Back in the 1950s there was a very popular song by Frank Sinatra. The opening lines went:

“Love and marriage,

Go together like horse and carriage;

This I tell you brother,

You can't have one without the other.”

It is exactly like that with politicians. Bad ideas and they go together like tics on dogs in the monsoon because of the inherent conflict between their moral compasses and incentives structures. As the same song says, “Try, try, try to separate them, it's an illusion.”

Politicians look for ways of gaining sanction and legitimacy for bad ideas. In the old days, intellectuals would be roped into the enterprise. These days business leaders are used for this purpose. But the effect is the same.

The latest example of this sort of thing comes in a report * called the “Interim Report of the Task Force on Subsidies on Kerosene, LPG and Fertiliser”. It is the consequence of a promise made by the Finance Minister in the 2011-12 Budget.

The central idea on which it is built is a political one, namely, that the same thing should have two prices, one lower than the other. The poor pay the lower price, and the rest pay the market price.

The difference is paid by the taxpayer who, thus, pays twice. That's the politics of it.

Naughty Nandan

Nandan Nilekani recognises that this is a bad idea. His report says: “Since subsidies, by definition, provide for the delivery of goods or services at prices that are lower than market prices, they generate several incentive distortions among those delivering, administering and receiving it.” Yes.

He also says that the difference between the two prices — market price and subsidised price — should be kept at a minimum to minimise trader skullduggery.

To quote: “A subsidy, by its very nature, introduces two or more prices for the same good, and creates incentives for pilferage and diversion. As a result, the underprivileged suffer the most. Ensuring that goods move in the supply chain at market prices can minimise the incentives for diversion.” Yes again.

But then he plays a reverse sweep. He endorses a bad idea by indicating that he knows it is a rotten idea but promises, to all intents and purposes that he will look for ways to mitigate the miseries it heaps on the economy. So the bulk of the report is devoted to finding ways of playing cricket with a hockey stick.

Tch, tch Nandan, you don't want to end up like Montek, do you, first endorsing, then distancing because you know you are endorsing a bad idea?

Nice Mr Nilekani

But Mr Nilekani still has the opportunity to undo Nandan's mischief or folly. He can do so by reiterating to the Government, without equivocation, that it is a far better idea to give the deserving poor money rather than artificially cheap goods which they may not want.

Indeed, the Report says that “Where possible, it is best to empower beneficiaries and give them the choice to receive subsidies in the form of subsidised goods and services or as cash, based on their own preferences.”

This sentence needs editing. All Mr Nilekani has to do is to change this sentence as follows:

“It is best to give the choice to beneficiaries to receive subsidies in the form of cash.” Simple, no complications running to 80 pages.

In other words, give only straightforward income support (dole) because the only thing you can't sell at a higher price is money. Besides, everyone likes it.

Mr Nilekani knows this — and has therefore written that “the Core Subsidy Management System (CSMS) will transfer the cash component of subsidies directly into the bank accounts of beneficiaries. Beneficiaries may then access these funds through various banking channels such as bank branches, ATMs, business correspondents, Internet, and mobile banking.”

But the politicians will not like it. They want to pretend they are subsidising the poor whereas, in fact, as scores of studies have shown, they are actually subsidising their corporate benefactors — and, yes, that includes the public sector.

They will take what suits them and leave out the stuff that is really dear to the Nilekani heart. They will bury the good that Nandan Nilekani wanted to do with the report.

This will happen because of something Mr Nilekani must know very well from his engineering and Infy days: A sort of duality problem in linear programming.

In lay terms, it means it is virtually impossible to minimise the gap between an upper bound (say market price) and a lower bound (the subsidised price) on a dynamic basis.

The optimum gap will always be not only out of reach but also keep widening. We have seen this in the case of the three subsidies the report deals with, namely, kerosene, LPG and fertiliser.

So if he doesn't look sharp, like so many other report writers for the Government, Mr Nilekani will be left explaining: “that's not what I meant, “that's not what I had said”; and, when really peeved, “ blady reskals , they implemented only a tenth of what I had recommended, and that too the wrong tenth, in the wrong order.”

*http://finmin.nic.in/reports/Interim_report_Task_Force_DTS.pdf

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