Fulfilling The Promise – Kirit S Parikh, The writer is chairman, Integrated Research and Action for Development (IRADe).
March 9, 2011
The announcement in the budget of providing fertiliser and fuel subsides through cash transfer, if successfully implemented, can effectively reach the poor and reduce the burden of subsidies. There are, however, sceptics who question if this can be effectively implemented. The old-age pension and widows’ pension schemes that involve cash transfer are, according to some, the least effective schemes in reaching the intended beneficiaries. Also, questions are raised whether cash transfer can work when many poor are illiterate and do not have bank accounts. It is also suggested that cash would be easier to siphon off. These are misplaced concerns.
Often when a new policy or measure is suggested, people point out all that can go wrong and say it is not perfect. However, the question that should be asked is whether it is substantially better than present policy or not.
So, let’s look at how the present policy performs. A number of studies have shown that between one third to half of kerosene supplied through the public distribution system (PDS) gets diverted to adulterate diesel and does not reach the intended persons. Also, as per the National Sample Survey data for 2004-05, among rural households that get any kerosene from PDS, the bottom 90% of the households get around three litres per household per month. Some 25% of the rural households in all decile groups do not get any kerosene at all. Thus, 25% of the poor are excluded and nearly 75% of the rich are included. If we consider that 50% are poor, then only half of the 66% kerosene distributed through PDS reaches the poor. Thus, the poor today get only 33% of the subsidy expenditure by the government.
If all the poor households were to get kerosene – five litres instead of three – it would require around 75% of the kerosene that is currently supplied to the PDS system. The subsidy burden of kerosene would come down by 25%.
An effective targeting scheme, which is the key to this, can be based on Aadhaar, the Unique ID Card. Aadhaar is a smart card that carries finger prints and iris scan data. A person with the card can go to a shop and put his fingers on a small device that transmits the data to the Aadhaar computer system, which confirms within five seconds if the person is the same one as the card holder. It is thus not possible for anyone else to claim the entitlement associated with the card. The cards can be charged with their entitlement.
The poor can go to any shop, buy kerosene at market price, pay the ration price in cash and the difference between market price and ration price is electronically transferred from the government’s account to the trader’s account. This way, there will be only one price of kerosene in the market and traders will have no incentive to divert it. Direct cash transfer would require a bank account for each family, while what is proposed here, just giving the entitlement through Aadhaar card, does not.
The key element in the scheme’s success is identification of the poor. How do we ensure that this is done correctly? If the poor are identified in an open gram sabha, the errors of exclusion of the poor as well as erroneous inclusion of the rich can be minimised.
Can illiterate persons manage smart cards? Illiterate does not mean dumb. People manage their ration cards even today. A smart card is no different. Also, by now families without at least one literate person would be very few.
Finally, should kerosene or LPG subsidy be given as entitlement or as cash transfer that the consumer is free to use for anything? LPG is a clean cooking fuel and is a merit good that we want everybody to use. Cooking with firewood and dung causes indoor air pollution with significant adverse impact on health. The social cost of it has been estimated to be much more than the cost of subsidising LPG for the poor. When cash is provided, the poor may not spend it on LPG, especially if a man – rather than a woman – takes the decision on spending in the household as the burden of smoke from firewood is largely borne by women. In such a case, it is better to provide subsidy as an entitlement rather than as cash. One can argue that even when given as entitlement, the poor can sell it and convert it into cash. While this is possible, it would involve a transaction cost which would discourage people from selling it. If cash is to be given, it should at least be given to the woman of the household.
Thus, the announcement by the finance minister in the budget to give subsidy for kerosene, LPG and fertiliser in the form of cash transfer is to be welcomed if it is based on a mechanism that leads to effective targeting, empowers women and eliminates dual pricing. I prefer entitlement to cash transfer at least for merit goods where there are externalities.
We are generally averse to experimenting with new solutions. Why not implement this for Aadhaar card holders and test whether they are better off than ration card holders? In two to three years, we could be ready to implement a superior scheme nationally.
