Column : Beware of the new privy purses

Written by MK VENU | M.K. Venu | Updated: Nov 29 2012, 09:26am hrs
The UPA government has described its plan to roll out direct-cash-transfer-based delivery of various subsidies and welfare programmesof Rs 3.2 lakh crore a year, beginning 2013as a game changer. Indeed, a cash transfer programme on such a massive scale has the potential to radically alter the dynamics of Indias current political economy, driven as it currently is by the entrenched vested interests which have taken deep roots over 20 years post the 1991 economic reforms. These vested interests are essentially feeding on the massive increaseover 25 timesin the centrally-sponsored welfare expenditure, which has increased from about R8,000 crore in 1994 to R2,37,000 crore in 2011!

Over the years, we have witnessed a substantial capture of such central funds by newly-empowered elites at the state and district levels to the exclusion of the majority of the very poor. The direct cash transfer programme, if implemented well, could prove to be the biggest assault on the cosy arrangement which enabled the local political and business elites to capture a big chunk of central funds. Indeed, if undertaken properly, it could prove to be the most critical structural reform ever undertaken in recent decades. And whats more, it is on the expenditure side of the government balance sheet, a long overdue reform.

In terms of its radical potential, the cash transfer programme could have as much resonance as the abolition of privy purses by the then Prime Minister Indira Gandhi. The one big difference is Indira Gandhi had abolished the privy purses held by the royalty in her bid to chart a socialist path. In contrast, today, we have a post-economic reforms elite, enjoying a reinvented version of the privy purses, which need to be abolished as a necessary precondition to drive inclusive growth with fiscal discipline.

Make no mistake, there will be stiff resistance from those who are currently enjoying the benefits captured from the massive leakages in the welfare programmes that have proliferated over the past 15 years. There is no substantive audit of how R2,37,000 crore of centrally-sponsored funding is being delivered to the real beneficiaries. The radical project to direct these funds to the real targetsthe very poor and needywill not be an easy task. The UPA may have to fight attempts by its own allies to sabotage the direct cash transfer system as it is bound to hurt the privy purses of state, district and even panchayat level politicians. In the process, there could even be a backlash as these elites are disproportionately vocal, and the very poor to whom the benefits are being transferred will remain largely silent. But they will certainly vote at the elections!

In some ways, direct cash transfer must be seen as a political instrument that will help in the creative destruction of the present, entrenched vested interest network. To just give one small example of the magnitude of the privy purse enjoyed by Indias post-economic reforms elite, the government recently conducted a cash transfer pilot project in Alwar to assess the leakage in kerosene subsidy. The results were stunning. Over 50% of the subsidy was being appropriated by the non-poor. Is it any surprise then that the kerosene mafia of Uttar Pradesh simply chose to murder a young officer of a public sector oil company who had detected adulteration by a petrol depot during an inspection round The annual leakage of kerosene subsidy alone is estimated at over R12,000 crore.

The Commission for Agricultural Costs and Prices (CACP) has prepared a note for the finance ministry estimating how much the government could save in food and fertiliser subsidy by using the direct cash transfer mechanism. The food and fertiliser subsidy bill together is projected to be R2,00,000 crore in 2013-14. The food subsidy itself will be a little over half of this. Fertiliser subsidy could be about R90,000 crore in 2013-14.

The CACP estimates that a direct cash transfer programme for food and fertilisers could save about one-third of the total subsidy bill currently being incurred. This means the Centre could easily save up to R65,000 crore annually. Of course, in delivering food subsidy through a direct cash transfer programme, the government must ensure that it dovetails well with the current PDS system, especially where it is working well. The implementation has to be subtle and nuanced.

If done well, it is possible that, of the R3,20,000 crore worth of spending, which the government plans to bring into the direct cash transfer system over the next two years, close to one-third might actually be saved. That itself could lead to a fiscal correction of 1% of GDP.

However, the real import of the direct cash transfer scheme is that it will seek to modernise Indias social welfare delivery system. If done well, it will mark the reinventing of the Indian State and will restore the poor citizens faith in the Indian Constitution. The pitfall, of course, is if the implementation of this mega programme is shoddy, the post-capitalist privy purse holders will succeed in keeping Indias development at bay for much longer than we can imagine.