In January 2013 the then UPA – government had announced a nation-wide roll-out of direct benefit transfer [DBT] – an acronym for transfer of subsidy amount in to the bank account of the beneficiary. But, the mission remained on paper as even in LPG [liquefied petroleum gas] where it was launched on a limited scale June, 2013, the plan was abandoned in January, 2014.
Modi – government resurrected DBT for LPG in November, 2014 in select districts and by January, 2015 embraced all 676 districts in India. Emboldened by its success [leakages have been completely eliminated and this alone would result in saving of over Rs 10,000 crores annually] is now planning big to cover all other subsidies viz., kerosene, food and fertilizers.
Replacing subsidies by income support
At present, the government extends support by directing suppliers viz., oil PSUs [public sector undertakings], fertilizer manufacturers and Food Corporation of India [FCI]/other state agencies to sell products at prices below cost of supply and reimbursing the difference as subsidy. Under DBT, while they will sell at full price, beneficiaries will have subsidy credited to their account. What is even more striking is its intent to consolidate all these subsidies in to a lump sum amount and give it as a sort of direct income support [DIS].
Currently, total subsidy budget [2015-16] of the Union government is about Rs 244,000 crores. Taking a total of about 24 crores households [as per Socio-Economic & Caste Census (SECC)], if this amount is distributed in cash to 9.6 crore poor households [40% of total households (as per SECC)], each poor household will get about Rs 24,000 annually or Rs 2000 per month.
For a poor farm household, this amount will be much more than the subsidy benefit that he gets under existing dispensation if at all it reaches him [considering large-scale diversion of all subsidized stuff viz., urea 30%, food 50% or more and kerosene 40% plus, millions of them are deprived]. To get an idea, let us look at some facts.
On an average, a farmer uses 90 kg ‘nitrogen [N]’, 40 kg ‘phosphate [P]’ and 13 kg ‘potash [K]’ per hectare. Taking subsidy rates for 2015-16 as Rs 20.8 per kg N, Rs 18.6 per kg P and Rs 15.5 per kg K, total subsidy per hectare is Rs 2817 [90×20.8+40×18.6+13×15.5]. Assuming that he grows two crops in a year [one each in Kharif (April-September) and Rabi (October-March)], he would be availing of Rs 5634 annually as fertilizer subsidy.
On food, taking an average subsidized price of around Rs 2.5 per kg [under Food Security Act (FSA), wheat/rice is supplied at Rs 2/3 per kg respectively] and market price of Rs 24 per kg, the subsidy works out to Rs 21.5 per kg. On supply of 25 kg per month [@ 5 kg per person for a family of 5], he gets subsidy of Rs 537 per month or Rs 6444 per annum.
On kerosene, current subsidy is Rs 12 per litre [2015-16]. Taking consumption of 10 litre a month, total subsidy works out to Rs 120 per month or Rs 1440 per annum. All put together, he gets Rs 13,518 [5634+6444+1440] towards subsidy on fertilizers, food and fuel. As against this, under DIS he will get nearly 80% more at about Rs 24,000 per annum and that will be an assured amount.
Under DIS, poor households will be clear gainers as they will not only get more money but also have freedom to use it the way they like. The government will improve fiscal deficit as subsidies are better targeted and leakages end. And, the economy will gain as wastage are minimized due to more efficient use of resources. An added bonanza will be reducing our vulnerabilities at WTO as our subsidies being in the nature of direct income support to the poor, these won’t be branded as trade distorting.
SPEED BREAKERS AHEAD
However, to get to this rosy scenario, the government will need to cross several hurdles.
Coverage and identification of beneficiaries
The government may find the political cost of restricting food subsidy to 40% of total households [against 67% under FSA] to be too high. This is also evident from its putting Shanta Kumar committee report which had recommended lower of target in cold storage. Under FSA, 2 years after the Act coming in force, only 11 states have thus far completed authentication exercise and uploaded data base on web. Doing this for poor households all over the country will be much more daunting and time consuming process.
