The Hindu Business Line : Just give them cash

Instead of subsidising food and kerosene, the Government would be better off distributing the same amount in cash to the target families for it is simpler to transmit money that move grain or fuel, and leakages are easier to plug. It is better for the beneficiaries too as it gives purchasing power and choice where there was none. This freedom of the market place will bring out the efficiencies all round, says K. Venugopal.

IN THE new financial year, the Government will spend more than Rs 33,000 crore to distribute foodgrains and kerosene at subsidised rates to the population living below the poverty line — some 33 crore people. And simple arithmetic will tell you that it is about Rs 1,000 worth of subsidy per head per year or Rs 83 per head per month. If we assume five persons to a family, the subsidy amounts to Rs 415 per per month.

Why cannot these families be given this as cash rather than be asked to go through the rigmarole of taking their ration of low-priced rice and kerosene or wheat and kerosene from government shops? Giving cash has got to be the better option: it delivers greater consumer power to the underprivileged; it is definitely simpler to transmit than it is to move grain or fuel physically, and leakages are easier to catch.

Over the past few years the people below the poverty line have been buying about 11-20 kg of wheat and rice per family per month. The allocation of foodgrains for BPL families has been further increased from 20 kg to 25 kg per month with effect from July 2001. Yet whether the allocations reach the targeted beneficiaries or whether the targeted beneficiaries have the money to buy their subsidised entitlements is open to debate. For, though the price is fixed low (for the really poor the retail price in the Antyodaya Anna Yojana scheme is Rs 2 a kg for wheat and Rs 3 a kg for rice), the purchasing power of a good many is inadequate to buy the full quota. No wonder the amounts allocated are rarely lifted in full.

When cash replaces physical entitlements, the scenario will change dramatically: the cash payout to BPL families would be enough for them to buy their entitlements in full. They can buy up to 25 kg of either cereal plus 10 litres of kerosene, and at market price. And they do not need to spend a paisa of their own.

Transmitting cash to the targeted population rather than subsidised grain makes better sense because cash endows upon targeted beneficiaries a base load of purchasing power where there was none. Second, it affords the freedom of consumer choice: the family can buy any cereal or pulses, not just or rice, with the money. Third, the family can walk into any store, not just the Government-run outlet, to meet its consumption requirements.

It is this freedom of the market place that will bring out the efficiencies. The parallel distribution system that the government has run for decades did deliver food security for the deprived sections, but has become porous and very expensive to sustain. Several studies by independent agencies, including some contracted by Government, have pointed to the substantial leakage of grains. A study by Tata Economic Consultancy Services five years ago showed that the diversion was as high as 55 per cent in edible oil, 36 per cent in wheat and 31 per cent in rice. Correctives were no doubt applied after that, but now with the multiplicity of selling prices for different classes of consumers-those above the poverty line, those below it and for the really poor-there has been an exacerbation of the problem of leakage.

Managing the system in terms of storage and delivery is becoming more and more expensive for the government, and given the fact the grains are largely procured from the northern States and delivered deep in the South means complex and expensive logistics. If the Government's role were merely to transmit cash and run fair price shops selling grain at their economic cost, as they do so for those above the poverty line, there would be pressure on the shops to stay competitive with the market. They would need to become more efficient or face exit. The Government could still engage the Food Corporation of India (FCI) in the procurement of grains and to perform the price support role for farmers. But the FCI could market grain at cost. A subsidy on the selling price would not be needed.

As for kerosene, the effect would be even more salutary. Kerosene entitlements and its unintended misuse are related issues. The quantities meant for the public distribution system are issued free of excise duty and are attractively priced for diversion. Trucks in many parts of the country have switched to using kerosene with deleterious effects on their engines and on the exchequer.

Once the PDS consumers have been given enough money to buy their requirement in the open market, the Government can tax kerosene in much the same way as it does diesel and leave little arbitrage for the adulterators. Truck engines will be happier burning the right fuel and the Government will recover its usual 16 per cent excise on all the kerosene produced.

One may ask how the money can be reached safely each month to the beneficiaries. The spread of the banking system is now pervasive enough to make it a reliable conduit; the post-office network too can pitch in. It is certainly a challenge that can be met.

Nutrient for farmer's pocket

CAN this cash-driven model be used elsewhere? Fertilisers, on which the Government incurs a subsidy of over Rs 12,700 crore annually, make an ideal choice.

Today the subsidy is routed through the fertiliser companies so that they may reduce their selling price to levels that are affordable to the farmer. The formula that determines which factory gets how much is complex and open to contest: the inefficient producers get more subsidy than the efficient ones. Wriggling out of this complex mechanism has been difficult for government. And any increase in the government fixed issue price of urea is followed by a howl of political protest, as happened on Budget day. This again is an excellent case for a direct cash subsidy to growers. There are 11 crore cultivators in the country, 60 per cent of whom hold less than one hectare each. The subsidy if distributed equally to all holders would amount to a Rs 1,156 dole a year.

Given that market prices of fertiliser are Rs 8-10 per kg, that sum will fetch at least the small cultivators almost all the fertiliser they need, whether it is urea, complex or plain farm-yard manure. The farmer can choose the combination of fertilisers that suits his crop and his land and not be blindly driven by the lop-sided pricing to buy urea.

Those who hold more than one hectare may have to supplement it with their own money to get enough nutrients for their large farms. Large corporate-style farms and plantations, in any case, do not need the largesse. The Government can be satisfied that it has provided for the small cultivator. Fertiliser units on the other hand might find this move to market-driven demand and pricing a little daunting. Some of the units, which use high-priced feedstock, might prove uncompetitive, but living in an unkind market is an experience they may have to come to terms with.

As for delivery of cash to the farmers, once again the banking system will have the means. Over the past three years, it has made headway into the farm community with Kisan Credit Cards. Nearly 2.5 crore farmers have opened bank accounts and been issued these cards. The money for fertiliser can be funnelled into these accounts without much hassle. The Government resolve is to bring all eligible farmers on board in two years' time. It should happen even quicker if farmers know they will stand to gain a direct subsidy if they have the card.

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