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The scorching May heat. Miles and miles of parched land. And the inconsequential tag of the smallest of Alwar district's 14 tehsils make Kotkasim an unknown geography even on Rajasthan's map. But it has a star status that even its residents are blissfully unaware of. In its dusty lanes and bylanes, New Delhi runs an unlikely laboratory for an experiment that it hopes will transform the lives of the poorest of the poor: delivering subsidy and welfare programmes directly to them, sans intermediaries.

Leakages and intermediaries suck out lakhs of crores of rupees that the government spends on subsidies and social welfare programmes every year. Estimates range from the famous "10 paise" statement Rajiv Gandhi made in 1985, claiming a 90 per cent leakage, to those by government and non-government organisations, ranging from 38 per cent to 65 per cent.

Now, early results from a kerosene subsidy pilot in Kotkasim's 24 panchayats show stunning success in plugging leakages. Two other pilots, at Ranchi in Jharkhand for rural employment programme MGNREGA, pension and education grants, and at Mysore in Karnataka for direct transfer of LPG subsidy, have also kicked off with enormous promise, holding out hope. The much-awaited pilot for the direct transfer of Rs 67,199 crore fertiliser subsidy is yet to take off (see ‘Fertiliser Formula' on Page 4)

Kotkasim's Kerosene
It was in the ‘Royal Chamber' of the 200-year-old City Palace of Alwar, 100 km from Delhi, where Kotkasim's tryst with kerosene was sealed. This is the office of the district collector, Ashutosh A.T. Pednekar, who moved into the chamber 20 months ago. He handpicked Kotkasim for the experiment last December as close monitoring was possible due to its small size.

What Pednekar has reported to the Centre has reinforced the widespread belief about leakages. Six months ago, 80-82 kilolitre (kl) of the 84 kl of kerosene allotment for Kotkasim was being consumed by the tehsil's 25,843 ration card holders, as reported by its 34 PDS fair price shops until November. In December, the administration began implementing the pilot. First, all ration card holders were asked to report their bank account numbers to facilitate direct subsidy. For those who did not have accounts, the PDS monitoring wing tied up with eight local branches of Rajasthan Gramin Bank, Punjab National Bank and SBI and conducted 32 awareness camps in panchayats to open no-frills bank accounts.

A snapshot of the government's subsidies and flagship development programmes shows the need for targeted disbursal

MGNREGA: 40,000
NRHM: 18,115

(in Rs crore Source: Budget 2012-13)

Next, the administration began weeding out non-eligible ration cards. Around 6,000 card holders did not respond to requests to identify themselves. Ghost citizens? "They will be sifted out of the system unless card holders turn up with identity proof," says Pednekar. Another 1,239 had double LPG cylinder connections and were not eligible for kerosene subsidy; 3,085 had single gas connections and were only eligible for 50 per cent of the 3-litre kerosene entitlement a month per card holder.

Having sifted through 25,843 card holders, the administration moved to the core of the direct transfer programme. At the PDS shop, every consumer was asked to pay the market price of Rs 44.50 per litre, against Rs 15.25 earlier. They were paid the difference, or subsidy, of Rs 29.25 per litre directly into their bank accounts — three months in advance. "Each card holder is entitled to 3 litre of kerosene a month — a subsidy of Rs 90 a month. So we deposited Rs 270 into each account," says Lalit Jain, district supply officer. "At the market price, alternate usage of kerosene becomes unattractive."

Now consider Pednekar's discovery of leakages: 79 per cent in December, 83 per cent in March and a stunning 87.8 per cent in May 2012. As the PDS cell tightened its grip, the offtake shrank from 82 kl in November to 9.5 kl in May. Officials say a state-wide rollout can save Rs 1,000 crore in Rajasthan just from kerosene. An enthused, but guarded, Centre has kept the early findings under wraps for now. Obviously, Kotkasim's results may not hold true for the entire nation. "There are signs of substantial savings, but it is too early to talk about a national rollout as the UIDAI programme is still at an early stage," says R.P.N. Singh, minister of state, Ministry of Petroleum and Natural Gas.

Click To View A Slideshow On Subsidies: Innovate To Save

But on 16 March, when the findings were presented before principal secretaries of states and union territories, nearly a dozen states bought into the idea. The petroleum ministry promptly announced Rs 100 crore as grant for each state that pilots such projects. On its part, the Centre has targeted rolling out these pilot projects in 50 districts by the end of the year, while Alwar has included two more blocks — Rajgarh and Raini — covering 74,000 ration card holders. It will also cover direct subsidy disbursement for other services such as old-age pension and scholarships. The software for the kerosene project, developed at a cost of Rs 35 lakh by the National Informatics Centre, can run these services too.

