One of the biggest challenges for the finance minister in the upcoming budget is to increase spending in rural areas. The challenge is not only to increase the quantum of money delivered through various subsidies, along with employment generation programmes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme, but also ensure that the benefits reach the poor.
The challenge of efficiently delivering government benefits to the large mass of poor farmers and the working population in rural areas is crucial to the revival of the rural economy at a time when it is clearly in stress.
The necessity of increasing such expenditure during times of rural distress and otherwise is not challenged even by those who find such subsidies regressive. However, a large and influential lobby does exist, arguing against such spending on account of leakages. Although definitive data on leakages in most such schemes is not available except for the public distribution system, the good news is that PDS leakages have come down substantially in the last decade.
The news on the other big subsidy element, the petroleum subsidy, is also positive, with the government managing to do away with subsidies on petrol and diesel. So much so that these fuels are now sources of substantial revenue to the government after the collapse in global petroleum prices. The remaining components of the petroleum subsidy—liquefied petroleum gas and kerosene—are also showing signs of reduction, partly as a result of declining consumption of kerosene and partly because of the fall in crude prices.
While leakages are no reason for reducing spending on these programmes given the current situation, there is a need to fix the delivery mechanism. Essentially, the issue revolves around three questions: What to deliver? Whom to deliver to? How to deliver?
Of these, there has been definitive movement by the government on ‘how to deliver’. The focus on the trinity of JAM (Jan Dhan accounts, Aadhaar and Mobile) is essentially to fix the mechanisms of delivery of subsidies to beneficiaries. But given their nature, this exercise is more likely to be successful for benefits delivered in cash, although the same mechanism is also useful for delivery of benefits in kind. However, the focus on direct benefit transfers has meant that other aspects of subsidy delivery have largely been ignored or made slower progress.
The most important among these is ‘whom to deliver to’. This has been a vexed issue for more than a decade now, ever since the government decided to shift to targeted PDS. The issue of identification of beneficiaries is not only crucial for implementing the National Food Security Act (NFSA) but also for other schemes such as social pensions.
On this front, the socioeconomic caste census (SECC) has not been used in many states for beneficiary identification. While there are concerns on the quality of SECC data, most states that are using the SECC for beneficiary identification have found the data to be fairly reliable. Bihar is a notable example where the use of SECC data for beneficiary identification has led to reduction in exclusion errors for the NFSA. However, the use of different methodologies and criteria of identification by state governments means that there is no clarity on either the criteria for identification of beneficiaries or the extent of exclusion and inclusion errors in these lists. In some of the states, the list in use is the below poverty line census of 2002, which is known for its errors of targeting.
While the SECC is useful for beneficiary identification for social sector schemes, it is not sufficient as far as identification of beneficiaries for delivery of subsidies in agriculture is concerned. Since the agricultural sector receives various forms of subsidy, designing error-free methods of identification is a must.
This is essential due to the large number of absentee landowners and because a significant amount of land is cultivated under unrecorded tenancy. Attempts by the agriculture department of Uttar Pradesh to use a model of cash transfers in lieu of product-linked subsidy in case of seeds clearly showed high levels of exclusion.
The final issue of ‘what to deliver’, although linked to reforms in the other two issues of ‘whom to deliver to’ and ‘how to deliver’, is essentially a political economy question. Andhra Pradesh has clearly shown that once the delivery mechanism is fixed with correct identification of beneficiaries, it does not matter whether the subsidy is given in cash or in kind. While the Andhra model was successful in reducing leakages in cash transfers, it also worked in the case of PDS where the benefits were given in kind. Moreover, PDS is a good example where states such as Tamil Nadu, Odisha and Chhattisgarh have shown success in eliminating leakages with in-kind transfers. Unfortunately, instead of focusing on implementing the NFSA throughout the country using these success stories, the focus of the government is on shifting to cash transfers.
But the issue of cash-versus-kind is not one that can be resolved by just fixing the delivery mechanism. This is a question which requires an understanding of the efficiency of the transfers, not just from a technocratic approach of leakages, but also on what works better for the intended purpose. There is now sufficient evidence to suggest that subsidies delivered in kind for food-related schemes deliver more in terms of nutritional intake compared with similar amounts delivered in cash. The same may be true for subsidies in agriculture where product-linked subsidies may be required till such time as there is some evidence to suggest otherwise.
Any hasty attempt to shift to cash transfers may only end up excluding a large majority of needy farmers from the few benefits they receive. At a time when the agricultural sector is suffering from the twin problems of drought and global commodity price deflation, any attempt to reduce subsidies will be detrimental to the economy. The need of the hour is not just to augment efforts to fix the broken delivery mechanism but also to increase spending in rural areas on these programmes.