A case for expanding Direct Benefits Transfer (DBT)

The two major issues with subsidies in India — targeting and leakages — can both be tackled by the government’s ongoing Direct Benefits Transfer push. The time is now ripe to have it for all subsidy programmes.

The National Democratic Alliance (NDA) government, by design and thanks to some legacy benefits from the United Progressive Alliance (UPA) government’s term, is increasingly finding itself in a sweet spot where social security aid and subsidies can finally be rid of the long-standing issues plaguing such systems in India. The two major issues with subsidies in India — targeting and leakages — can both be tackled by the government’s ongoing Direct Benefits Transfer (DBT) push. The time is now ripe to have Direct Benefits Transfer (DBT) for all subsidy programmes.

Leakages occur when the subsidy does not reach the recipient due to corruption, pilferage or other causes. Mis-targeting benefits higher income groups that don’t really deserve the subsidies, thereby needlessly increasing the government’s expenditure.

The government’s Direct Benefits Transfer (DBT) plan, which simply involves transferring the subsidy amount directly to the beneficiaries’ bank accounts instead of having to fiddle around with differential pricing for the underprivileged, can effectively address the issue of leakages and go a long way in solving the mis-targeting problem.

Efficient targeting, using Aadhaar-linked data, ensures that the intended beneficiary receives the money in his account, thus helping him as well as reducing the government’s subsidy burden. This has resulted in effectively solving the leakage and mis-targeting problems in some schemes, but other schemes have shown that they need more work to be efficient.

The case of MGNREGA wages is an example where Direct Benefits Transfer (DBT) effectively addressed both issues at once. In the beginning, there were reports across the country of MGNREGA wages — at the time given in cash — being misappropriated by middlemen in such large-scale systems. In 2013, the government initiated the Direct Benefits Transfer (DBT) scheme in MGNREGA after several successful pilot projects and eliminated these middlemen to a large extent. So far, in this financial year, under this scheme, Rs.20,500 crore has been credited to the accounts of almost 5 crore people. All the beneficiaries — only the beneficiaries — stood to reap benefits from MGNREGA wages.

More fine-tuning

However, other schemes, though successful, need more fine-tuning. While the original Direct Benefits Transfer scheme for liquefied petroleum gas (LPG) subsidies, named PAHAL [Pratyaksh Hanstantrit Labh], was launched in June 2013, the NDA government modified and re-launched the scheme in 54 districts on in November 2014; for the rest of the country it was January 2015. The idea was that consumers link their Aadhaar number to a bank account and receive the subsidy amount for 12 cylinders in a year. Those without an Aadhaar number could furnish any other bank account to receive the subsidy.

Now, while this ensured that all LPG consumers could, in theory, avail of the subsidy, it also meant that a large proportion of the subsidies were going to people who could afford LPG cylinders at the un-subsidised rate. Towards this, and to the credit of the government, it was recently decided that people earning more than Rs.10 lakh a year would not be eligible for the LPG subsidy.

So, Direct Benefits Transfer (DBT) addresses the leakages issue while the income cap addresses the mis-targeting problem. Back-of-the-envelope calculations (since there are no accurate figures of how many LPG users earn more than Rs.10 lakh) peg the government’s savings from such a move at around Rs.5,000 crore a year.

There are also subsidy schemes where Direct Benefits Transfer (DBT), in its efficient implementation, could actually result in adverse outcomes. Take the example of Direct Benefits Transfer (DBT) in the kerosene scheme the Centre is incentivising States to adopt. The benefits here are immense. Experts estimate that around half the kerosene sold in the country is being misused. Instead of being used as lighting fuel — its most common use — kerosene is being used to adulterate diesel among other things. This means that the benefit of kerosene being sold at subsidised rates is also unintentionally going to those involved in such activities.

Under the Direct Benefits Transfer (DBT) in kerosene scheme, the consumer buys kerosene at full price and then receives the subsidy amount in his bank account if eligible. Here, too, mis-targeting and leakages are addressed. But, as economist Pronab Sen has pointed out, this could lead to unintended outcomes unless the scheme is managed carefully.

If the subsidy amount each household is due is calculated on the basis of the total amount of kerosene sold divided by the number of eligible households, then this will result in each household receiving about double the subsidy amount it should be getting because total usage also takes into account pilferage. In other words, the total sales figures overestimate actual household-level usage because they also take into account usage by theft.

Over-subsidising kerosene to such an extent will mean that it will remain the lighting fuel of choice for poor households, with no chance of a switch being made to cleaner energy sources like solar power. So, in improving the targeting of kerosene subsidies, the government could be cementing the use of the dirty fuel in future. The possibility that the government will subsequently reduce the subsidy amount, viewed as a political no-no, seems remote.

Currently, the government has introduced Direct Benefits Transfer (DBT) in food subsidies in only a few Union Territories and is looking to introduce it in fertilizer subsidies as well — a fervent demand made by farmers’ associations when they met the Finance Minister for a pre-Budget meeting recently.

The sweet spot created by universalising banking via the Jan-Dhan Yojana, efficient targeting via Aadhaar, and the increasing ubiquity of smartphones is so attractive that the government should make full use of it to extend Direct Benefits Transfer (DBT) to all subsidy schemes. It’s a win-win.