task force to suggest the ways and means of implementing this.

The task force, headed by Nandan Nilekani, Chairman, UIDAI, submitted a detailed report, recommending creation of what it called a Core Subsidy Management System (CSMS) to implement the new subsidy regime.  The task force foresaw the gap that exists in the payment system reach and recommended this

Since it may take a while for the payment systems in the country to gear up for direct transfer of subsidies, an intermediate step may be considered where the subsidy difference is transferred to wholesalers/retailers in the first phase, and only later on to customers.

But the government has disregarded it and has announced DCT right away. Also, there is no news on where the rollout of CSMS has reached.

With all its good intentions, the government will have only itself to blame, if the whole idea backfires.

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The Importance of Being Shri Nandan Nilekani

If there was one proper noun that stood out in the budget speech of the finance minister, Mr Pranab Mukherjee this year, it was undoubtedly Aadhaar. The speech had as many as nine reference to Aadhaar. Whether it is for subsidy being credited directly to beneficiary’s bank account, creating a more efficient public distribution regime by creating a PDS network, or for disbursement of government payouts—such as MG-NREGA payments, pensions and scholarships—the finance minister seemed confident that Aadhaar could be leveraged as a platform to deliver.

And it was just a couple of months back that a section of the media was writing off the project when the National Identification Authority Bill met with some adverse comments from a parliamentary standing committee headed by BJP MP and former finance minister Yashwant Sinha! In a cover story in Dataquest, The Politics of Identity, I had unequivocally pointed out then that “the Parliamentary Standing Committee’s return of the National Identification Authority in its present form is not a mandate to scrap the project; though some vested interests portray it that way.”

And I was not exactly being prophetic. Anyone following the project would know that this has been the most important project for UPA II for driving its No 1 policy priority: inclusion. And the government would not easily allow it to fall by the wayside.

In fact, since 2009 (that is beginning of UPA-II), the finance minister has, in all his budget speeches referred to the project. Here is a compilation of what he said about the project, in each of his budget speeches.

The setting up of the Unique Identification Authority of India (UIDAI) is a major step in improving governance with regard to delivery of public services. This project is very close to my heart. I am happy to note that this project also marks the beginning of an era where the top private sector talent in India steps forward to take the responsibility for implementing projects of vital national importance. The UIDAI will set up an online data base with identity and biometric details of Indian residents and provide enrolment and verification services across the country. The first set of unique identity numbers will be rolled out in 12 to 18 months. I have proposed a provision of Rs.120 crore for this project – July 2009 Budget Speech

The 2010 budget speech referred to the progress and raised the allocation to Rs 1900 crore

In my last Budget Speech, I had announced the constitution of the Unique Identification Authority of India, its broad working principles and the timelines for delivery of the first UID numbers. I am happy to report that the Authority has been constituted and it will be able to meet its commitments of issuing the first set of UID numbers in the coming year. It would provide an effective platform for financial inclusion and targeted subsidy payments. Since the UIDAI will now get into the operational phase, I am allocating Rs.1,900 crore to the Authority for 2010-11 – Budget Speech 2010

 By 2011, Aadhaar project had established its potential, in the eyes of the FM, as one of the most important initiatives to improve governance

The UID Mission has taken off and Aadhaar numbers are being generated in large numbers. So far 20 lakh Aadhaar numbers have been given and from 1st October 2011, ten lakh numbers will be generated per day. The stage is now set for realising the potential of Aadhaar for improving service delivery, accountability and transparency in governance of various schemes – Budget Speech 2011

The 2012 speech, which was full with reference to the project, too saw it on top when it came to highlight plans for improving governance.

The enrolments into the Aadhaar system have crossed 20 crore and the Aadhaar numbers generated upto date have crossed 14 crore. I propose to allocate adequate funds to complete another 40 crore enrolments starting from April 1, 2012. The Aadhaar platform is now ready to support the payments of MG-NREGA; old age, widow and disability pensions; and scholarships directly to the beneficiary accounts in selected areas – Budget Speech 2012

This year, the FM allocated Rs 14,232 crore for the project.

It is now amply clear that as far as the finance minister is concerned, this is a project that is close to his heart, as he admitted in his July 2009 speech.

That is not too surprising, considering that the government has huge expectations from the project. What is, however, noteworthy, is the kind of importance the finance minister has given to the person driving the project: Nandan Nilekani.

In 2010, he was appointed as the chairman of a Technology Advisory Group for Unique Projects (TAGUP) in the Finance Ministry. The group submitted its report in end January 2011. In his budget speech this year, the minister informed the parliament that two of the projects are being implemented, including the ambitious GST Network. Soon after the TAGUP submitted its report, Nilekani was appointed as the head of a task force to recommend mechanisms for  transferring the subsidies directly to the beneficiaries. The 2012 budget speech also informed the Parliament that the task force recommendation has been accepted.

“The recommendations of the task force headed by Shri Nandan Nilekani on IT strategy for direct transfer of subsidy have been accepted. Based on these recommendations, a mobile- based Fertiliser Management System (mFMS) has been designed to provide end-to-end information on the movement of fertilisers and subsidies, from the manufacturer to the retail level,” the FM said in his budget speech.

And with that, “Shri Nandan Nilkani” had the honour of featuring in three subsequent Union Budget speeches. I doubt if there is any other example of this in independent India. While in 2010, only two people featured in the budget speech, Nilekani and Kirit Parikh, 2011 too saw two names: Sam Pitroda and Nilekani. This year’s speech had only Nilekani’s name.

And who knows what new assignment is in store for him this year!

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