Big Picture, Indian Economy, Uncategorized

A Case for Expanding DBT

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So far, Direct Benefit Transfer (DBT) has been able to tackle two major issues associated with subsidies in India-targeting and leakages. This makes the time ripe to have DBT for all subsidy programmes.

What is DBT?

The government’s DBT plan involves transferring the subsidy amount directly to the beneficiaries’ bank accounts.

  • Here, the government does not have to fiddle around with differential pricing for the underprivileged.
  • This method can effectively address the issue of leakages and go a long way in solving the mis-targeting problem.

The government has also linked DBT to Aadhaar. 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.

DBT in MGNREGA:

The case of MGNREGA wages is an example where DBT effectively addressed both issues-targeting and leakages- at once. Initially, when MGNREGA wages were given in cash, there were reports across the country of MGNREGA wages being misappropriated by middlemen.

  • In 2013, the government initiated the 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 stood to reap benefits from MGNREGA wages.

DBT in PAHAL:

The modified DBT scheme, named PAHAL [Pratyaksh Hanstantrit Labh], for liquefied petroleum gas (LPG) subsidies was launched by the government in 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.
  • While, on one hand, this ensured that all LPG consumers could avail of the subsidy, on the other it also meant that a large proportion of the subsidies were going to people who could afford LPG cylinders at the un-subsidised rate.
  • Thus, the government recently decided that people earning more than Rs.10 lakh a year would not be eligible for the LPG subsidy. So, DBT addresses the leakages issue while the income cap addresses the mis-targeting problem.
  • Hence, it is clear that few schemes, like the one above, though successful, need more fine-tuning.

DBT in Kerosene:

There are also subsidy schemes where DBT, in its efficient implementation, could actually result in adverse outcomes. Take the example of DBT in the Kerosene. The centre recently proposed to introduce DBT in kerosene. Under the scheme, the consumer will pay the un-subsidised price of kerosene and then receive the subsidy amount in his bank account. The benefits are immense.

  • However, the problem with such a transfer system stems from the fact that if the quantum of subsidy each household is eligible to is determined on the basis of current kerosene usage, then this means that the subsidy amount transferred to each household would be about double its actual usage, since currently around half is being pilfered.
  • This creates a situation where kerosene is so highly subsidised that there will never be an incentive for users toshift to cleaner forms of lighting such as solar.
  • 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.
  • Here, too, mis-targeting and leakages are addressed. But, this could lead to unintended outcomes unless the scheme is managed carefully.

Conclusion:

Currently, the government has introduced DBT in food subsidies in only a few Union Territories and is looking to introduce it in fertilizer subsidies as well. 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 DBT to all subsidy schemes along with careful management.

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