Column: Discard dysfunctional subsidies

Written by Rajiv Kumar | Updated: Apr 24 2014, 08:30am hrs
Subsidies for the middle-class are here to stay. None of the political parties have mentioned any reduction, let alone elimination of subsidies in their manifestos for the ongoing Parliamentary elections. One can only hope that some parties, especially the BJP if it comes to power, will not feel bound by their manifestos and move to do away with at least those subsidies that can be seen to be dysfunctional and that do not reach the intended beneficiaries. One such is the kerosene subsidy. From several studies and anecdotal evidence it is clear that a major chunk of the kerosene subsidy is misused for adulteration of petrol with kerosene. Officers who tried to stop this nefarious practice have had to pay with their lives. Similarly, the fertiliser subsidy does not go directly to the farmers who use them but to the producers, some of whom can continue with their outdated manufacturing capacities rather than be forced to modernise them. Consequently, fertiliser subsidies perpetuate inefficiency and high costs which, in turn, raise the cost of producing food grains and stoke inflation. Therefore, the best outcome would still be for the incoming government to do away with these subsidies that encourage wasteful consumption, degradation of our natural resources and industrial inefficiency. Such bold steps will have to be taken in the first few months of taking office so that the positive consequences of curbing fiscal profligacy and switching to market-determined prices can emerge well before opposition can be mobilised and people get sucked into a costly strife and agitate against doing away with the subsidies.

But we have to be prepared that such an outcome is highly unlikely. Going by their manifestos, political parties do not appear to have the necessary will to alienate the middle-class which is undoubtedly the principal beneficiary of these subsidies though the latter are marketed as being intended for the poor. In this situation, it may be useful to consider some alternatives for a more efficient delivery of these subsidies to the intended beneficiaries. An oft-discussed option is to monetise the value of all the subsidies that are received by an individual or a household and transfer the amount directly to her/its bank account. This form of cash transfer, in lieu of product-specific subsidies, is seen to be less distortionary and more efficient as it has far less avenues for leakages and misappropriation. Additionally, as in Brazil, such cash transfers can be made conditional on the beneficiary achieving some stipulated goals like keeping the girl child in school or immunising the children against specific diseases, etc. Conditional cash transfers are now seen to be the more efficient, effective and least distortionary means of affording higher consumption for the poorer segments of the population. The resistance against it comes, expectedly, from the middle-class beneficiaries who face near certain exclusion from such a scheme as they will not be eligible on any reasonable income criteria.

Conditional cash transfers can be implemented only if there is a foolproof and well-developed method of identifying the targeted beneficiaries. Universal coverage by the unique identity number, Aadhaar, promises a solution to this vexing problem as it provides a relatively foolproof method, biometric identification, that could digitally throw up information about an individuals (or households) economic activities. Just like the social security number in the US and other advanced economies, Aadhaar has the potential to connect the beneficiarys bank account with information about her income source, family, etc, with details of ongoing schooling of children and health status of members. This can be very useful in ensuring the desired compliance with conditions stipulated for the cash transfer. Making Aadhaar mandatory for receiving the subsidy amount and using it for other economic activities like opening a bank account or admitting a child in school could provide the needed platform for operationalising the conditional cash transfers in place of the present set of product specific subsidies.

It would be far more arduous and complicated (of course, not impossible) to implement the conditional cash transfer scheme in the absence of a versatile identification mechanism like Aadhaar. Therefore, the incoming government should very carefully consider any suggestion to do away with Aadhaar. Not only will such a move destroy a vast and carefully constructed programme which has used nearly a thousand crore of taxpayers money, but it will also stymie any move to shift away from the present system of subsidies to the more robust and efficient conditional cash transfers as the principal modality for welfare payments. Aadhaar also offers the possibility, if implemented with due care and under even more effective supervision to root out some malpractices that have reportedly crept in inevitably, to weed out the fake identity cards and eliminate ghost beneficiaries from the system.

The major criticism of Aadhaar, valid to an extent, is that it offers citizenship to its holders without adequate due diligence. Anybody residing in India with the required number of proof of residence can acquire an Aadhaar card even if he or she may not qualify to be an Indian citizen. This is perhaps a major lacuna in the system and it is rather surprising that this was not spotted earlier and rectified. The reason could well be the tussle over turf between the Aadhaar administration and the ministry of home affairs that has been preparing the National Population Register and sees itself as the exclusive authority for adjudicating on an individuals right to be an Indian citizen. My suggestion would be for the new government to resolve this rather petty turf war and require all Aadhaar card holders to also declare their place and date of birth as a necessary condition for obtaining the Aadhaar cards. Only those who are born in the country would be given the Aadhaar card. This would ensure that the card is not misused for claiming Indian citizenship. For those who have already acquired these cards, a special program could be launched to collect this information and required action be taken. There may well be some better ways to get over this problem. And the government could also appoint a small group to examine if Aadhaar suffers from other weaknesses and suggest means to overcome them. A way forward for achieving greater convergence between the national identity card and Aadhaar could also be suggested. It will be indeed a pity to dismantle the entire platform that has been put in place over the past five years. Aadhaar also offers a good example of a high level of efficiency in the public sector and can serve as a model for expanding e-governance to other government departments as well, specially those which are responsible for delivery of public services and collection of vital statistics. The government could consider using the same system for collecting much needed data on health and employment indicators that are inadequately available at present. It is surely more efficient to redesign and improve an existing platform and putting it to better use rather than junking it in a hurry.

The author is senior fellow, Centre for Policy Research and former secretary general, Ficci and former director and chief executive, ICRIER