Putting cash in the bank account of a beneficiary or direct benefit transfer (DBT) is a revolutionary idea that has the potential for radically transforming the way government’s welfare schemes including subsidies are administered.
DBT is globally recognized for (i) openness and transparency in administration; (ii) substantially enhanced targeting and speedy reach; (iii) elimination of leakages and (iv) avoidance of market distortions and resultant benefits of competition where subsidies on food, fertilizers, LPG and kerosene etc are involved.
India latched on to this idea only a couple of years back when the erstwhile UPA – government announced its adoption in January 2013 for some 29 schemes. The move was half-hearted as it kept out food and fertilizers [these account for about 2/3rd of total subsidies food, fuel and fertilizers] from the word go.
The only area where UPA – regime demonstrated some seriousness was LPG where it rolled out DBT in June, 2013. The scheme was run barely for 6 months and was quietly abandoned from January, 2014 on the pretext that there were some voids/discrepancies in implementation which needed to be sorted out.
For wriggling out, it also rode piggy back on an order of Supreme Court (SC) which said that ‘use of Aadhaar card cannot be made mandatory’. This was unwarranted as SC never prohibited use of Aadhaar; all that it meant was that no service or welfare measure could be denied simply because a person does not have it.
In contrast, Modi – government within 5 months of its assuming office in May 2014, resurrected DBT for LPG by launching the scheme on November 15, 2014 covering 54 districts. From January 1, 2015, it established a national foot print by bringing all 676 districts under its ambit.
Though, this government encouraged and accepted use of Aadhaar card for purpose of subsidy transfer, unlike UPA, it was not hamstrung by any pre-conceived notion that beneficiary would get subsidy only if he has the card. In other words, it presumed that bank account was good enough for authentication.
Out of a total of 150 million LPG consumers (those who were availing subsidy under earlier scheme), around 120 million have thus far enrolled under DBT. The customers were given a grace period of 3 months i.e. until March 31, 2015 during which they would continue to get cylinder at subsidized price. They were also allowed another 3 months so called ‘parking’ period during which they may open bank account. Once account is opened, subsidy would be transferred against purchases made by them.
The grace period is already over and we are one month in to the parking window. The current enrollment at 120 million clearly demonstrates that some 30 million consumers under the erstwhile scheme comprised predominantly of ghost entries and duplicate connections; though there could be some cases of customers voluntarily opting out.
This is reinforced by the fact that since implementation of DBT, the sale of subsidized cylinders has dipped drastically to 6% in February, 2015 and further to down to 3% in March, 2015. Correspondingly, the sale of un-subsidized/commercial LPG has increased by 27% in February, 2015 and 28% in March, 2015.
These trends corroborate a widely held belief that the extant arrangements were subjected to blatant misuse. That 25% of subsidized cylinders were diverted for commercial use. In other words, the tax payer was defrauded to the tune of Rs 11,500 crores (25% of Rs 46,000 crores being under-recovery on sale of LPG during 2013-14).
Successful re-launch of DBT by Modi – government means such fraud perpetrated on the exchequer involving tens of thousands of crores year-after-year in the past has been put to an end. It is also aiming at better targeting by persuading more and more people to voluntarily shun availing of LPG subsidy.
Due to 50% drop in price of crude oil since June 2014, under-recovery on LPG has decreased from Rs 450 per cylinder to just Rs 204 [Rs 621(market price) minus Rs 417 (subsidized price)] currently. Even at this level, subsidy outgo would be around Rs 30,000 crores per annum [204×12 (cylinders per customer in a year)x12.5 crores (number of customers enrolled under DBT)].
But, there is no case for giving even Rs 30,000 crores. This is completely out of sync with Modiji’s philosophy of giving subsidy only to poor. This is because only 0.07% of LPG subsidy in rural areas went to poorest 20% households. In urban areas, poorest 20% got only 8.2% of subsidies (as per Economic Survey).
Today, when crude price is ruling low with possibility of declining further (as Iran starts pumping more oil following removal of sanctions) and market price of LPG at nearly half of what it was an year go, this is an opportune time for government to apply the hammer, remove subsidy and allow free float of the price.
The freedom of pricing should be accompanied by involvement of private sector in its manufacture/import and marketing. This will unleash forces of competition, spur efficiency improvement and cost reduction. Under this scenario, consumers may continue to pay current (subsidized) price of Rs 417 per cylinder (or even less) without government having to spend a rupee from its coffers.
From here onward, government should muster courage to try out DBT for giving subsidy on food and fertilizers which together account for over Rs 200,000 crores of subsidy annually and number of beneficiaries are 800 million in food and 138 million farm households in fertilizers. Millions of these are located in remote areas which do not even have bank branches.
Putting IT and financial infrastructure in place including bank accounts for all consumers and farmers by itself poses a gargantuan challenge. But, the bigger challenge is to forge a political consensus and overcome resistance from vested interests. The resistance will be even more if government tries to restrict subsidy only to the poor (as millions of those already enjoying get excluded).
Yet, the effort is worth making as expected savings by plugging leakages and reducing other cost alone would be about Rs 70,000 crores annually. This would be much more if beneficiaries are restricted only to the poor or about 300 million (25% of population) in food and 117 million small & marginal farmers (85% of farm households) in case of fertilizers.
In the face of impending state elections and both fertilizers and food being politically sensitive, still if Modi can implement DBT in these areas, he would have delivered on a real big bang reform with all round benefits for economy and welfare of the poor.