Monday, December 10, 2012

A liberal view of Direct Cash Subsidiy

The cash transfer scheme was first mooted by the UPA in 2005. The push came from the western world, which advocated direct cash transfers in order to overcome the shortfalls in the Public Distribution System (PDS). There is also a political angle to it. A government that is seen to be handing out cash can be perceived to be a benefactor and translate in to votes. A combination of both is the reason for the UPA government to push this scheme through. What it entails is to do away with the PDS. All products at free market prices and to those people who qualify for the ‘cash transfer’ (estimated at around one crore families) a periodic cash amount will be transferred to their bank accounts to enable them to buy essential stuff like food, fuel etc at market prices. In theory it sounds excellent. Free market means that no one has to do the complex PDS management and also help the nation to be rid of scams in ration distribution and control. We can also be rid of black marketing of essential commodities if cash transfers are adopted. To the actual recipient, this should be a good thing, in theory. No longer should they have to deal with the evil PDS chain. They can now buy freely from where they want. Similarly, for the government, a fantastic saving by shutting down the PDS, saving the costs associated with it (storage, distribution, procurement etc). Such kinds of programs exist in over 40 countries and were kicked off nearly two decades ago. By and large most have been doing well, except in a few cases, corruption has reared its ugly head there also. For instance, in small towns in India, it is not uncommon for the monthly pension payout to be subjected to a “toll” by the disbursing authority. India being India, corruption is endemic and embedded in the genetic structure. We will find a way to exploit every system. If administered properly, the end result would be a huge financial gain to the nation. The administrative mechanism (now proposed to be through the Aadhar scheme) has to be perfect. And it is going to be a task to ensure bank account opening. Without being negative about it, let us hope that the experiment succeeds. The scheme could take four to five years to be fully implemented. Hopefully, this would also mean that every citizen pays for every service or product. Electricity need not be given free, fertilizers need not be subsidised, and kerosene and diesel need not be separately priced. Corporate entities in the listed space would rejoice. Electricity projects need not get stalled because state electricity boards will now be able to meet commitments properly. The scheme rolls out in 51 districts in 14 states of the country on Jan 1, 2013, and will cover all the country's 640 administrative districts by end-2013. On paper, it sounds excellent, does it not? In reality, there will be more problems than solutions. People will take the cash subsidies; spend it on liquor, entertainment and mobile phones etc. Families will start to starve because they cannot now afford food at market prices, having spent the money elsewhere. And once people are addicted to cash receipts, each successive government at the centre and the state governments in conjunction will keep giving away more and more. In reality, corruption would tend to rise. The other issue is that the cash transfer, once given, cannot be taken away even if the person improves his standard of living. To take it away would be politically inconvenient and would lose votes. The other thing is that the scheme would have to be inflation indexed to provide for increase in food prices. A straw poll would indicate that women of the household would prefer subsidised food to getting cash in to the hands of the males, who would make a beeline for the liquor shop. The other thing is that coming close to the general elections of 2014, the scheme will be seen as a UPA or rather a specific Rahul Gandhi scheme (he is going to inaugurate the roll out ) and will ensure Congress voting by the masses. To this extent, such schemes generally can be construed to be a political tool for vote garnering. The other big risk is that the last mile reach through the banking system will pose problems. In the garb of overcoming that, the scheme might move to cash disbursement at designated locations, which will become a hotbed for corruption. If the scheme goes through, from the stock market perspective, bet on oil marketing, fertiliser, sugar, electricity, power generation etc. Forget the macro for now and see how it unfolds.

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