November 30, 2012

cash transfer of subsidy is just a better disbursement tool & notthing else

Earlier this week (beginning Monday, November 26, 2012), the government of India operationalised the first phase of its 'cash transfer of subsidy' scheme. A lot of debate has ensued since then. A day before the formal announcement, I contributed an editorial on this subject matter in the newspaper I presently work.

Here is what I wrote in it:

Gaining superficially

Cash subsidies are worth a try but can't replace need for propriety

An unknown animal is about to be unleashed by the government in the economy about whom the only two things known with certainty is its speed and the trail it leaves behind, somewhat like that of a cheetah which is the fastest sprinter on our planet and also leaves behind identifiable footprints. But among the things not known about this animal are the two most important ones -- whether it will target its intended prey or whether it will end up eating the wrong prey. 

The government is ready to go live with its direct cash transfers scheme for managing various kinds of subsidies under different welfare programs. To be implemented in phases, both with respect to the type of subsidy and the coverage of districts, with effect from the first day of 2013, the new cash transfer scheme is aimed at reducing the debilitating diversion of subsidies from the targeted needy beneficiaries to the un-targeted greedy intermediaries. There is no disputing this good aim. Even the technological tool chosen -- electronic transfer of subsidy amount to transfers to bank accounts of beneficiaries -- is very sound. 

But there are no other shortcuts to the aim. Those in charge of steering and administering the new scheme of cash transfers will still be expected not to be unscrupulous and dishonest so that there is no fraud in the transfers. Those responsible for providing necessary inputs to the scheme such as the identification of intended beneficiaries and collating their data, including the bank account numbers, will still have to do their job devoid of inaccuracies--deliberate or out of inefficiency--which can have the same effect of subsidy mis-use as the current regime has. Sure, an audit trail will be available in the electronic transfer mechanism and it will be easier to track and investigate later if there are allegations of continued mis-use. But there were elaborate laid-out procedures along with several checks and balances in the current in-kind subsidy system too, but which were skillfully manipulated by the pilferers. 

In other words, if the government is thinking it will, through the implementation of cash subsidies, be able to evade the biggest responsibility of ensuring zero leakages then it is being short-sighted. Effective monitoring mechanisms will still be required to be in place in the new scheme and be actually used. 

The question, therefore, still begs -- if there was no governmental and political will to seriously stop diversion of subsidies, and some even allege the monetary benefits of that going to political parties, will there be one in the new scheme of things? Still, a case exists for the new scheme to be tried out as otherwise we will never surely know whether the it is better, at least in parts, than the existing subsidy regime. More importantly, the dual pricing that exists in the current regime is not a desirable one given the temptations it poses to the manipulators. It is aptly stated by the government's June 2011 interim report on direct transfer of subsidies on kerosene, LPG and fertiliser that "ensuring that goods move in the supply chain at market prices can minimize the incentives for diversion." These three products, incidentally, will be in the first phase of the new cash subsidy implementation. 

Cash subsidies will also help in areas where there is no illegitimate diversion but there exists a cruel, though legal, use of subsidies. Diesel use is one such area and which also gobbles up a big chunk of the subsidy bill. Direct cash transfer to farmers and targetted transporters of essential goods will mean market-driven diesel price which will be hugely welcomed by one and all. But how soon will the government move to bring that in the cash subsidy regime remains to be seen.

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