Can Technology Make Government Subsidies More Effective?

A boy goes to the ration store to buy dal and rice. A small farmer sprays fertilizers on his crop. A mother fills her water jug at the community tap. A family purchases kerosene to light their house. For India’s poor, government subsidies are crucial to maintaining a certain minimum quality of life. However, historically, the reaches of government subsidies extend far beyond the poorest population. Train tickets, gas cylinders, electricity, and petrol are all subject to below-market pricing due to government intervention.

A subsidy, defined in its simplest form, is the amount of money used to keep market prices artificially low. According to the Indian Economic Survey, 3.78 trillion rupees (or 4.2% of India’s GDP) was projected to be spent on government subsidies in 2014-2015. The Modi administration has stated their intention to decrease the percentage of GDP spent on subsidies to 1.6% of total GDP by 2017-2018.

How do they plan to do this without leaving the poorest Indian citizens without a lifeline? The intention is to cut out the loopholes and middlemen that currently divert resources, like the black market for LPG cylinders, by integrating technology and welfare together. Relying heavily on technology, the existing postal service, and the politically popular concept of direct cash transfers, the goal is to increase the efficiency of government subsidies by removing the leaks that allow subsidized products to trickle away.

Government Subsidies: Then and Now

To understand the current state of subsidies in India, let’s take a quick dive into the past. The history of India’s subsidized commodity distribution is rooted in universal coverage for all citizens. Beginning before independence, the British rationed grains during World War II. After independence, as part of the planned economic development beginning in 1951, the Central Government’s Public Distribution System (PDS) began to distribute six daily commodities (rice, wheat, sugar, edible oil, a form of coal, and kerosene oil) to Indians countrywide, regardless of income. At the time, subsidies of household commodities were viewed as necessary to counter the high cost of food after World War II and provide a modicum of food security.

Today, the ration card is still a common fixture in the life of urban and rural Indians. There are three levels of ration cards — the AAY, BPL, and the APL cards.Antyodaya cards (expanded to the Antyodaya Anna Yojna or AAY), covers families with monthly incomes of less than Rs. 250 per month, as well as senior citizens, widows, the terminally ill, and physically handicapped with little or no regular income. Qualification for BPL (Below the Poverty Line) ration cards is determined by not falling into one of the 15 determining categories, ranging from owning a two wheeler with a 100CC capacity or above (note that BPL families are allowed to own up to one auto-rickshaw) to serving as a government employee. The holder of a BPL can access the benefits of the 2013 food security bill: 5 kg of subsidized rice, wheat, and coarse grains a month, among other things. Finally, an APL card (Above the Poverty Line) allows holders to receive their rice and wheat shares only after the BPL/AAY families have received theirs at a subsidized rate.

These Persistent Leaky Pipes

However, even with the three-tier ration card system, leakages and distortions across the subsidy system still result in wasted government resources. As highlighted in the 2014-2015 India Budget Report, the wastages in the current subsidy system are often regressive to the point of benefiting rich households more than poor households. Take water subsidies for example. It is estimated that up to 85% of government water subsidies go to private taps, yet 60% of poor households collect water from public taps. Or electricity subsidies — 67.2 % of Indian households are connected to the electric grid, most likely representing some of the wealthiest households in the country. Out of the population with connectivity to the electric grid, the top income quintile consumes 121 kWh per month on average (37% of the subsidy) while the bottom quintile consumes only 45 kWh on average (10% of the electricity subsidy).

Furthermore, in the majority of commodity markets discussed in the 2014-2015 financial report, leakages are rampant. Holes are everywhere, with commodities typically disappearing into the pockets of middlemen and later ending up on the black market. The percentage of commodities that disappear can range from 54% (wheat) to 15% (rice) of all government-subsidized products.

