JAM could wipe every tear from every eye

A holistic view on India's allocation conundrum detailing allocation, number of beneficiaries and leakages

The Indian economy can hope to achieve ‘nirvana’ by better targeting of subsidies — which, on the one hand, protect the poor, while, on the other, allow prices to perform their due role in allocation of resources. This, in turn, will boost growth.

Economic Survey 2014-15, perhaps for the first time, takes a holistic view on India’s subsidy conundrum, detailing item-wise allocation, estimated number of beneficiaries and the leakages.


It suggests dovetailing the Jan Dhan Yojana with Aadhaar and Mobile platform (JAM) to transfer subsidies directly in cash as a solution to ensure minimum leakage.

Relying heavily on published reports, surveys, studies and its own analysis, the Survey shows that around Rs 3,78,000 crore or around 4.24 per cent of gross domestic product is annually spent by the Centre in providing subsidised rice, wheat, pulses, sugar, kerosene, LPG, naphtha, water, electricity, diesel, fertilisers, iron ore, railways through various schemes and programmes like the public distribution system, cheap kerosene, etc.  

It also cites examples and instances from ground where alternative method of subsidy transfer have actually plugged leakages for example distribution of Mahatma Gandhi National Rural Employment Guarantee Act payments in Andhra Pradesh via Aadhaar-linked bank accounts.  In rice and wheat alone, the government provides both producer and consumer subsidies totalling about Rs 1,25,000 crore a year.

“Prima facie, price subsidies do not appear to have had a transformative effect on the living standards of the poor, though they have helped poor households weather inflation and price volatility, but they may not be the government’s best weapon of choice in the fight against poverty,” the Survey notes. Besides, it offers large rent-seeking opportunities to black marketers.

It says price subsidies are often regressive, which benefits rich household more than the poor ones.

“If one were to plot the distribution of welfare gains against income, the benefits of a regressive price subsidy would increase as we move up the income distribution,” it said.

Electricity:

The survey shows that power subsidies actually only benefit just 67.2 per cent of households that are electrified. The top quintile consumes around 37 per cent of the total electricity subsidies, while the poor consume just 10 per cent of total subsidy.
 

Fuel:

The survey shows poor benefit just Rs 10 per person from cheap LPG gas, while for the rich this benefit moves up to almost Rs 80 per person. 
 

Kerosene:

In case of kerosene, the survey shows that just around 46 per cent of the total consumption of cheap kerosene in the country is by below poverty line families and those under the Antodaya Anna Yojana (AAY), while the rest is availed by people who actually do not need it.  “A majority (51 percent) of subsidized kerosene is consumed by the non-poor and almost 15 percent of subsidised kerosene is actually consumed by the relatively well-off (the richest 40 percent),” the survey showed. 

The leakage which is an off-shoot of this ill-directed subsidies leads to annual loss of almost Rs 10,000 crore to the exchequer. “We calculate that if leakages are checked then kerosene consumption of states can be met even if the current PDS allocation is lowered by a staggering 41 per cent,” the Survey noted. Kerosene subsidies totaled Rs 30,574 crore in 2013-14 and are expected to cost Rs 28,382 crore in 2014-15.
 

Foodgrains:

The survey notes that around 54 per cent of the wheat allocated through the Public Distribution System (PDS) amounting to around Rs 12,600 crore per year and 15 per cent of rice amounting to around Rs 5,800 crore does not reach the intended beneficiary. Mis-directed subsidies lead to mono-cropping between rice and wheat.

 

Railways: 

The survey shows that controlled rail fares benefit the wealthy households more than the poor, for whom it is actually meant, as poor households constitute just 28.1 per cent of the total originating passengers on non-suburban trains.  This leads to railways running perpetually at a loss; making them inefficient and also weaning away traffic towards roads because of cross-subsidization with freight.  
 

Solution:

The survey suggests supporting the poor by dovetailing Jandhan Yojana, Aaadhar and mobile technology (JAM) for better identification of beneficiaries in a less distortive manner. Apart, from JAM, the survey also advocates using mobile money platform and post offices for direct transfer of cash and cutting leakages. “If the JAM Number Trinity can be seamlessly linked, and all subsidies rolled into one or a few monthly transfers, real progress in terms of direct income support to the poor may finally be possible,” the Survey noted.