Subsidies and Direct Benefit Transfer in India: Notes

A subsidy is money the government spends so that a buyer pays less than the cost of what he buys, or a seller receives more than the market would pay him. In India it is the instrument through which food, fertiliser and cooking fuel are kept within the reach of poor households, and in the Union Budget the three of them are called the major subsidies. Because a subsidy is revenue expenditure that creates no asset, it weighs directly on the fiscal deficit, and the search for a way of giving the benefit without the leakage of the old system produced Direct Benefit Transfer, which moves money into the beneficiary's own bank account.

What a subsidy is and how it is classified

Economists separate an explicit subsidy, which appears in the budget as a payment, from an implicit subsidy, which is hidden in the low price charged by a public service such as irrigation water or electricity. A second division is between merit subsidies, on goods such as elementary education, basic health and sanitation whose benefit spreads beyond the person who receives them, and non-merit subsidies, which go to goods consumed privately. A third division, used in the budget papers, is by the commodity subsidised: food, fertiliser and petroleum. A subsidy may be given to the consumer, as with food grains sold below cost, or to the producer, as with fertiliser, where the manufacturer is paid the difference between the cost of production and the price the farmer pays.

The food subsidy

The food subsidy is the difference between what it costs the Food Corporation of India to buy, move and store grain, called the economic cost, and what it earns from selling that grain to the states at the central issue price, together with the cost of holding the buffer stock. The National Food Security Act, 2013 turned the old scheme into a right. It covers up to three-quarters of the rural and half of the urban population, divides them into priority households, which are entitled to five kilograms of grain a person a month, and Antyodaya Anna Yojana households, which get thirty-five kilograms a household a month, and makes the eldest woman of the household of eighteen years or above the head of the household for the ration card. The Act also provides a maternity benefit and meals for children, and it gives a food security allowance when grain is not supplied.

Direct Benefit Transfer

Direct Benefit Transfer was launched on 1 January 2013 in a small number of districts and now covers hundreds of central schemes. Its purpose is to remove the middlemen between the treasury and the beneficiary: the subsidy is credited to the beneficiary's bank account, the account is linked to the Aadhaar number, duplicate and non-existent names are removed, and the payment can be traced. The mission that runs it began in the Planning Commission and was later placed in the Cabinet Secretariat. Three technologies make it possible, and the Economic Survey of 2014-15 named them together as the JAM trinity: the Jan Dhan bank accounts that gave households a place to receive money, the Aadhaar number that identifies the beneficiary, and the mobile phone that tells him the money has come. The payments run on the Public Financial Management System of the Controller General of Accounts and on the Aadhaar Payment Bridge of the National Payments Corporation of India. The portal counts three kinds of transfer: cash into an account, in-kind benefits such as the subsidised grain, and other benefits such as the wages of a scheme's workers.

Where DBT is used and what the law says

PAHAL, the transfer of the cooking gas subsidy, was begun in fifty-four districts in November 2014 and extended across the country from 1 January 2015; the consumer buys the cylinder at the market price and the subsidy reaches his account, and the Give It Up campaign asked those who could afford it to surrender the benefit. Wages under the rural employment guarantee, scholarships, pensions and the income support paid to farmers under PM-KISAN are all sent the same way. In fertiliser the transfer is made not to the farmer but to the company, after the sale is recorded on a point of sale machine at the shop. The legal basis is the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016, passed as a Money Bill, whose Section 7 allows the government to require Aadhaar for a subsidy or benefit charged on the Consolidated Fund of India; the Supreme Court upheld that section in 2018 while striking down the use of Aadhaar by private companies.

The argument about subsidies

The case for cash transfer is that it cannot be diverted on the way, that it costs less to administer, that the beneficiary chooses what to buy, and that it does not distort the price of the commodity. The case against it is that a household may not spend the money on food, that prices in a remote village may rise faster than the transfer, that an account or a biometric failure can exclude the very poor, and that a right to grain is a surer protection than a sum of money. The Shanta Kumar Committee of 2015, appointed to look at the Food Corporation of India, recommended a narrower coverage under the Food Security Act and a gradual move to cash. The general rule examiners expect is that subsidies should be targeted, time-bound and transparent, so that they support the poor without becoming a permanent charge on the budget.