Direct Transfers

Posted on February 16, 2011 | View 780

Subsidy reform needs institutional and administrative support to succeed.

The government has taken the first baby steps towards a subsidy regime that targets the poor better and avoids leakages. A committee, headed by UIDAI chairman Nandan Nilekani will look at what it will take to get subsidies directly to those who need them.


It has four months to prepare a report and two months after that, a pilot scheme will be rolled out. This column has long argued in favour of a system of direct cash transfers to the poor, instead of subsidising products like cooking gas, kerosene, fertilisers and so on.


Direct transfers should reach the intended beneficiaries, who can then use the funds to buy what they need, at prices determined by a competitive market. If successful, such a system could finish the vicious kerosene-mobster cartels prevalent in many parts, cut inefficiencies in the public distribution system and make farmers, instead of fertiliser companies, the real beneficiaries of the government's handouts.


The real challenge lies in execution.The first hurdle is to identify the poor. In some states, the number of below-poverty-line cards issued exceeds their total population.


The unique identity number project, implemented well, could cut through the clutter and identify a person well enough for his income status to be verified.


The second challenge is to work out a mechanism to transfer subsidies from the Centre to the hands of the people who need it.


An inclusive banking system, supported by a countrywide broadband network, connected to teller machines at post offices and point-ofsales terminals even in villages across the country would be needed. The third, and possibly biggest hurdle is institutional. A direct transfer mechanism for subsidies will upset many entrenched lobbies across the country.


To minimise this resistance, the entire administrative mechanism, including the Centre, state governments, district and panchayat administrations needs to be taken into confidence, and mobilised to implement the transfer scheme.


An overhaul of India's vast and complex subsidy regime cannot just be a technocratic quick-fix; to succeed, it'll need strong administrative and institutional legs and political will.

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