Direct benefit transfers can pay out subsidies


  • The Reserve Bank of India (RBI) has recently cautioned states from shifting to a DBT mechanism for food subsidies. The drive for efficiency in subsidy disbursement is a benign concept. But poorly implemented, it can have fatal consequences.

Subsidy, With a Grain of Salt

  • India’s subsidy disbursement system has historically been flawed, leakages in PDS being a key example. Almost 54% of PDS grains were diverted in 2005. Five years later, the figure was 41%. The lowest diversions were in Tamil Nadu (7%) and highest in Bihar (85%) in 2005.
  • DBT is a newly embraced method for disbursing subsidies in a manner that could potentially eliminate spurious transactions, while cutting red tape and increasing efficiency. Coupled with Jan Dhan accounts, it can be an efficient way for providing benefits directly to beneficiaries while leaving a paper trail. 

Three Focus Area:

  • However, for a DBT implementation to succeed, there must be focus on three critical areas: proper identification of beneficiaries, timely transfer of money to beneficiaries, and their ability to access these benefits with relative ease. While Aadhaar, reaching over 89% of India’s population, can solve the identification problem, the transfer of money (about 15% households don’t have a banking account) and access issues pose additional challenges.
  • Mobile penetration could substitute for some banking tasks. But last-mile physical connectivity to financial centres will be needed.
  • There must be due care in choosing which sectors to roll out DBT in. Implementing it for farm sector remains particularly difficult, given a variety of subsidies. Meanwhile, DBT solutions are mostly focused on income support.
  • The tyranny of distance in the hinterland, with the rural bank branches still far and few, along with poor village road infrastructure will make access to this subsidy difficult.
  • The potential for expanding the utilisation of DBT in fertiliser allocation, for instance, holds significant promise.
  • However, the DBT subsidy on fertilisers is currently given to the farmer whose name appears on the land title.
  • Given that land settlements happen infrequently, and most farmers don’t tend to undertake mutations on land titles usually associated with their forefathers, this could lead to significant downstream implementation issues. Farmers who are sharecroppers could lose out.

Source of Subsidy:

  • The source of subsidy will also add to complexity in disbursements. Some subsidies are administered by the Centre (e.g., fertilisers), some by state governments (e.g., electricity), while others are covered by both (e.g., seeds). The trifecta of Aadhaar, Jan Dhan and mobile phone connectivity can help the scale-up of DBT quickly when the subsidy is offered in a universal manner, with limited administrative coordination required between the Centre and the states.

Gas, That Doesn’t Leak

  • Consider how PAHAL (Pratyaksha Hastaantarit Laabh) has yielded impressive results in reducing LPG subsidies by about Rs 2,000 crore. Similarly, with MNREGA payments in Bihar, DBT has reduced leakages by 14% and disbursals by 38% through real-time individual payments, while reducing payment delays.
  • However, any targeted subsidy schemes that have identification risks and seek to allocate subsidies across a family may not be suitable. Administrative ease also matters. Complex interfaces between institutions along with intermediary inertia can hamper rollouts.
  • While cash transfers for food subsidies have been explored in pilots, surveys have highlighted a number of pertinent issues. Over 20% of those surveyed have claimed to have not received cash in lieu of market-linked prices, while those who received payments were aggrieved by lack of communication on bank transfers and inadequate grievance redressal mechanisms. RBI, in its latest report on state finances, has expressed the need for greater robustness in delivering benefits through cash transfer route.
  • Finally, one must not give up on existing systems. Reforming the PDS, as Chhattisgarh did recently, may be a better way to improve delivery and access.
  • The Chhattisgarh government de-privatised ration shops and increased commission on sales, while it issued fresh ration cards to weed out bogus ones. It broke the rice miller-ration shop nexus by taking control of logistics and procurement, leading to 90% of the domiciled population having food and nutrition security.
  • Similar reforms in Odisha have increased coverage from 6.4% in 1993-94 to 58% in 2011-12, while reducing calorie deficiency by 31.4%, and prevented over 14 million from going hungry. Increasing density of PDS shops, enrolling larger population especially in rural areas, and advancements in supply chain, can further improve PDS delivery.
  • One would hope that in our rush to push DBT, we don’t simply replace the (admittedly tyrannical) discretion of the local land records officer and village council chief with that of the database analyst.


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