In an exclusive interview given to a leading economic daily, Dr Arvind Panagariya, deputy chairperson, NITI Aayog has exalted the virtues of targeted cash transfer [TCT] instead of universal cash transfer [UCT] opining that opting for the former would help in reaching out more of state financial assistance or subsidy to the poor. This is stating the obvious.
A given amount of subsidy if distributed among a lesser number of persons say, those living below the poverty line [their number is naturally less than the population universe] will result in each person getting more than the amount he would get if that given subsidy amount were distributed amongt the entire population.
Yet, its reiteration by none other than Dr Arvind who is in charge of policy formulation is redeeming. This is all the more when prime minister, Modi wants subsidy to be given only to the poor and compulsion of fiscal consolidation require that various subsidy payments viz., food, fertilizers, fuel etc are drastically pruned.
Unfortunately, the ground reality is far removed from these noble objectives. What to talk of TCT, at present, we do not even have cash transfer for disbursing most of the subsidies sans LPG.
In case of LPG, under PAHAL [Pratyaksha Hastaantarit Laabh] launched by Modi – government in January 2015, subsidy is directly credited in to the account of beneficiaries even as they buy it at market price. Here again, the manner of administration results in preventing realization of the full benefits of this novel concept.
The scheme is implemented through downstream public sector undertakings [PSUs] in the oil sector viz., Indian Oil Corporation [IOCL], Bharat Petroleum Corporation [BPCL] and Hindustan Petroleum Corporation [HPCL]. They deposit the subsidy in the account of beneficiaries and claim reimbursement from the Government of India [GOI]. This results in ‘inefficiencies’ creeping in to the system.
The reimbursement claimed by PSUs won’t be restricted only to the difference between the market price and target [albeit subsidized] price. This would also include their service charge which would be on actual [overheads, margin etc] devoid of any norms. The government should avoid this by giving subsidy directly to the beneficiaries.
It should also open up retailing of all petroleum products including diesel and petrol [their prices are already decontrolled and no subsidy is payable] to private sector. This will unleash competitive forces resulting in lowering of the market price. This will benefit everyone including those who are not covered by subsidy dispensation.
In fertilizers, food and kerosene, the extant arrangements are much worse than in LPG. Herein, there is no provision for crediting subsidy to beneficiaries account as this is routed through suppliers. The latter sell the product at a low price [as per GOI diktat] and claim excess of cost of supply over this as subsidy. There are two major flaws in administering the subsidy scheme in this manner.
First, since manufacturers get paid on actual cost, there is no incentive to improve efficiency and reduce cost. As a result, while, high cost units get full protection, efficient suppliers have no incentive to stay in business. The recent exit of Tata Chemicals Limited [TCL] from urea [a nitrogenous fertilizer] operations and frantically looking to exit complex fertilizers is a case in point.
The system breeds ‘inefficiencies’ and ‘cost padding’ across the entire supply chain. The suppliers of raw materials viz., gas, phosphoric acid, ammonia etc [mostly global] get away with high prices as they know that this will get compensated under subsidy scheme. This is also true of transporters and other suppliers of logistic services. Even states are tempted to levy taxes.
In food, the main supplier viz., Food Corporation of India [FCI] gets reimbursement for high cost of its operations. In a recent report, the Comptroller and Auditor General [CAG] pointed towards a staggering loss of about Rs 50,000 crores due to sheer mismanagement and irregularities [this includes outright misappropriation/disappearance of stocks, ‘fictitious’ payments etc]. Needless to say, all of this is shielded under the subsidy mechanism.
Second, since subsidy is given via subsidizing sale price, the benefit is enjoyed by all and sundry. For instance, when urea is sold at a very low ‘uniform’ price, even rich farmers [including those who own plantations growing commercial crops such as tea, rubber etc] benefit. Further, the heavily subsidized price [being 1/3rd to 1/4th of cost] leads to its large-scale diversion to chemical factories. Besides, farmers brazenly ignore dire need for its efficient use.
No wonder, in Economic Survey [2015-16], chief economic adviser, Arvind Subramanian stated that “24% of fertilizer subsidy is spent on inefficient producers, 41% is diverted to non-agricultural uses [including smuggling to neighboring countries] and 24% is consumed by larger – presumably richer farmers”.
Moreover, as long as extant system continues, the government can never switch over to targeting benefit only to the poor which is the ultimate objective. This can happen only when it stops giving subsidy through suppliers and instead gives directly to beneficiaries [as has been done in case of LPG]. But, this is nowhere in sight as even under pilot projects being run in select districts, it continues to route fertilizer subsidy through manufacturers.
True, Team Modi has made strenuous efforts to streamline implementation of subsidy schemes and plug leakages. It has even brought about substantial saving in subsidy [LPG: Rs 15,000 crores; food: over Rs 10,000 crores – in both segments by eliminating bogus beneficiaries]. In fertilizers, by making neem coating of urea mandatory, it has sought to rein in diversion.
But, there is dire need for latching on to long pending reforms. As alluded to by Dr Arvind, while ‘targeting’ of subsidy should be the ultimate goal, the least one would expect right now is switch to cash transfer in fertilizers, food and kerosene. After TCT is in place, the government should seriously consider replacing all subsidies by direct income support [DIS].
DIS to be given only to poor will empower him/her to decide as to where exactly to use it viz., on fertilizers, food, fuel or in any other area. For instance, he/she is a poor farmer, he would prefer to use it more on buying fertilizers. If, he is a poor worker/laborer, then natural choice would be more on food. He can be his own boss.
This will also be in sync with Modi’s overall theme of ‘empowering’ the poor and promoting ‘inclusive’ development. But, whether or not he goes for this big bang reform and how soon can only be left to realm of speculation.