$2.5 Tn Global Spend On Subsidies Every Year
(BW Pic By Ritesh Sharma)

A Mountain Of Cash!
Rajiv Gandhi was not way off the mark. Even a state-sponsored study by the National Council of Applied Economic Research (NCAER) in 2005 noted that at least 38 per cent of the 11,254,878 kl of kerosene supplied to PDS was being pilfered. Assuming the national average of pilferage is somewhere between the Alwar experiment and NCAER's estimate, or 50 per cent, the government could potentially save or redeploy at least 50 per cent of the Rs 25,000-crore kerosene subsidy.

Now, imagine if the leaks in the Rs 2,08,503 crore of central subsidy, Rs 1,88,573 crore of central welfare spends, apart from Rs 7,00,000 crore of state subsidies and welfare expenditure due to pilferage and  middlemen  were plugged and the monies delivered directly to the intended beneficiaries! The UPA government is also moving ahead with its ‘health for all' and ‘food for all' programmes that could add another Rs 2,00,000 crore to the  subsidies (assuming 50 per cent leakage, the loss would amount to Rs 1,00,000 crore).

By conservative estimates, plugging 50 per cent leakage could potentially leave an extra Rs 5,00,000 crore in the hands of the government. A bonanza in the midst of declining economic growth, rising fiscal deficit, a depreciating rupee and high inflation. The savings would equal the combined GDPs of Sri Lanka, Nepal and Bhutan. They could wipe out India's fiscal deficit and help the government drive social change, besides making political gains.

And we have not yet touched upon the politically volcanic subsidies in sectors such as road and rail transport, hot potato ‘power', sensitive ‘education', under-the-radar ‘water' and the emotive ‘land', where every bit of the learning from these pilot projects can be deployed. Planning Commission vice-chairman Montek Singh Ahluwalia, for instance, prefers direct subsidies in every possible field, even in education. "Most funding of public universities should be stopped. Instead, anybody who is eligible to get admission should be given a scholarship, directly paid to the university," Ahluwalia said at a BW roundtable on education in 2011.

Click On The Graphic To View Enlarged Image

When it comes to subsidies, politics and economics lock horns. Subsidies may be a social need, but they are a serious economic hazard as they create artificial distortions. First, by underpricing a product or service. And then, when pilfered products compete with non-subsidised products, creating a warped market. Second, cash doles are at odds with the "wage theory" of economics. Third, the World Trade Organisation estimates at least 78 per cent of the $2.5 trillion that governments spend annually on farming, fuel, energy, transportation, water, fisheries and forestry subsidies is an economic oddity called perverse subsidies (where financial input is higher than the economic output).

Hence, subsidies are good politics, but bad economics. It is to avoid such large-scale disruptions and widespread pilferage that, in 2011, the Centre zeroed in on an idea that was economically the least disruptive: direct transfer or direct financial transfers, as they are called in many countries. They require transfer of cash equivalent to the amount of subsidy directly into the account of the beneficiary.

Brazil, Colombia, Mexico and South Africa are experimenting on similar biometric authentication and direct cash projects. The Consultative Group to Assist the Poor (CGAP), a policy and research centre housed at the World Bank, Washington, says that the results from these countries are encouraging. "All four countries have large, established social cash transfer (programmes) that reach millions of poor households. In Brazil and South Africa, they provide income to households accounting for almost a third of the entire population. These programmes collectively touch some 30 million recipients," said a CGAP study in February.

Nilekani's Home Turf
Unlike Kotkasim, the LPG pilot in Mysore, 100 km away from UIDAI chairman Nandan Nilekani's hometown Bangalore, relies on UID's Aadhaar identity. Aimed at trimming the Rs 30,000 crore annual LPG subsidy, the experiment also began six months ago. But faced with teething troubles, it is still perfecting delivery and authentication on the basis of UID. Direct transfer of cash is still distant.

Barely 2 km from the Mysore palace, Sudharshan, a delivery boy for Indian Oil Corporation (IOC) distributor Venus Gas Services, is on the move with 60 cylinders, delivery slips and a Point of Sale (PoS) machine. His primary job is to provide refills to households, but he doubles up as a key cog in the LPG pilot. He uses his PoS to authenticate the identity of the consumer through the UID and IOC's database.

