by Vivek Kaul
Hence, the subsidies are leaking and, at the same time, of what remains, the not-so-poor are taking in a substantial chunk. So what is the way out of this quagmire? Instead of trying to run a terribly leaky system, the government should simply hand over cash or coupons to the poor and let them decide what they want to do with it. It is important to realise that the principle of one product-one price should not be violated. It makes more sense to hand over coupons or cash to the poor so that they can buy foodgrains, sugar, kerosene, etc. at the market price.
The economist Kaushik Basu explains the coupon system in his book An Economist in the Real World.
The basic idea behind this is fairly simple. The current system basically entails the government handing over the subsidised goods to the PDS shopkeeper. The shopkeeper is, in turn, expected to pass on the subsidy in the form of cheap rice, wheat or kerosene to the intended beneficiary. But this, as we have seen, does not always happen.
Hence, the idea is to hand over the subsidy directly to the poor by handing over food coupons to those belonging to the BPL households. They can then use these coupons to buy food from any shop (not necessarily the PDS shop). The shopkeeper can take the coupon to the bank and exchange it for cash.
With the principle of one product-one price not being violated, the incentive to adulterate would also be less. Also, if one shopkeeper tries to adulterate a commodity, the buyers can always move on and buy from any other shop. Hence, the system would create some competition among the shopkeepers.
There are certain concerns expressed about this system. The coupons can be counterfeited. But that happens with paper currency as well. Hence, a certain amount of counterfeiting always exists, but it does not paralyse the entire system. The same logic holds for food coupons as well.
Another concern expressed is what if households do not exchange coupons for food but sell them off and use the money to buy other products. Basu suggests that the selling of coupons should be legal. His logic is very straightforward. Even in the current system, where the government actually provides rice, wheat and kerosene through the PDS, there is no way of knowing whether the intended beneficiary is actually eating the rice/wheat or using the kerosene.
The extra bureaucracy that would have to be created in order to monitor whether the food coupons are actually being used to buy food would not be worth the trouble. Also, the term ‘coupons’ does not imply that actual paper coupons need to be handed out. Smart-cards can play the role as well. In fact, if you replace the word ‘coupon’ with cash, the basic logic remains the same.
Furthermore, there is this great belief among the well-off that giving money (directly or through coupons) to the poor would mean that the men will simply drink it away. This argument only sounds true because it plays on the stereotype of the poor being poor because they waste their time drinking and not working hard enough.
Nevertheless, as the economist Joseph Halon points out: “Poverty is fundamentally about a lack of cash. It’s not about stupidity.”796 Hence, if the poor do get money under an unconditional cash transfer scheme, they wouldn’t necessarily waste it on alcohol and tobacco. In fact, there is enough research from all over the world that shows this.
As Rutger Bergman writes in Utopia for Realists:
The great thing about money is that people can use it to buy things they need instead of things that self-appointed experts think they need. And, as it happens, there is one category of product[s] which poor people do not spend their free money on, and that’s alcohol and tobacco. In fact, a major study by the World Bank demonstrated that [in] 82 per cent of all researched cases in Africa, Latin America and Asia, alcohol and tobacco consumption actually declined.
In fact, there was a very strange but interesting experiment conducted in Liberia. The idea was to check out what would happen if you gave $200 to the shiftiest of the poor. To carry out the experiment, alcoholics, addicts and petty criminals were rounded up from the slums. As Bergman writes: “Three years later, what had they spent their money on? Food, clothing, medicine and small businesses. ‘If these men didn’t throw away free money,’ one of the researchers wondered, ‘who would?’”797
In fact, a prestigious medical journal summed up the findings a few years ago when it said: “When the poor receive no-strings cash, they actually tend to work harder.”798 So, there is enough evidence internationally to suggest that giving cash to people in need is a good idea.
