The government’s think-tank seems suddenly optimistic about cash-transfers and coupons (direct transfers) to reach subsidies to the target population. Direct transfers are being talked of as the panacea in major areas involving subsidies — food, education, fertiliser, kerosene, and so on. There are, however, several weaknesses in the panacea.
Subsidies are a kind of market intervention by the government when the market by itself finds equilibrium at a much lower consumption-level than socially or economically desirable. The attempt mostly is to intervene and make the goods or services available at a lower price so that the desired consumption level is reached. Since equilibrium is an interplay between demand and supply, the intervention can be from either side. Let us see some limitations of the current proposals.
First, consider the choice of side from which the intervention will take place. Direct transfers work most effectively from the demand side where the recipient uses the coupon or cash to buy the goods and services in question and increases his consumption. Not all goods and services are amenable to intervention from the demand side. Supply-side interventions try to work by altering the marginal cost structure of various players. The government can bring down the cost structure by supplying some inputs at cheaper prices (like coal for electricity producers), reducing taxes or handing out subsidies. If the variable costs come down for all suppliers, and the government can ensure competitive conditions, markets will drive down market prices.
Fertilisers and fuels are examples of how supply-side intervention will be far more effective than cash transfers and coupons. Imagine the complexities if one were to attempt distribution of coupons to consumers to subsidise fertiliser. Apart from problems of “how much to whom”, which will itself open the flood gates for corruption, a massive increase in the number of people to be dealt with will require the creation and administration of a massive system. If the transfer size is the same for all irrespective of land holdings, then there will be an enormous spillage owing to mismatches; if based on land holdings, falsification of size will be natural besides it being unequal and regressive. The government’s hopes on proper information systems and unique identification (UID) system to effectively tackle all these issues appear rather naive. For similar reasons fuel subsidies (petrol and diesel) work much better through supply-side, rather than issuing subsidy coupons to millions of truck owners, auto drivers, two- and four-wheelers.
Second, a good subsidy system should also consider the “hierarchy of wants” of the target segment. If the consumption of good or service being targeted for subsidy is way above the current consumption profile of the recipient, he is more likely to sell his entitlement or use the cash than consume his subsidised good. Physical transfers like subsidised rice score here, even if relatively.
Here is where politicians like Tamil Nadu’s Kamaraj and M G Ramachandran made for far more practical economists. They exchanged “what the target segment wanted” (physically distributing food by mid-day meal schemes) in exchange for “what the state wanted them to consume” (education) and delivered education, although it was way above the target’s immediate concern in the fifties and sixties. A coupon system here would have mostly failed, since poor children in rural areas would have preferred to work the fields to earn their bread (and realise some extra cash by selling coupons) to first fill their bellies: intellectual pursuits could wait.
Third, the argument of cash-transfers reducing corruption. Any transfers involve giving out entitlements by some “authority” without the recipient paying commensurate value. Unless the system of policing is highly effective, it creates ideal ground for the giver to demand bribes and the receiver to pay it and the exact amount transferred (or price of coupons) will settle in between. One already sees it in the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and old-age pensions — the percentage to be paid to original certifiers (read some local politician) and the monthly dispensers (read the postman) are well established. Every touch-point provides opportunities for extracting bribes.
Even between cash and coupons each may have its merits in a given situation. In areas like higher education where prior qualification determines eligibility and thus restricts spillage, coupons may be better. When all the problems could directly be traced to corruption instead of setting right our criminal administration and policing why are we naively giving up our fight against this one national enemy? When systems work in so many other nations why not here?
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The government has a responsibility to expand public services, like policing, appointment of judges, criminal investigation personnel, education capacity, and so on in line with global per capita standards (India’s record in most of these areas are woefully inadequate). It is disturbing that the government has abdicated its prime task in the name of controlling its deficit.
Even the choice of goods to be subsidised needs careful design. Instead of years of focus on academic education, skill development would have delivered more productive skills to industry, improved our competitiveness and delivered jobs to the recipient, which would have attracted them to schools.
Delivery of subsidies requires careful analysis of the recipient, nature of goods in question, and several other factors than can’t be addressed by a one-size-fits-all approach. Unfortunately, mistakes in designing economic systems take unduly long to be discovered. It is usually the next generation that cares to admit failures – like our socialistic pursuits – but by that time the populace would have paid a heavy price.
The author is CFO of a large paper company. These views are personal. He can be reached at
kumarviru61@yahoo.co.in