Opening bank account for all poor households
Bringing all 9.6 crores poor households within the bank network and ensure that all have bank accounts is a stupendous task. Many rural areas do not have bank branches and required expansion is a time consuming process. Though, PM Jan Dhan Yojna with over 15 crores accounts opened under it acts as a good springboard, it needs to be checked whether these include all of poor. On verification, those excluded will have to be brought in.
Ensuring adequate food supplies
Under existing system, a fair price shop [FPS] picks up food at central issue price [CIP] [or subsidized price] and sells to consumers after adding its margin even as excess of procurement, handling and distribution cost [PHDC] over CIP is directly reimbursed to state agencies. Under DIS, it will have to pay full price covering PHDC and then, sell adding its margin. This will result in FPS having to bloc more than 10 times working capital [WC] than at present.
Tens of thousands of FPS owners used to picking up food at throwaway price [entailing minimum WC] and even making money via diverting a good slice of this to market – for several decades – may simply not be willing to digest it. So, they will either resist change [using their political connections] or in the event of being forced in to it, a large number may even exit this business. This could result in major disruption in supplies.
Timely reach of subsidy to consumers
Under FSA/target public distribution system [TPDS], consumers pay Rs 2/3 per kg to buy wheat/rice from FPS. Under DIS, they will have to pay full price say Rs 24 per kg to cover PHDC plus margin of FPS. It is therefore absolutely essential that the state support under DIS comes to his account well in advance to enable his purchases every month. If for some reason, the money does not reach in time, it could be catastrophic.
Impact of escalation in cost [PHDC]
Under FSA/TPDS, consumers need not worry on this score as food is available at a subsidized price of Rs 2/3 per kg irrespective of the cost. Under DIS, the government will have to keep revising the amount of support to be credited to account of consumers and making sure that it reaches in time. Any delay in this regard can prove costly for poor consumers. Increase in cost also makes the task for FPS owners more challenging as they will have deploy that much extra WC in the business.
Preventing misuse at consumer’s level
When, cash is given to beneficiary, there is always a risk of money being used for purposes other than buying food, fertilizers and fuel. This can be prevented by ensuring that to the maximum extent possible, the bank account is in the name of woman and all funds are transferred to that account.
Implementing DIS in phases
This was recommended by Shanta Kumar committee and government is intending to first do it on trial basis in 10% of 300 food surplus districts. There are risk involved in it. This is because areas where existing system FSA/TPDS continues, food will be diverted to mentioned districts due to huge differential in prices.
Need for deft handling and navigation
All of the above are pretty tough speed-breakers which are not so easy to surmount. The government will need to work on several fronts concurrently to make a successful transition to direct income support [DIS]. The foremost requirement is to put in place wholesome reforms in the entire food supply and distribution chain so that alternative channels are in place to fill the void in case extant FPSs down their shutters. For details, pl read:-
Second, prime minister will need to show a lot of political acumen and courage to build a consensus around restricting support only to poor households. The innovative techniques that he is using to goad better off sections of society to voluntarily surrender LPG subsidy will be needed on a much bigger scale in case of food and fertilizers. The vested interests who want status quo to continue will need to be countenanced skilfully.
Third, since the proposed DIS will tantamount to substantial dilution of extant FSA [reduction in coverage from 67% to 40% and dispensing with selling food at Rs 1/2/3 per kg], the government may have to go to the parliament seeking necessary amendment. This in turn, will require a lot of political acumen in mobilizing support of opposition parties especially in view of BJP being in minority in Rajya Sabha.
Finally, it will have to put to work a good blend of financial architecture and IT [information technology] infrastructure to ensure that all poor households have bank accounts duly authenticated with Aadhaar cards and foolproof mechanisms are in place for timely transfer of funds [Supreme Court can help by making use of Aadhaar ‘mandatory’].
How fast Modi – government will be able to move forward, only time will tell; for now, this is just a beginning on a long drive.