What the Govt Should Do and What It Shouldn’t

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The government of India over the years, at least in theory, has tried to make the lives of its citizens comfortable, by trying to deliver various goods and services at a subsidised rate.

And it has failed miserably at it. The leakage is extremely high i.e. much of the stuff the government wants to deliver gets stolen before it reaches the individuals it is meant for.

54% of the wheat that the government distributes through the public distribution system gets siphoned off. So does 15% of the rice and 48% of the sugar.

And the stealing doesn’t end at rice and wheat. 40% of fertilizer, 46% of kerosene and 24% of cooking gas is also stolen.

The government suffers from what economists call a principal-agent problem. As Vijay Joshi writes in India’s Long Road—The Search for Prosperity: “The government…suffers from a ‘principal-agent problem’. Its functionaries (legislators, bureaucrats) may pursue their own agendas rather than act in the public interest. They may shirk their duties or feather their own nests.”

While politicians and high-level bureaucrats are a part of the government, they are not the ones that people of this country deal with on a regular basis. The people deal with low level officials, from clerks at the local transport authority who won’t lift a finger without being bribed to the shopkeepers running the public distribution system, throughout the country.

And the incentives of these individuals are not in line with the public interest. Hence, there is pilferage and the subsidies that are meant for the people of this country never reach them.

This leads to a lot of money being spent by the government getting wasted. It leads to the government having to incur a higher expenditure than it would have if things reached the people they were meant for.

It also leads to an active black economy, where everything that is stolen from the public distribution system, is sold in the open market, at a higher price.

So what is the way around this? Should the government stop subsidising the people of this country and in the process save the money that gets wasted? Not really.

As Joshi writes: “There is a crucial distinction to be made between on the one hand the state paying for goods and services and on the other hand the state producing goods and services. For example, ‘food security’ may be thought of in common usage as a ‘public good’. However, even if it is agreed that the state should pay for food security, it does not follow that the state should carry out the task of actually delivering food to people.”

The fact that the government tries to deliver rice, wheat, sugar, kerosene, cooking gas, etc., to people, leads to the principle-agent problem and all the corruption that follows. So what is the way out? As Joshi writes: “The state could enable the poor to buy food in the market, at market prices, by transferring purchasing power to them directly in the form of cash or food vouchers. A system along these lines may be more effective in reaching poor people, and also less corrupt. This example is not chosen at random: it is highly relevant to the problems facing India’s public distribution system(PDS) for food delivery.”

Such a system is already available in case of cooking gas. It’s called Pahal. In this case, the subsidy amount on a cooking gas cylinder is paid directly into the bank account of the individual, instead of the cylinder being sold at a lower subsidised price, as was the case earlier.

In late June, 2016, the finance secretary Ashok Lavasa, told PTI that the government had saved Rs 14,872 crore by paying the subsidy amount directly into the account of people, instead of trying to deliver the cooking gas cylinder at a subsidised amount. The government has been able to save money by being able to bring down the cooking gas cylinders being sold in black.

As the Economic Survey of 2015-2016 points out: “The Pahal scheme has been a big success. The use of Aadhaar has made black marketing harder, and LPG leakages have reduced by about 24 per cent with limited exclusion of genuine beneficiaries.”

The real benefit to the government and the citizens will come when the government is able to implement the cash transfer programme (or what it calls direct benefit transfer) to other areas, where the leakages are high. For this to happen, citizens need to have Aadhaar cards and these cards need to be linked to savings bank accounts.

A lot of progress has been made in the issuance of Aadhar cards. As the Economic Survey points out: “The current government has built on the previous government’s support for the Aadhaar program: 210 million Aadhaar cards were created in 2015, at an astonishing rate of over 4 million cards per week. 975 million individuals now hold an Aadhaar card – over 75 percent of the population and nearly 95 per cent of the adult population.”

An Aadhaar card is necessary in order to identify the right beneficiary. This helps in eliminating bogus identities, through which people claim subsidies. But for the government to be able to transfer money to individuals, the Aadhaar card needs to be linked to a bank account.

As of June 2016, the 22.3 crore bank accounts had been opened under the Jan Dhan Yojana. This is a huge jump from 5.3 crore bank accounts from September 2014. Nevertheless, a lot still needs to be done on this front. As the Economic Survey points out: “Despite Jan Dhan’s record-breaking feats, basic savings account penetration in most states is still relatively low – 46 per cent on average and above 75 per cent in only 2 states (Madhya Pradesh and Chattisgarh).”

The Economic Survey was published in February 2016. Given that some time has elapsed since then, the figures quote above would have improved since then. What also does not help is the fact that only 27 per cent of villages have a bank within a distance of 5 kilometres. This means that last mile connectivity is a problem.

This essentially means that if the government moves to cash transfers immediately in a whole host of areas, chances of people being left out because they do not have a bank account, are high. This needs to be set right in the years to come. Of course, it is easier said than done.

The savings from such a system, if and when it is in place, will be huge. As Nitin Gadkari, the road transport and highways minister recently said: “If bogus claims are removed from scholarships, pension, subsidies, ration cards and other schemes and these are linked to Jan Dhan Yojna and Aadhar, it will result in savings of Rs 1 lakh crore to the exchequer.” For all the leakages that happen, Gadkari might just be right.

The column originally appeared in Vivek Kaul’s Diary on July 8, 2016

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About vivekkaul
Vivek Kaul is a writer who has worked at senior positions with the Daily News and Analysis(DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System , the latest book in the trilogy has just been published. The first two books in the trilogy were published in November 2013 and July 2014 respectively. Both the books were bestsellers on Amazon.com and Amazon.in. Currently he works as an economic commentator and writes regular columns for www.firstpost.com. He is also the India editor of The Daily Reckoning newsletter published by www.equitymaster.com. His writing has appeared across various other publications in India. These include The Times of India, Business Standard,Business Today, Business World, The Hindu, The Hindu Business Line, Indian Management, The Asian Age, Deccan Chronicle, Forbes India, Mutual Fund Insight, The Free Press Journal, Quartz.com, DailyO.in, Business World, Huffington Post and Wealth Insight. In the past he has also been a regular columnist for www.rediff.com. He has lectured at IIM Bangalore, IIM Indore, TA PAI Institute of Management and the Alliance University (Bangalore). He has also taught a course titled Indian Economy to the PGPMX batch of IIM Indore. His areas of interest are the intersection between politics and economics, the international financial crisis, personal finance, marketing and branding, and anything to do with cinema and music. He can be reached at vivek.kaul@gmail.com

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