Cash Transfer of Subsidies

The Execution Challenge Cash transfer of subsidies is an idea whose time is coming. That said, executing the idea to ensure it delivers money to only those who deserve it, and in a way they can understand and access, will take a lot of doing, report Shelley Singh and M Rajshekhar It’s a polarised debate. Always has been. Those who make a living expanding the possibilities of technology feel it can solve many economic ills, even those of the India that lives on 20 a day under the trembling glow of a lantern. And those who engage with that very India say technology solutions are fine, but they belie an understanding of rural lives and livelihoods. The divide is back in focus, over a 1,50,000 crore question: should the government continue to give grain, fuel and fertiliser to the poor at below-market prices, or should it transfer cash to their bank accounts? Wanting a better return on the 1,50,000 crore the government gives as subsidy every year, finance minister Pranab Mukherjee, in his budget speech last month, signalled a move to the cash-transfer system. “It’s a transformational move,” says Rana Kapoor, founder, Yes Bank. This overwhelming view of practitioners in the banking and IT sectors, for whom this is also a business opportunity, is based as much on their belief in technology as on their reading of the existing system. “Subsidies, in their current form, have not worked,” says Ajai Chowdhry, chairman of HCL Infosystems. “There are too many hops, each a bedrock of corruption,” says Guru Malladi, partner, government services, Ernst & Young (E&Y). “Cash transfers will change that.” The government’s expectation from a cashtransfer system is two-fold. One, ensure the subsidy reaches the deserving — the poor. Two, it goes only to the deserving. Today, the poor don’t always get their entitlement. They are intimidated and shortchanged by contractors, middlemen and the village elite. The all-important document that determines who is entitled is the BPL (below poverty line) card. Himanshu, who is doing research on agriculture, says that the village elite has usurped BPL cards. “BPL cards come for anywhere between 1,000 and 10,000,” says Himanshu, an assistant professor at the Jawaharlal Nehru University. Then, there’s mis-targeting. Take LPG cylinders, which cost about 620 per cylinder, but are sold for just 300. Most of the 130 million connections are in urban areas, mostly in households or establishments that can pay cost price. Even the fertiliser subsidy is universal. “Among the big beneficiaries are companies like Tata Tea and big zamindars,” says Neel Ratan, executive director, Pricewaterhouse Coopers. According to an IIM Ahmedabad study done in 2009 by Vijay Paul Sharma and Hrima Thaker, small and marginal farmers account for 82% of land holdings, but only 52% of fertiliser consumption. The price of fertiliser is fixed and the government reimburses fertiliser companies on their cost of production. “The government has been taking the industry’s statements of cost of production at face value, especially for urea,” says Sudha Narayanan, an agricultural economist at Cornell University. “There is no incentive for the industry to reduce its inefficiencies. They just pass it all to the government. Cash transfers can take us away from that.” Himanshu says the government has tried direct transfers in welfare schemes, but with “sub-optimal” results. The government, for example, deposits National Rural Employment Guarantee Scheme (NREGS) payments into beneficiary bank accounts. But the list of beneficiaries itself is often rigged by village sarpanches and the local administration. “Why are we not strengthening those systems first,” asks Himanshu. THE ‘MERGER’ CHALLENGE The cash-transfer system aims to use technology to institutionalise and eliminate human interference. Its challenge will be to deliver a far superior system, one that addresses the ills that plague the existing one and acknowledges local realities. The man entrusted with that amalgam is Nandan Nilekani, a distinguished chieftain of Indian IT. In 2009, Nilekani left the safety of Infosys Technologies, India’s second-largest It company, to join the government in the effective capacity of a minister. His ongoing project is to hand out a unique identification (UID) number to each of the 1.2 billion Indians. It’s a number that will make redundant every other means of identification and will be the basis of all future transactions. The Unique Identification Authority of India (UIDAI), which Nilekani chairs, started handing out UID numbers in September 2010. It has given out 2.5 million numbers so far. October onwards, it will step it up to 1 million numbers a day, and will cover 600 million by 2014. Mukherjee has expanded Nilekani’s brief. He has given Nilekani the responsibility to devise a smart card-based mechanism for cash transfers of subsidies. Nilekani declined to talk on the possible shape of a cash-transfer system. As a starting point, the government has set up a committee headed by Nilekani, and