India announces changes in subsidies, will hand out cash to its poor

Clutching the yellow card that is proof of her impoverished status, Kapuri Munna lines up at a small corner store every week to buy low-cost food grains and kerosene that the government sets aside for the poor.

But she is not always lucky enough to find food and fuel for her family of eight.

  • ( RAMA LAKSHMI / THE WASHINGTON POST ) - Kusum Kumari, 17, buys subsidized kerosene from a store in New Delhi. Government audits have found that the subsidy system is rife with corruption.
  • ( DONATELLA GIAGNORI/ / LATINCONTENT VIA GETTY IMAGES ) - A woman cooks outside her house in a New Delhi slum. India has a complex system of food and other subsidies for the poor.

( RAMA LAKSHMI / THE WASHINGTON POST ) - Kusum Kumari, 17, buys subsidized kerosene from a store in New Delhi. Government audits have found that the subsidy system is rife with corruption.

“I return to my slum empty-handed many times because the shopkeeper says there is no stock,” Munna, 47, said. “Is the government not sending enough or is somebody eating it all up in the middle? The rich seem to be getting richer and the poor getting poorer.”

Government audits in the past decade have found that corrupt traders and officials divert almost half of the cheap grains and cooking fuel meant for the poor, with just 27 cents of every dollar spent on such subsidies reaching the intended recipients.

Now India wants to fix that leaking bucket of welfare spending.

On Monday, Finance Minister Pranab Mukherjee told Parliament that the country will move toward direct transfers of cash subsidies for cooking fuels and fertilizer. Under the annual budget he unveiled, India will spend almost $35 billion on subsidies, down 14 percent from the current year.

The move toward direct cash deposits into the bank accounts of the poor, eschewing artificial caps on the prices of fuel and fertilizer, signals a radical shift in India’s creaking, socialist-style welfare system. It also aims to correct the market and price distortions that have crept into the economy over the years.

The government hopes that an ambitious biometric identity number program, launched in 2009 and similar to the Social Security system, will help make the transition.

That program “will create the essential plumbing . . . a pipeline between the government and the poor to send subsidies directly to the poor,” said Nandan Nilekani, chairman of the Unique Identification Authority of India and head of a task force established two weeks ago to reform the subsidy system.

The cash transfers can be done through cellphones, bank accounts or smart cards attached to the identity number. Where there are no banks, “hand-held micro-ATMs” will be given to agents and shopkeepers. “There will be no fake names in the rolls, no ghost beneficiaries,” Nilekani said.

If the experiment in direct fuel and fertilizer subsidy handouts is successful, food subsidies will follow.

But critics fear the change may lead to the government shrinking its welfare responsibility.

“Instead of fixing the corrupt system, the government is defeatist to resort to sending cash,” said Harsh Mander, director of the Center for Equity Studies. “And cash in the hands of a family need not necessarily mean food in the belly of children and women.”

India does not offer unemployment benefits, but it has developed a complex system of indirect protections for the poor and the farmers with subsidies on food, fuel, fertilizers and electricity. Food subsidies are designed to maintain price stability against shifting market rates. But, according to World Bank reports, the cooking gas subsidy benefits the urban middle classes more than the poor; the fertilizer subsidy benefits fertilizer companies more than the farmers; and cheap electricity encourages farmers to callously run their pumps, leading to severe groundwater depletion.

A government directive that established the task force said the current subsidy model results in “waste, leakage, adulteration and inefficiency.” The leaks in health-care, pension-benefits and job-guarantee schemes will cost India $100 billion in the next five years, the government estimated last year.

“Poor people have been paying for the inefficiencies in the Indian system,” said Shankkar Aiyar, a columnist who writes on the economy. Aiyar said the debate is complicated by disagreement about the number of people living in abject poverty, with estimates ranging from 280 million to 410 million. “How will direct cash transfer work with such varying data?”

Others say that India’s poor may not be ready for this transition.

“If we put cash in uneducated, poor people’s hands, how do we monitor whether they spend it on a nutritious meal and not on potato chips, soda, alcohol and shampoos?” asked a government official in New Delhi, which is likely to test out cash handouts soon.

Inspired by a Brazilian program begun a few years ago, India has launched initiatives that provide cash incentives to the poor when they fulfill certain social welfare goals.

In 2005, the national maternity health program began to give poor pregnant women cash payments if they went to a hospital for prenatal shots and for their deliveries. To address the skewed gender ratio in the capital, the New Delhi government launched Ladli, which means ‘beloved girl’ in Hindi, in 2006. Under the program, periodic cash transfers were made to poor families to encourage the survival, nutrition and education of girls.

The most ambitious cash transfer program is Prime Minister Manmohan Singh’s flagship rural job guarantee program, which pays poor villagers for 100 days of manual labor and has cost $22 billion over the past five years.

Economists say that altering the current subsidy system and cutting waste could reduce the government deficit by 25 percent, boost growth and help the poor.

But some have criticized Singh, who launched India’s economic reforms in 1991, for what they call his excessive focus on welfare.

“Instead of initiating more far-reaching free-market reforms,” said Barun S. Mitra, director of New Delhi-based free market think tank Liberty Institute, “this government is getting sucked deeper and deeper into welfare programs.”

 
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