Sudharshan knocks at a door in Hoskeri Cross near the palace. Purushotham, the house owner, is at work. Sudharshan consults the PoS for the list of family members and asks for Prema, Purushotham's wife. She thumbs the slot in the PoS machine, but the system cannot recognise her identity. She tries several times, with different fingers, but fails. That, however, does not stop Sudharshan from delivering the cylinder. The transaction is recorded manually. His next stop is Vijayakumar's house in KR Mohalla. The one after that is at Rani's place. While Vijayakumar's fingerprints were rejected by the PoS, Rani's was accepted. It goes on...

On an average, all of Venus's 18 PoS-armed delivery boys authenticate at least 100 customers a day. Distributors of Hindustan Petroleum and Bharat Petroleum too have deployed a similar army. "We do it on a trial-and-error basis. It's completely new, so there are a lot of improvements happening," says Neeta Maroli, administrator of Venus Gas.

Three distributors were selected from Mysore as Aadhaar enrolment was at its most advanced in the district. "We got a form detailing family members, their Aadhaar numbers, a copy of the Aadhaar card and a cancelled cheque to confirm their bank account. From our customer base of 26,000, we  have details of 13,000," says Maroli. "This ensures that booked cylinders go to the right person," she says.

But every bit of the experiment will be useful for the ultimate objective of directing subsidies to specific beneficiaries. For instance, the moment the government manages to map each of India's 125.4 million LPG customers of oil marketing PSUs on the basis of income levels, it will be able to target the intended beneficiaries. In case the government decides that only the 72,37,560 below poverty line (BPL) families availing LPG need to be subsidised, it could pull the plug on 118. 2 million subscribers and save about Rs 28,000 crore annually. The proposal of the Standing Committee on Petroleum and Natural Gas, being considered by the Centre, is to do away with providing subsidised domestic LPG cylinders to the rich and affluent sections having an income of over Rs 6 lakh per annum, including those holding constitutional posts and public representatives such as MPs and MLAs.

For now, the problem is not one of technology. Several customers who filled up the forms did not provide complete details. Even initials were wrong. "The software is so sensitive that even such mistakes can result in a database mismatch. And it will indicate transaction failure," says M. Madhava, partner, Venus Gas.

38% Pilferage in the kerosene supplied to the pds system

Mobile connectivity is crucial. In areas with weak or no signal, the PoS fails to authenticate biometrically. "We have told our boys to try as many times as possible. We need to cut offline deliveries," Madhava said. "One of them tried 21 times before he succeeded," says Palani, a Hindustan Petroleum staff attached to Mysore distributor, Little Gas Company. A positive fallout of the pilot has, however, been the cancellation of scores of multiple connections in the same family, which is illegal. In the second week of June, oil marketing PSUs decided to expand the scope of the LPG pilot programme from Mysore city to the entire district, covering 570,00 households.

Ranchi Rocks
The annual village mela is in full swing in Tigra panchayat, a nondescript rural landscape lying 25 km from Ranchi. Most villagers have gone to the mela already, but two 20-something girls and a male companion wait restlessly at the deserted panchayat office. Manila Kumari, Reshma Kumari and Lela Oraon hope to catch the banking correspondent to withdraw the money they earned from community work under the MGNREGA the previous week.

THE E-WAY:Micro-ATMs allow villagers with Aadhaar numbers to carry out financial transactions
(Pic By Niraj Sinha)

Minutes later, Mahmood Alam steps in with his micro-ATM, a gadget the size of a credit card swipe machine, that allows people with the 12-digit Aadhaar number to carry out financial transactions. Alam moves to a corner of the panchayat building where mobile connectivity, essential for the device to work, is best.

Manila approaches him with her card, Alam keys in the UID and asks her to authenticate it using her thumb. She presses her thumb on the machine. Once, twice, thrice… without success. This is Manila's first attempt at a micro-ATM transaction. Alam reassures her and asks her to try again. The machine authenticates her. Her account has Rs 732, the wage the government paid her for six days of labour. She asks Alam to withdraw Rs 700 for her; the machine completes the transaction and churns out a receipt. Reshma and Lela follow the same drill.

Alam has been Tigra's window to the banking world since December. That month was when Tigra was chosen as one of the 12 panchayats in four districts of Jharkhand for the conduct of the Centre's direct payment experiment using Aadhaar. In Hazaribagh, Saraikela and Ramgarh, besides MGNREGA payments, scholarships and old-age pensions are also being paid to those with Aadhaar-enabled bank accounts.

"It works on the MGNREGA software. Over 3,000 people have got no-frills bank accounts from ICICI Bank, Bank of India and Union Bank of India. The system is running well and the authentication process has been proved," says an upbeat Sujata Chaturvedi, deputy director general, UIDAI. The pilot is going smoothly as all labourers benefiting from the project have already been issued UID cards. Their numbers are also with the block development officers, who authorise payments. Once a payment demand is raised, the amount goes directly to the banks. Aravind Prasad, in charge of UIDAI in Ranchi, says 2,535 e-transactions worth Rs 8.4 lakh have been conducted between 24 December and 24 April in the four districts. "This may not be a big number, but it shows that it works," says Prasad.