comprising the secretaries of the four ministries impacted by subsidies: food, agriculture, fertilisers and petroleum. According to Mukherjee, the task force will give its report by June 2011 and the system will be in place by March 2012. “A new subsidy-management system will sit on top of the UID database,” a top UIDAI official said, not wanting to be identified. “It will ensure that only eligible — bpl families, for instance — get the benefits.” THE IDENTIFICATION CHALLENGE The likely system can be broken into three parts. The first part is to identify every Indian correctly. The UID does that by using biometrics (fingerprints and eye scans), both of which are unique to each individual. It eliminates duplication, as is prevalent in the current system, which accepts multiple sources of identification. So, say, an Anil Kumar Sharma can claim two identities — one by virtue of his full name on his driving licence, another by having AK Sharma on his passport. “People have identities, but many have multiple identities,” says E&Y’s Malladi. “There’s no way to verify who is getting the subsidy.” The second part is to identify the poor and the needy. “With the arrival of the UID number, the question is how can we link benefits to the individual,” says Sutanu Behuria, secretary, department of fertilisers, ministry of chemical & fertilisers. “At this time, it is not happening.” The 12-digit UID number captures five parameters: name, date of birth, name of parents, address and biometrics. It doesn’t capture income status, which is usually the basis for such entitlements. Under the present system, based on several parameters, the Planning Commission estimates the percentage of BPL households in every state. The states then identify the households and hands them BPL cards. The current system of BPL card allocation leaves a lot to be desired. As the number of welfare programmes linked to BPL cards increases, so does the cornering of cards by the power centres in a village. “More than the poor, it is the undeserving who avail of the PDS. It is vote-bank politics,” says Ram Prasad Kurmi, a former sarpanch of of Khosla village, in Janjgir-Champa district, Chhattisgarh. There are also fake BPL cards in circulation. Recently, in Maharashtra, 300,000 fake cards were cancelled. In a paper titled ‘Programmes to Protect the Hungry’, Madhura Swaminathan, professor, Indian Statistical Institute, notes that 52.1% of all agricultural labour households and 60.7% of scheduled-caste households either had no BPL card or were designated to be ‘above poverty line’. Correctly identifying BPL households is the big challenge for the cash-transfer system. A host of product-specific factors will come into play. Take fertilisers. For example, on what basis will the subsidy be distributed? Say, it is land holdings. “Land records are in terrible shape. They have not been updated for a long time,” says Himanshu. “If the land is still in the grandfather’s name, while his grandsons have split it into four and are farming it, who does the money go to?” Another identification question revolves around sharecroppers, who lease land from owners and cultivate it. “Officially 10% and unofficially 30% of India’s fields are cultivated by sharecroppers,” says Himanshu. “If you move the cash to the land owner’s bank account, you will leave these sharecroppers out.” Cash transfers are anything but straight-forward. THE BANKING CHALLENGE The third, and final, part is to move money to the bank account of a member of a BPL household. India is a vastly unbanked country. According to the RBI, India has about 350 million bank accounts. The actual number of people with bank accounts is far lower since many hold more than one account. A cash-transfer system cannot be operationalised without bank accounts. In order to increase financial inclusion in India, the RBI has been prodding banks to launch ‘no-frill accounts’ — essentially, savings accounts with zero balance, limited withdrawals every month and no overdraft. Yet, banks haven’t aggressively covered the unbanked. They had no incentive to do so because the payback was poor. The cash-transfer scheme changes that. In full flow and based on current numbers, it will pump in 1,00,000 crore through banks, giving them access to a sizeable corpus of zero-cost funds on a rolling basis. “We see a terrific opportunity in cash transfers,” says Kapoor of Yes Bank. But where are the touch points, asks Himanshu. “In Belari town in Uttar Pradesh, for example, there is one atm for 200,000-300,000 people,” he says. “Can you imagine people travelling two to three hours to get some money? That could result in labour losing a day of productive work.” While banks are showing greater interest in including the village unbanked, they are still unsure about servicing them through physical branches. Instead, they are looking at remote-banking options like the ‘banking correspondent’ model and mobile banking. A banking correspondent model involves having a bank representative in a village – for example, a kirana store — with