Cash subsidy: Identify the needy

India’s perennial challenge of wasteful government expenditure and mounting subsidies has surfaced again with worsening state of fiscal management. Rampant corruption in social schemes is also compelling government to go for a complete revamp of   welfare programs. India has just initiated a radical overhaul of welfare schemes that would see the government make cash payments direct to the needy.  The government is launching an ambitious scheme for direct electronic transfer of cash to beneficiaries that is expected to cover one quarter of households of the country. After several trials of cash transfers in different areas of India this is the first major initiative at national level. Direct cash transfer of subsidies is a welcome move as long as government system can handle the colossal task of identification of true beneficiaries and bringing them in to formal banking network.

 Bloating subsidies and inefficient expenditure has become a lasting bane for India’s fiscal health. Indian Government has always been generous in providing fuel, food, power and fertilizer on cheaper rates than the actual costs. Subsidies are meant to address poverty in India. There is no uplift of poor and below poverty line people as most of the government benefits never reach to the needy populace. The current emergence is how to plug the leakage of subsidies and target the subsidies for poor. The government has pegged its outgo on food, fuel and fertilizer subsidies in the 2012-13 fiscal at over Rs 1.79 lakh crore, nearly 14 per cent lower than the revised estimates for the current fiscal. According to the Budget proposals, the government's subsidy bill on food, petroleum and fertilisers is estimated at Rs 1,79,554 crore for the 2012-13 fiscal as against Rs 2,08,503 crore in the revised estimates for this fiscal.

 The debate to cut subsidies has become more prominent after the recent  report of Dr Vijay Kelkar Committee on fiscal consolidation. Report  says the economy is on the edge of a "fiscal precipice" and if the government does not cut subsidies on fuels, food and fertlisers, the budget deficit could go out of control in current fiscal year. The report notes that whereas Budget 2012-13 sought to limit subsidies to 2 percent of GDP, that number will likely be overshot. Report cautions in an unequivocal terms that  “A do-nothing approach would mean the risk  of a much larger adjustment of incomes and spending forced by the markets, both domestic  and international, with a spiraling fiscal deficit and its consequences for much slower growth,  rising unemployment, and higher inflation.”

 The plan to start  direct cash transfer of subsidies has come in this premise.  Against the backdrop of corruption and pilferage in various schemes, the government has been thinking about direct cash transfers to genuine beneficiaries to plug leakages as it is expected to bring down the subsidy burden.
 The beneficiaries will include poor people. Of them, the Unique Identity (UID) Mission (Aadhar)  has already enlisted 200 million people and the number is expected to go up to 600 million in the next six month. The program will initially cover scholarships, pensions and unemployment allowances and later MNREGA and Public Distribution Schemes. A Cash Transfer System can be used for transferring cash benefits such as MNREGA wages, scholarships, pensions, income support of other types and health benefits.  The program is inspired by such successful schemes existing in countries like Brazil and Mexico and cities like New York and Washington.

  The whole idea of cash transfers must be seen into the context of few bottlenecks. Indian economic and social planning is marred with critical data gaps. The unavailability of a credible income data is the oldest inhibiting factor in the implementation of welfare schemes. India still lacks an authentic data of people living below poverty line as host of official poverty estimates are just in the chorus of mutual contradiction. The governor of the Reserve Bank of India has recently complained about the quality of data made available. The credibility deficit about Indian socio-economic data has been created because of the glaring errors but also because of the unnecessary politicization of the data. So much so that today nobody trusts our employment estimates, industrial production estimates, inflation estimates and certainly not the ones on poverty. We must have a credible income data  at the earliest to identify beneficiaries for getting cash transfers. The next big challenge is that a large part of Indian population is just out of formal banking network. As proposed move aims to transfer individual benefits from the government directly into the bank accounts of beneficiaries, lack of financial inclusion will be a major roadblock. Indian banking sector is required to gear up to reach out with the poor.  

  The success of this plan will largely depend on the government’s efficiency in dealing with the fundamental issues like the basis of targeting, definition of poverty line and identification of intended beneficiaries. Devising a methodology to transfer the cash subsidy to the poor is going to be a tough task. Central government will also need a proactive support of state governments in taking up fundamental reforms required in refurbishment of welfare system. Direct transfer of subsidies to poor is a far-reaching move. The new system is expected to reduce the cost and subsidy bill through better targeting providing the government could identify the needy in a transparent manner.