To the Poor with Love

The Government gets serious about subsidies in the form of direct cash transfers to the needy

The Government gets serious about subsidies in the form of direct cash transfers to the needy

A clean Diwali without crackers is as lacklustre an event as a pro-poor Budget. Both miss the headlines despite deserving celebration. While one is good for the people’s lungs, the other intends to fix at last the deficiencies that kept millions in deprivation while soothing the Indian conscience with hand-outs for the poor (which, less noticed, never reached them). So when the Government gets serious about subsidies in the form of direct cash transfers to the needy, it is time to sit up and cheer. Done well, it could mark a paradigm shift. “Of all the mechanisms to help the poor, cash transfers is a lot more efficient, as it gives a poor household maximum empowerment,” says Dr Surjit Bhalla, chairman, Oxus Investments.

In his Budget speech, Finance Minister Pranab Mukherjee flagged fuel and fertilisers as the first target of the plan. The broad idea is to stop subsidising their production and distribution, let their prices be determined by market forces of demand and supply, and instead empower the poor with money to buy what they need through an e-network set up under the Aadhar project of unique identities. This way, producers faced with competition would be pressured to turn efficient, price signals would help close gaps between demand and supply, and subsidies would actually reach their intended beneficiaries.

Right now, dual pricing policies in these sectors end up distorting price signals and generating corruption. Subsidised supplies meant for the poor get diverted to the regular market. An estimated 35 per cent of kerosene is ‘leaked’ this way. If this is bad, think of foodgrain, with its diversion estimate of a deplorably high 50 per cent. In fact, it’s the food sector where direct transfers could have their biggest instant impact on poverty relief.

The plan has its sceptics. “The cash transfer mechanism is an administrative convenience for the Government that exposes its lack of political will to fix the public distribution system,” say activists Aruna Roy and Nikhil Dey of the Mazdoor Kisan Shakti Sangathan. Others have practical worries. Will the deserving really get the cash? “Identifying the poor is a separate task,” admits economist Kirit Parikh, “but once done, the Aadhar system will transfer cash to the concerned person’s account.” Adds Bhalla, “Yes, there could be leakages in the cash transfer mechanism also, with some better-offs bribing their way onto the poverty list—this is already happening—but that should not deter the Government from reaching out to the ones who are targeted correctly.”

And what if the transferred cash ends up as booze money? Well, as Kaushik Basu argues in a 2010 paper: ‘If they choose to buy something else, then it is not as big a tragedy as the benefits going to owners of PDS stores, as often happens.’ Perhaps specific-use ‘smart cards’ could solve that problem. Later, health and education could be covered too, sectors where direct transfers could have their biggest long-term impact on poverty relief. Success would mean empowering the poor with choice as much as money—say, via cards that are accepted by a variety of shops, clinics and schools. Private ones too.

budgetsopssubsidies