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

The Indian government provides subsidies on food grains and cooking gas for the poor through the Public Distribution System. The government in Panchkula District, Haryana is piloting a biometric system which recognizes fingerprints in place of the traditional ration cards in order to avoid duplication and misuse of these subsidies.
Washington Post Foreign Service
Monday, February 28, 2011; 8:02 PM

IN NEW DELHI 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.

"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.

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