The UPA government has avoided a potential minefield by deciding to not replace subsidies in kind, such as food rations, with cash in an ambitious new scheme to spruce up public delivery.
Sources have told HT the government has indefinitely shelved a plan to include these two commodities in a project to transfer cash benefits, such as old-age pensions, directly to the bank accounts of millions of end-users.
The food ministry, the planning commission and the finance ministry persuaded the Prime Minister against including food, as it could backfire.
Food activists, already opposed to such a move, could have pilloried the cash transfer project, giving bad press. This could have weakened the Congress's plan to strongly pitch the cash transfers as a feel-good service for the common man. Besides, the system itself was not ready to handle subsides in kind.
Moreover, ration and fertilizers, which together make up about two-thirds of the government's annual subsidy bill, are critical to food security.
Sources said the government never wanted to replace food handouts with "direct cash transfers". This would have meant providing lump sum money instead of food and dismantling the public distribution system, a crucial social safety net. Moreover, the payments would have had to be periodically adjusted for inflation, a cumbersome task.
Rather, the government wanted to test-run a scheme for "direct subsidy transfer" for food in all the Union territories. Direct subsidy transfer would have entailed paying out just the subsidy amount for cheap ration -- the difference between their market price and the discounted price at which the government sells to the poor - directly into the bank accounts of beneficiaries. This too was shot down because the food ministry felt it was too risky to implement.
"We don't want to start schemes and then stumble," finance minister P. Chidambaram had said on Tuesday.
Fertilisers, the other large subsidy, was not included for cash transfers because experimental trials were not successful.
To spare farmers high fertiliser costs, the government limits retail prices of fertilisers. In other words, producers sell fertilisers at below-market prices and recover the cost from the government. This annual fertiliser subsidy stands at over Rs. 61,000 crore. The government had firmed up a model to implement direct cash transfers of fertiliser subsidy to the farmer, instead of the retailer, in a phased manner.
In the first stage, all stakeholders across the fertiliser supply chain were required to report daily dispatch, receipts and stock updates.
From November 1, the government had planned that manufacturers and importers would receive a part of the subsidy only after the retailer confirm receipt of fertiliser stock. The focus was on increasing transparency across the supply chain through mobile phone-enabled fertiliser monitoring system (m-FMS).
The system had a total of 1,95,369 wholesalers and retailers registered. However, unforeseen difficulties cropped up.
Thousands of landless farmers work as share-croppers and India has a high rate of absentee landlords. Getting a headcount of farmers owning land was tricky. Moreover, many retailers were not reporting sales because they generally evade taxes.
The government may try to revisit the fertilizer subsidy for cash transfers only after a through appraisal of the system. "That has, as of now, no deadline but is open ended," an official said.