Necessity Is The Mother Of...
The need to move to direct subsidies is an outcome of India's rapid economic and population growth. The economy has transitioned from a stage when nearly everybody needed subsidies to one where only a select few need them. But policies and delivery mechanisms have failed to keep pace, and the burden is stretching finances. The Rs 81,192 crore annual under-recovery by the oil companies from subsidised diesel being a case in point.

As the population grows, and subsidies balloon, at some point governments will be faced with questions such as: Do all rail, road travellers need subsidies? Do all power and water consumers need to avail of subsidised tariffs? And that will force some hard calls to be taken.

The move towards direct transfers is irreversible. The Electronic Delivery of Services Bill, 2011, being vetted by a parliamentary committee, wants the Centre, states and public authorities to deliver all services through electronic modes, including receipt and payment of money. The National Food Security Bill 2011 confers on every citizen the right to food, besides nutritional support to women and children. Universal health coverage and education are next. The key to their success will be establishing the identity of every claimant, either by using UID or by going door to door.

The Aftermath
Early results of the pilots may have been encouraging. A nationwide rollout of these programmes can, without a doubt, weed out unintended beneficiaries. But there is still many a slip between the lip and the cup. As N.C. Saxena, former secretary of the Planning Commission, says: "These programmes are fine at the pilot level. But they cannot be extended. Rural areas of poor states have no banking system to support them."

For instance, Kotkasim's villagers point out that while the Alwar PDS team may be basking in glory, many of the non-respondents who got weeded out in the pilot may have temporarily migrated in search of better prospects. There are also concerns about the future of those who never owned ration cards and were dependent on others' cards for affordable kerosene and foodgrain. The district administration, though, feels such issues can be addressed later.

9% Estimated share of state subsidies in the GDP
72% Success rate of PoS transactions in Mysore pilot

In the absence of banking correspondents, villagers also have no way of figuring out when the subsidy is transferred into their accounts. "The problem is that if we need to know whether the money has been credited or not, we will have to go to the bank first," says Ram Singh, from Ikrotia village. Luckily for Singh and others in Kotkasim, the bank network is fairly good.

On the other hand, the pilot has left the ration shop owners sulking. Dharamvir, a shopowner, says his monthly earnings have shrunk from Rs 1,620 to Rs 450 ever since sales from his outlet have reduced from 1,800 litre to 500 litre. Further, he has to purchase kerosene at the market price, and if the entire lot does not get sold, his funds get stuck. The flipside is that he and other ration shopowners in Ikrotia and Gunshar villages are now allowed to sell products such as branded tea and wheat flour. The government intends to convert PDS outlets into multi-product shops to retain ration shopowners' interest.



The task force under Nandan Nilekani has mooted a three-stage approach for direct payment of fertiliser subsidy. The first phase will gather data on the retail availability of fertilisers, while phase II will see the subsidy being transferred to the retailer. In the third phase, the subsidy will be transferred directly to the intended beneficiary (marginal and small farmer) based on Aadhaar numbers. Phase I has made good progress as it rides on the ‘mobile Fertiliser Monitoring System (mFMS)' that tracks the stock position, sale and receipt of fertiliser. But concerns remain. How will the government define a marginal farmer? Also, few political parties will agree to support slashing of farmer sops. The pilot project for phase I was launched in November 2011 and a countrywide rollout and stabilisation is currently in progress.

Others doubt whether biometrics are the best way to authenticate such programmes. Pranesh Prakash of the Centre for Internet Society, Bangalore, says having biometrics as the only authentication method is not advisable. "Such a system is needed, but UID is conceived as a panacea for all ills, which is not true. There are a lot of privacy issues. UID should also have a second authentication option," he says. In Mysore, for instance, the PoS does not recognise all Aadhaar-enabled customers. Of the 24,236 transactions using PoS in Mysore till date, the average success rate is 72 per cent. Not bad for a pilot project, but mandatory authentication requirement will not work if 28 per cent are denied subsidised cylinders.

In his 2012 Budget speech, finance minster Pranab Mukherjee committed to scaling up Aadhaar-enabled payments for government schemes in 50 districts within six months. Even if that deadline is missed, Mukherjee may have pressed the button on a self-propelling missile that will now find its target.

joe (dot)mathew(at)abp(dot)in

(This story was published in Businessworld Issue Dated 02-07-2012)