How do things look on the Indian front? There have been a few pilot projects that have happened. In 2011, the Delhi government and SEWA (Self-Employed Women’s Association) carried out a cash transfer programme for BPL families in West Delhi. They essentially tested the impact of substituting rations given under the PDS with cash transfers. The results were fairly encouraging. It was found that the consumption of pulses, eggs, fish and meat went up. Furthermore, alcohol consumption did not increase. And lastly, the efficiency of the PDS shops went up.799 This happened because people were no longer dependent on the PDS shop to buy what they needed.
Another cash transfer scheme which has been tried at a much larger scale is PAHAL (the Pradhanmantri LPG Yojana). The cooking gas cylinders sold for domestic consumption are subsidised. In August 2016, the subsidy stood at Rs. 63.90 per cylinder. Earlier, subsidised cylinders were sold at a lower price and, in the process, violated the principle of one product-one price.
Commercial establishments were ineligible for the subsidy. They had to pay the market price along with central and state taxes, which amounted to 30 per cent of the price, on an average. Hence, not surprisingly, a significant portion of the domestic cooking gas cylinders were diverted into the black market, where they were bought by small hotel owners, who had to otherwise pay a much higher price for them. This was done at times by creating fake household accounts against which subsidised cooking gas was bought and sold in the black market.
The cash transfer scheme for domestic cooking gas was first launched in June 2013 and then suspended by the Congress-led United Progressive Alliance government. It was relaunched in November 2014 in 54 districts. The scheme basically pays the subsidy amount directly into the bank account of an individual within a period of three days. People have to buy a cooking gas cylinder at the full price. The scheme became pan-Indian from January 1, 2015 onwards.
It is estimated that the scheme has more than 15.1 crore beneficiaries and around Rs. 29,000 crore has been transferred into their bank accounts.800 Given that consumers buy cooking gas at the full price, the principle of one product-one price is not violated. Hence, there is lesser incentive for operators to divert domestic cooking gas to commercial establishments in the black market.
Furthermore, in order to carry out the cash transfer (or direct benefit transfer, as the government calls it), the government links Aadhaar-enabled bank accounts with the consumer numbers. This helps in eliminating ghost accounts. As the Economic Survey of 2015-2016 points out: “The PAHAL scheme has been a big success. The use of Aadhaar has made black marketing harder, and LPG leakages have reduced by about 24 per cent, with limited exclusion of [the] genuine beneficiaries.”
The Economic Survey was published in February 2016. After that, several claims were made regarding the total amount of money that the government was saving due to PAHAL. In June 2016, the Finance Secretary, Ashok Lavasa, said that the government had saved Rs. 14,872 crore by paying the subsidy amount from the PAHAL scheme directly into the bank accounts of people.801
A CAG Audit Report on PAHAL published in August 2016 eventually pointed out that, while there were some savings from PAHAL, they were nowhere near the claims being made by the government as well as the oil marketing companies which sell cooking gas cylinders.
In the report, the CAG said that the reduction of Rs. 23,316 crore in the cooking fuel subsidy for the first three quarters of 2015-2016, in comparison to 2014-2015, was largely due to a sharp fall in oil prices, and not due to the PAHAL scheme.802
As the report pointed out: “While im
plementation of [the] PAHAL scheme coupled with the LPG ‘Give It Up’ campaign has resulted in the reduction of off-take of domestic subsidised LPG cylinders, the resultant savings… [were] not as significant as that generated through [the] fall… [in] subsidy rates.”
The CAG said that the savings due to the implementation of PAHAL were only Rs. 1,764 crore. The remaining Rs. 21,552 crore fall in cooking gas subsidies was largely due to a fall in oil prices. Another interesting point that the CAG made was that, while calculating the fall in the subsidy, the national average off-take of 6.27 cylinders a year should have been used, and not the maximum number of 12 subsidised cylinders that consumers are allowed as a subsidy during the course of a year. 803
Thus, in their zeal to sell the effectiveness of these reforms, the Narendra Modi government has perhaps ended up over-reporting the savings from PAHAL. But, given the distrust for any sort of economic reform in India, this step could have been avoided. If PAHAL had led to savings of only Rs. 1,764 crore and the government had reported the correct number, then that in itself would have been a good beginning. By doing what it did, the government gave an opportunity to nay-sayers to say ‘We told you that economic reforms don’t work in India’. And that is not a good message to spread.
