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Subsidies: High Cost, Low Impact

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Union minister for rural development Raghuvansh Prasad Yadav says that in Chhattisgarh, a district collector has been suspended for diverting disbursements meant for wages under the National Rural Employment Guarantee Scheme (NREGS) to buy pesticide.
A National Council for Applied Economic Research (NCAER) report estimates that 38 per cent of kerosene meant for the public distribution system (PDS) that poor families access is diverted for non-PDS use. Why? As an internal note of the oil ministry acknowledges, the price differential between PDS kerosene and other fuels like diesel, is encouraging large-scale, organised adulteration.

These are but two examples among possibly hundreds that led Finance Minister P. Chidambaram to say on 20 December last year that the cost of transferring a rupee of benefit to the poor through the PDS is Rs 3.65. At an event at the Institute of Economic Growth in Delhi, Prime Minister Manmohan Singh underscored the effect of such leakages and badly targeted subsidies. “Too much money is being spent on funding subsidies in the name of equity, with neither equity objectives nor efficiency objectives being met,” he observed.

Scale And Scope
So, are anti-poverty programmes actually making the poor even poorer? There are at least 151 centrally-sponsored poverty schemes, which last year entailed Rs 71,600 crore of expenditure. The government also spent Rs 25,000 crore to subsidise food, fertiliser and fuel through the PDS. Expenditure on different centrally-sponsored poverty alleviation schemes and various subsidies conservatively amounts to nearly Rs 1,50,000 crore.
Finance minister P. Chidambaram told chief ministers at the National Development Council that “while the PDS is necessary, unless it is efficient, procures adequate quantities of food grains and delivers food to the poor, the PDS could become an albatross around our neck and an opportunity for rent seekers to enrich themselves”.
Four months ago, on 30 July 2007, Lord Meghnad Desai asked in a panel discussion on improving delivery mechanisms in Delhi why poverty alleviation was such a difficult task. “Why can’t we transfer money, say a dollar a day, directly to the poor?” he asked. Chidambaram who was on the panel responded, “The quality of governance even at the state level, leave alone panchayats, is much lower than at the Centre. Cash transfer directly in the hands of poor is the single most popular programme of poverty alleviation until we provide jobs. But we need to have the money for it. We will need to dismantle the existing schemes and the system. I will do my sums tonight to see if we have the money”.

Cash Or Vouchers?
If all these funds were allocated to the roughly 200 million poor households, each would get about Rs. 7,500 annually. Even then, about 20-60 million poor families would remain below the poverty line. To provide any meaningful help, the cash transfers would have to be restricted to the poorest of the poor. A cash transfer scheme will thus entail choosing beneficiaries: i.e. only to be used in subsistence cases.
The government must find the political will to either target subsidies better or simply end them. It could start with a report on subsidies prepared by the finance ministry with the National Institute of Public Finance and Policy that recommends replacing the current subsidy regime in kerosene with coupons for poor ration card holders with which the fuel can be bought at subsidised rates from retailers. Another suggestion to minimise leakage of food grains from the PDS is cash transfers through post office network for covering the subsidy differential. But there is no guarantee these cash transfers will not be spent on alcohol, etc.

Elango Rungaswammy, head of the Kuthambakkam village panchayat in Tamil Nadu said at a seminar organised by the London Business School on rural India in December 2007 that “Income increases (from sources not necessarily NREGA) in villages are being spent on Coca Cola and cell phones.” He tells stories about youngsters thrilled at making Rs 3,000 a month splurging on motor bikes and then running down the assets and financial status of the household to keep up with the fuel bills and consumer loan payment. “Six months later the financier takes the bike away; the family loses most of its meagre savings and assets,” he said.
Teach A Man To Fish...?
And there are the horns of the dilemma: what helps the poor more, giving them fish or teaching them how to? Some would say the former presumes the poor aren’t all that hungry and will eat a little bit more and then will go drinking with the cash transfers. Others warn that cash transfers could breed dependence of the beneficiaries on the State. “Poverty eradication programmes based on cash transfers lack dignity and self-respect,” says a recent issue of Poverty in Focus — a UNDP periodical. That’s why the NREGA pays wages for manual labour rather than handing out doles, says Yadav.
Well-targeted poverty alleviation schemes are useful. After the notification of the NREGA, most states have had to revise upwards statutory minimum wage rates. Some states had not touched these rates for a decade. Depending on the base levels, they have gone by about 9 per cent in West Bengal to 55 per cent in Maharashtra, with the rest of the states in between.
What about disbursement of education and healthcare needs, which need more funds?
“Programmes need to work both as safety nets and springboards — cash transfers do not affect structural poverty; it is necessary also to promote access, supply and quality of services like education, health, vocational training and micro-credits,” the Poverty In Focus report goes on. This makes the case for continuing government-aided education plans, with concrete steps to improve student and teacher attendance and performance and arrest drop outs.
For effectively plugging the leakages, K. V. Kamath of ICICI Bank advocates the use of technology. The implementation of the NREGA in Andhra Pradhesh and Karnataka, which disburse 100 per cent of the wages through savings accounts of workers with the postal department and banks, has had far less leakages compared to other states. But there are still large unbanked areas in the country.
Yadav has written to the Prime Minister’s Office seeking his intervention. In his Independence Day speech, two years ago, Singh had said of the poverty alleviation programmes, “they are our weapons in the war on poverty”. It’s time those weapons were used on the enemy.
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(Businessworld Issue 25 Feb-3 Mar 2008)