The case for cash
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The case for cash

India’s corrupt system of indirect subsidies can’t deliver inclusive growth. As the government falters, the argument for paying the poor grows. Samar Halarnkar writes.

india Updated: May 21, 2011 17:07 IST
Hindustan Times

India’s corrupt system of indirect subsidies can’t deliver inclusive growth. As the government falters, the argument for paying the poor grows.

‘The popular view, understandably alluring, that all the government has to do to support poor consumers and poor farmers is to direct subsidies at them, and make sure that anybody caught cheating the system and adulterating food is punished misses the important question: punished by whom? For that we have to rely on another layer of bureaucracy and police force, which will open another layer of opportunity for cheating the system.’

You will find this candid view of how food and various agricultural subsidies work — or don’t — in an excellent paper written three months ago by someone who sounds like a government critic. The author is India’s chief economic adviser, Kaushik Basu, who favours replacing India’s faltering, flailing and deeply corrupt system of indirect subsidies with direct cash payments to the poor.

Subsidised foodgrain, distributed through the colonial-era public-distribution system (PDS), will cost the government more than Rs 55,000 crore this fiscal. Part of this money is meant for the farmer to buy grain at usually above market rates. Part of it is for the consumer, to sell grain at below market rates. One rupee in every four doesn’t reach either. It’s the government’s biggest social-security spend, and it can’t ensure the poor are well fed.

India’s sustained spectacular GDP growth (an average of 6.8% over the last 18 years) has caught world attention, changed lives, boosted ambitions but failed to trickle down as much as the government hoped it would. Hunger and malnutrition are enduring problems and, as I have pointed out in a previous column, there are statistical indications that many among the poor can’t cope with this era of growth.

According to a (reluctant) revision of the official poverty line this year, India now has about 440 million poor people. Fewer than 100 million of these benefit from the gargantuan food subsidy.

If the Right to Food soon becomes a fundamental right — the National Advisory Council (NAC) is drafting the contentious legislation, now in the works for more than a year — the subsidised food bill may balloon by not less than Rs 18,000 crore. That’s the figure the prime minister has in mind. NAC members wanted Rs 60,000 crore. The bargaining is still on.

Either way, the food-subsidy bill will balloon, straining the government’s efforts to rein in the fiscal deficit, which, as an analysis tabled in both houses of Parliament three days ago by Finance Minister Pranab Mukherjee reveals, will be 5.5% of GDP in 2010-11. That’s in line with Mukherjee’s target. But in March 2009, the goal for this year was a 3% deficit. Growing subsidies, loan waivers and a stimulus during last year’s downturn have seen the deficit soar in this decade of growth.

Mukherjee’s deficit planning will come under pressure as the 2014 general election nears. Under siege for corruption and misgovernance, the UPA government will become more vulnerable to populist spending. In an India where politicians are only too aware of ever-skyrocketing voter expectations, the temptations for new subsidies are immense.

As a political dustup in Punjab last month over unsustainable handouts to farmers revealed, it’s easier to discard a prudent finance minister than an imprudent subsidy. Since Independence, a subsidise-today-forget-tomorrow approach has marked India’s political economy. It has spawned what is arguably the world’s most complex, wasteful system of subsidies, directly meant for the consumer but usually delivered indirectly through a host of intermediaries, such as power companies reimbursed for cheap or free electricity to farmers, oil companies for cheap fuel and PDS shop owners for subsidised food.

Many subsidies are well intentioned and so designed (whether they are deserved depends on whom you ask). But they presuppose we are an honest nation, which we are not. As Basu points out, honesty is important to a prosperous society. “But that does not change the fact that in designing policy we have to take the people to be what they are and not what they ought to be,” says Basu. “This may well be the single biggest underlying flaw in the design of our policies.”

This flaw is exacting a heavy price on India’s finances and its poor. For example, of 3 kg of foodgrain sent to the poor, only a kg reaches. Leaks in national social-security schemes (among them, PDS, Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA), old-age pensions, healthcare) are likely to cost India $100 billion over the next five years. If the government can pay subsidies directly to the poor by cash transfers instead of running through a bureaucratic maze — by one estimate, grain in the PDS system runs through 19 levels from farmer to consumer — it could, says a recent McKinsey report, trim the fiscal deficit by 25%, cut corruption and boost growth.

Cash transfers can’t be implemented overnight. They require wide consensus from not just politicians but civil society (influential NAC member Jean Dreze, one of the architects of the MNREGA, is a strong opponent). They are impossible without a networked, nationwide infrastructure to move this cash. As the story on the facing page reports, poor Indians will first need bank accounts, a formidable task.

First thoughts are encouraging. A panel headed by Montek Singh Ahluwalia, deputy chairman of the Planning Commission, has recommended that the power ministry, instead of paying power-distribution companies, hand out electricity subsidies directly to farmers through a smart card linked to the unique identity number, now being rolled out nationwide. It’s in the beleaguered government’s best interests to show this can be implemented before 2014.

First Published: Dec 08, 2010 23:15 IST