Also, it needs to be underscored here that the good thing is that a system to effectively pay the subsidy on domestic gas cylinders is finally in place. The true utility of this will be felt once oil prices start to go up again. They have been rather subdued over the past two years. The fact that a system is in place is itself a huge thing in the Indian context, and that needs to be recognised.
Another point needs to be made here. Research shows that, in districts where the cash system transfer was first introduced, the black market prices spiked up by almost 30 per cent. This was largely because cylinders were now sold to domestic consumers at the market price. At the same time, ghost accounts were eliminated because the Aadhaar-enabled bank accounts were linked to the consumer numbers.
At the same time, the sale of commercial cooking gas cylinders went up by just 6 per cent. This figure was surprisingly low. Also, the sale of non-subsidised domestic cooking gas cylinders shot up. While each household is allowed to buy only 12 subsidised cooking gas cylinders during the course of a year, nevertheless, there is no limit to the number of unsubsidised cylinders that it can buy. The way the tax laws are structured, the unsubsidised cooking gas cylinders are still around 30 per cent cheaper than the commercial cooking gas cylinders.804 This is another violation of the one product-one price principle, which needs to be corrected if the government is serious about cutting down on leakages in domestic cooking gas.
Also, as mentioned earlier, the average national consumption of domestic cooking gas is 6.27 cylinders a year. But the maximum number of subsidised cylinders allowed during the course of a year is nearly double, at 12. This anomaly needs to be corrected. In fact, the consumption of domestic cooking gas goes up in March every year. This is primarily because March is the last month of the fiscal year, and distributors have a very strong incentive to invoice unconsumed subsidised cylinders to households and then resell it in the black market.805
Hence, the government could look at reducing the number of subsidised cylinders allowed during the course of any year to 10 in two instalments, first by reducing it to 11 and then to 10. This would make it politically more convenient.
Other than suffering from under-recoveries while selling domestic cooking gas, the oil-marketing companies also suffer under-recoveries while selling kerosene. In August 2016, the under-recovery on kerosene was Rs. 11.50 per litre. Hence, not surprisingly, the leakage in the case of kerosene distributed through the PDS is at a very high 41 per cent. Much of this leaked kerosene is used to dilute diesel. This increases the pollution to the environment caused by fuel. Other than this, it also costs the government a lot of money, given that the oil-marketing companies need to be compensated for their under-recoveries on this front. In 2013-2014, the under-recoveries on kerosene were at Rs. 31,255 crore. This had fallen to Rs. 11,496 crore in 2015-2016 due to a fall in oil prices.806
This huge wastage of money needs to be eliminated. A part of it can be done by transferring cash into the bank accounts of people who until now have been buying subsidised kerosene. On August 1, 2016, the government announced that it had decided to introduce the direct benefit transfer scheme for kerosene in 39 districts spread across nine states of the country (Punjab, Gujarat, Himachal Pradesh, Madhya Pradesh, Chhattisgarh, Rajasthan, Jharkhand, Haryana and Maharashtra).807
This is a step in the right direction. By starting small, the Modi government can see what issues arise, correct them along the way, and then roll out the scheme nationally. Until now, the government has introduced cash transfers only for the products which come under the petroleum subsidy. It has stayed away from introducing cash transfers for the food and fertilizer subsidies. One reason is that, politically, this is a tricky thing. Hence, the government first wants to be on a strong footing by successfully implementing the cash transfer programme for domestic cooking gas as well as kerosene.