cash and a swipe machine. Villagers can use their smart cards to withdraw and deposit cash. Several banks are running such pilots, including Allahabad Bank, Axis Bank, UCO Bank and Yes Bank. But even this has disadvantages. “It is inconvenient for users,” says Som Mittal, president, Nasscom, the nodal body for the IT and ITES industries. “People are at the mercy of the shop owner and often have to travel long distances to reach a correspondent.” Pilots are also being done in mobile banking. For example, Idea Cellular and Axis bank are testing mobile-money transfer between Dharavi in Mumbai and villages in eastern UP. At 575 million active users, more Indians have mobiles than bank accounts. The possibilities with mobiles are immense. The UIDAI official says the subsidy system can be linked to mobile connections, which will enable smsbased updates. THE FOOD SECURITY CHALLENGE In the first phase, Nilekani and company will look at the feasibility of cash transfers in kerosene, LPG and fertilisers. “The government’s ultimate intention is to replace even subsidies on food with cash transfers,” says fertiliser secretary Behuria. Himanshu feels doing away with the public distribution system (PDS) — through which grain and kerosene are distributed at belowmarket prices — will be a food-security disaster. “If there is no pds, there is no procurement. If there is no procurement, there is no MSP.” The minimum support price was started to incentivise production in cereals. “India grows 230 million tonnes, we need 300-400 million tonnes,” says Himanshu. Without an MSP, farmers will move to cash crops like cotton, as in happening in Punjab. Cornell University’s Narayanan says the government needs to be clear about why it is shifting to cash transfers in subsidies. “Fertiliser subsidies were introduced because the government wanted to make fertilisers affordable to farmers,” she says. “What are we trying to do now — boost food production, ensure balanced fertiliser use or lower the subsidy bill? We need to run pilots to see whether cash transfers can indeed deliver those benefits.” When Nilekani sits with the four secretaries, complex questions like this should come up. Not all answers will come easily. Or quickly. Current System: Physical Delivery Food Beneficiary: BPL households. Each household gets 35 kg of rice/wheat. States can add to this. Cost: 60,000 cr Fertiliser Beneficiary: Universal. Factored into the product price, government reimburses fertiliser companies Cost: 55,000 cr LPG Beneficiary: Universal. Factored into the product price, government reimburses oil companies Cost: 13,000 cr Kerosene Beneficiary: BPL households. Each household entitled to 5 litres per month Cost: 18,000 cr Diesel Beneficiary: Universal. Factored into the product price, government reimburses oil companies Cost: 20,000 cr Note: Food and fertiliser figures are subsidy estimates for 2010-11; LPG, kerosene and diesel figures show under-recoveries of oil companies (partly funded by government and partly by companies) in 2009-10 Problems Distribution of BPL cards is controlled by the village elite, who often corner welfare benefits Leakages in the food and kerosene supply chain before entitlements reach the target population Subsidies distorting markets and field-level behaviour (like a greater bias towards urea use by farmers) Subsidies going to the urban rich who have the purchasing power Subsidy bill soaring New System: Cash Transfer Instead of subsidising goods, government will identify the poor and the needy, and move cash of an equivalent amount to their bank accounts. The system will have three parts: a UID number, a bank account and some basis like the BPL card to identify the deserving. Questions How to ensure BPL cards stay in BPL households only? How to foolproof cash transfers to ensure the NREGS experience is not repeated? Can the ‘banking correspondent’ model handle volumes? How will cash transfers impact other parts of the rural economy like agriprocurement and cropping patterns? How to protect entitlements against inflation? TALKING HEADS “It is a great way of ensuring efficiency, effectiveness and timeliness in subsidy reaching the people. The move will be transformational. We see a terrific opportunity in this” RANA KAPOOR Yes Bank I “Subsidies, in their current form, have not worked. A big challenge has been identity and UID solves that bit of the problem. The government should put an end-date to complete this project” AJAI CHOWDHRY HCL Infosystems “The village elite has usurped BPL (below poverty line) cards. Elsewhere, they can be had for anywhere between 1,000 and 10,000, depending on the state” HIMANSHU Assistant Professor , JNU ___________________________________________________________ Fulfilling The Promise The government must opt for subsidies through cash transfer if it is to reach those in need Kirit S Parikh 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. The writer is chairman, Integrated Research and Action for Development (IRADe).

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