A Litmus Test for Cash Transfer of Subsidies

(The government recently announced direct cash transfer scheme for subsidies terming it as a game changer for the UPA. However, the pilot project for testing the scheme, which was launched in Rajasthan last year, failed. But, it was projected as a success by the government. The summary of the field observations reveals the reality of the claims made by the government. The question is not only about the cash transfer for the subsidies; it should be seen as a first step towards the whole mindset and chronic capitalist ideology of withdrawing the subsidies from the poor. This is an absurd attempt by the government and it goes against the basic character of our constitution and the government as a welfare state. – Pratirodh)

The Kotkasim Experiment: Field Observations

An experiment with “cash payment of kerosene subsidies” was launched last year in Kotkasim (Rajasthan). The Kotkasim experiment (involving direct cash payment of kerosene subsidies) has been projected as a success, and a model for the whole country. The main basis of this claim is a dramatic reduction in kerosene offtake, and therefore, in the kerosene subsidy. Field observations, however, suggest that this experiment is fraught with problems, and has led to a virtual paralysis of the kerosene distribution system in Kotkasim. The subsidy has been reduced, but at the cost of driving most people out of the subsidy system.

The scheme

Households used to get kerosene from Fair Price Shops (FPS) at a highly subsidized rate. Under the new system, they pay the market price (now Rs 49.50/litre) and the subsidy (difference between the market price and the subsidized rate) is paid into their bank account.

An advance subsidy for three months is paid at the beginning. From then on, the subsidy is paid every three months based on the household’s kerosene purchases in the last three months, as recorded in the FPS dealer’s sales register.

This scheme has been designed to curb leakages: under the new system, a dealer gains nothing from inflating his sales register and selling the difference in the open market, as many dealers used to do.

Households’ viewpoint

The poorest households seem to be the worst hit under the new system. For them, going to the bank to collect the subsidy means losing a day’s wages and also transport costs. For some households, these transaction costs exceed the subsidy.

The payment of subsidies is very erratic and untimely. Many households are yet to receive any subsidy, despite shelling out Rs 500 to open a (supposedly “zero-balance”) bank account. Others do receive subsidy from time to time, but in an arbitrary manner, not clearly related to their purchases.

Because of this erratic and unpredictable payment of subsidies, many households have curtailed their kerosene purchases: it is quite difficult for them to spare Rs 150 to buy just 3 litres of kerosene, and they are reluctant to do it in the absence of any guarantee of timely subsidy payment.

Households with better cash reserves and a better command of the system were not unhappy with the new system. They did not mind it as long as the payment of subsidies was timely and regular.

Dealers’ viewpoint

The new system has undermined the viability of the Fair Price Shops. This is because the dealers now earn only the official commissions, which are very low, and that too on a reduced quantity, because of the decline in offtake. Also they have to advance larger sums to buy the kerosene upfront.

The dealers in Kotkasim are being forced to buy kerosene at a loss, to show that the scheme as a success.This is both unsustainable and unethical.

What we observed looks like a desperate attempt by the administration to successfully execute the “show piece” at any cost. One District Supply Officer told a dealer:“Aapko scheme to chalani hi padegi, collector ko sammanit jo karwana hai” (you will have to run this scheme since we have to get the collector awarded).

If the purpose of the experiment was just to reduce the amount of subsidy (if need be by driving the beneficiaries out of the system) then yes, it was a “success”; but if the purpose was to put in place a more effective and equitable system, then it certainly cannot be considered a success. The experiment should be treated as an opportunity to understand and address the problems associated with this sort of system, instead of being misleadingly projected as a success.