Nevertheless, if leakages of government subsidies are to be brought down in the years to come, it is necessary that both food and fertilizer subsidies move towards the cash transfer system. While petroleum subsidies (essentially subsidies on domestic cooking gas and kerosene) go up and down depending on the price of oil, the same cannot be said in the case of food and fertilizer subsidies. It needs to be stated that both food and fertilizer subsidies are understated to the extent of the money that the government has not paid the FCI and fertilizer companies at the end of each financial year.
Table 12.5 clearly shows that the petroleum subsidies have fallen over the years since 2012-2013, due to falling oil prices. Also, the government is moving towards cash transfers when it comes to petroleum subsidies in a slow and steady way. Fertilizer subsidies have moved within a certain range. The biggest subsidy right now for the government is the food subsidy. And this is costing the nation in multiple ways.
Table 12.5: Government subsidies (in Rs. crore) for food, fertilizers and petroleum over the past five years.
* Budget estimates.
** Revised estimates.
Source: www.indiabudget.nic.in.
A lot of it gets leaked and does not reach those it is intended for. Farmers are producing more and more rice and wheat and not enough of other crops like pulses and oilseeds. In fact, food subsidies in 2011-2012 were at 0.83 per cent of the GDP (the 2011-2012 GDP at current prices and using the new GDP series). By 2015-2016, this had jumped to 1.03 per cent of the GDP.
The government has run a few pilot projects when it comes to replacing the food subsidy as it is currently offered with cash transfers. One such experiment has taken place in Chandigarh. Chandigarh is the capital of the states of Punjab and Haryana and is a union territory which is governed by the central government.
The results have not been too encouraging. The project started in September 2015. As the senior journalist and author Seetha pointed out in a newsreport: “‘Since September [2015], I have not got either foodgrains or cash; how are we to manage?’ is the common lament of women from extremely poor backgrounds. They are either domestic servants or casual labourers or wives of migrant labourers, hawkers or repairmen. Those who are getting money regularly insist it is not enough. (The cash subsidy has been fixed at Rs. 95 per individual.)”808
One major problem that has come to light concerns the number of applicants. The union territory had around 81,123 ration card holders under the targeted PDS, which the National Food Security Act had replaced. Nevertheless, only 56,689 applications were received for enrolment under the new Act. This was around 25,000 less than the earlier number.809
The reasons for this are not very clear. Activists have pointed out that the union territory administration did not publicise the enrolment exercise as extensively as the administration claims it had. Furthermore, the drive was carried out during a p
eriod when most migrant labourers had gone back to their villages. The union territory adminis tration does not agree with this. As Bhawna Garg, Secretary, Food and Supplies, pointed out to Seetha: “The enrolment was not a one-shot exercise, but is an ongoing one.”810
Also, another factor going against the cash transfers are the people who had benefited from the system as it had existed earlier. These include the shopkeepers who were running the shops which were a part of the PDS. They seem to be capitalising on the fact that the cash transfer system is not working well by telling people that at least they used to get something earlier.
As Seetha writes: “Ironically, there is now nostalgia for the early PDS, even from those who used to complain about its flaws. ‘Anaaj chahiye, paisa nahin’ (We don’t want money; we want foodgrains) [and] ‘Purana system theek tha’ (The old system was better) are two other common refrains. Closer questioning has them admitting that things were not hunky dory earlier. So, there could be a better-the-known-devil-than-the-unknown-angel syndrome at work.”
There are multiple points that arise here. One is that the cash transfer system is radically different from the way in which things were being done earlier. Hence, there has to be a huge effort undertaken on the part of the government to explain the new way of doing things to the people. The trouble is that in India economic reforms have never been explained to the people. It has always been reform by stealth. But that won’t work in this case, given that it will impact such a huge number of people. Hence, the cash transfer system will have to be explained to the people of this country. And these explanations will have to come from the highest level in the government, including the Prime Minister.