Once this is done, fertiliser, etc, can be priced at market rates and all distortions in markets will be removed
Finance minister Arun Jaitley is absolutely right when, in a blog post, he wrote about how Aadhaar-based direct benefit transfer (DBT) had increased—from Rs 7,400 crore in FY14 before the NDA came to power to over Rs 205,000 crore so far in FY19—and that this had resulted in over Rs 90,000 crore of savings in the last few years with the elimination of either duplicate or non-existent beneficiaries. While Jaitley quotes the World Bank’s Digital Dividend Report to say that India can save up to Rs 77,000 crore each year through the use of Aadhaar, the number looks very low if you apply the 50%-theft rule of thumb to the Rs 3 lakh crore or so that the Central government alone spends on subsidies each year. The good news, Jaitley said, was that around 99% of the country’s adult population had been linked to Aadhaar and over 63.5 crore bank accounts were linked to various bank accounts of beneficiaries. Nearly 23 crore PAHAL and Ujjwala beneficiaries get LPG subsidies in their bank accounts, 10 crore MNGNREGA beneficiaries get paid the same way, 58 crore ration card holders are linked, etc.
With this impressive performance, it is now time to take it to the next level, to eliminate all physical subsidies and replace them with DBT and, quite soon, even a quasi universal basic income (UBI) for groups like farmers. Right now, around 30% of total DBT payments comprise of what are called “in kind” benefits. This includes around Rs 30,000 crore for fertiliser subsidy and Rs 13,000 crore for food. Such a classification helps bump up the DBT numbers but is not strictly correct. These payments are not cash payments in people’s bank accounts, they represent giving subsidy the old way via ration shops and other such means, but the buyers are Aadhaar-authenticated. What is required, however, is to give the subsidy in cash and then let the sellers charge the market price, as is done for LPG. Once the market price is charged, the advantage of this is that it helps both consumers as well as suppliers. Suppliers no longer have to wait for months to get paid their subsidy from the government and, with the subsidies in their hands, consumers now have the choice of using the product judiciously. In the case of urea which farmers use too much of—this damages their farms as well as the environment—once farmers get the subsidy in their bank accounts, they will buy just the amount they need; indeed, if they get a fixed subsidy, they will even be encouraged to use less urea.
In the case of food subsidy, once consumers get the roughly Rs 20-25 per kg difference between the market and ration-shop prices, they will probably move to consuming other foods as well—they will get paid for 5 kg per month of rice/wheat. More important, once this is done, and there is no need to feed the ration shops, the government can slowly limit Food Corporation of India’s (FCI) operations that, apart from distorting the market, also add tens of thousands of crores to the annual food subsidy budget due to either inefficiency or corruption. This will set the stage for the final step in this journey, a quasi universal basic income for farmers to substitute for all subsidies—fertiliser, water, electricity, etc—as well as to give them income support. While Telangana’s Rhythu Bandhu is seen as the first such scheme, way back in 2015, the Shanta Kumar committee set up by the government had made this recommendation; while prime minister Modi ignored it then, with Aadhaar as well-entrenched as described by Jaitley, the time is ripe to implement this recommendation.