Cash Transfers and JAM

What can be done to clog the holes? At the end of the 2014-2015 fiscal year, the Finance Department introduced the JAM Trinity, an expanded version of a direct transfer program rolled out in 2013. The JAM Trinity is a Hindi acronym for a three-tiered identification system aimed at increasing the poor’s access to benefits while closing up leaking subsidy pipes. It combines the Jan Dhan Yojana (the central scheme to promote financial inclusion, largely through the opening of bank accounts), Aadhaar cards (the 12-number ID cards based on biometric data), and mobile numbers in an attempt to increase the feasibility of direct transfers to India’s poor.

International political economy research tells us this can be huge. Beginning in 1995, the Mexican government began making cash transfers to families in return for an investment in human capital. The government gave poor families cash but with strings attached, like requiring investment in preventative health care and primary education. Families that sent their children to secondary school received higher transfers. Direct cash transfers spread across Latin and South America and were widely considered a successful welfare reform.

The grounding idea for cash transfers is two-fold: first, healthier, better-educated children are more valuable assets to a country’s economy; and second, when provided with a small sense of economic stability, families will invest in their children’s education and health. Therefore, governments — both out of a sense of equality and for economic value — should invest in families’ well-being as much as possible.

There’s a growing body of research on this, but Latin America (with its relative financial wealth and its history as the original test field for direct transfers) is an interesting case study for how cash transfers coupled with other positive economic growth factors can move large sections of a population out of extreme poverty. Currently, 21.3% of India’s population lives in a state of extreme poverty.

The Risk of Fixing Leaks with Hasty Duck Tape

While the JAM Trinity is a potentially exciting proposal, some serious concerns remain around how to implement it. Solving these concerns will likely take time, as well as trial and error.

For example, identification for India’s poorest remains a massive logistical hurdle. In theory, the steps required to register a mobile number, receive an Aadhaar card, or register as part of Jan Dhan Yojana should provide ample proof of identity. However, despite significant government efforts to raise awareness about the various components of the JAM Trinity, many still remain outside of the schemes’ reach. As of 2014, 15 million bank accounts were opened through the Jan DhanScheme and, as of mid-2015, 820 million Aadhar cards have been issued. These are seemingly impressive numbers. However, an RTI Application filed to the Unique Identification Authority of India earlier this year revealed that 99.7% of all Aadhar cards were issued to people with two or more forms of ID. This is hardly a step towards identifying the unidentified.

There is also concern about the lack of operable infrastructure and the resulting delays in receiving subsidies or cash transfers. In a series of experiments with cash transfers in places such as Rajasthan, Jharkhand, and Delhi, recipients ran into problems that ranged from unclear fingerprints to receipt systems that relied on internet access in places where no internet access exists. In parts ofRajasthan, a 2011 program gave cash transfers (deposited in recipients’ bank accounts) in lieu of kerosene subsidies. During this time, the consumption of kerosene dropped dramatically along with user satisfaction. Many poor families were simply unable to navigate the many loops required to open a bank account, where they would receive their transfer, let alone afford the initial fee to start an account in the first place. Therefore, in communities where kerosene was a crucial component of providing light to the poor, families were shut out because the barriers of access were just too high.

Closing India’s leaky government subsidy tap cannot happen through technology-based programs if the base technology infrastructure is not yet in place. While the JAM Trinity and cash transfers have a role to play, so does continued outreach to marginalized families through simple technology (like cell phones), NGO outreach, and education. Furthermore, in countries like Brazil, which is considered a success story in the world of welfare cash transfers, welfare cash transfers are complimented with continuous, comprehensive provision of government-provided services and facilities. This hints at the need for a careful balance between cash transfers and social services.

The JAM Trinity gets it right when attempting to link the prolific growth of cell phone usage across India in the past few years to poverty alleviation. But now more needs to be done to ensure the poorest segments of society have the knowledge and identity proofs necessary for accessing a technological world.

The philosophy behind direct transfers in lieu of subsidies is the ability for families to take care of their children when given the space and means to do so. Increasing access to government schemes, identification, and welfare programs must focus on this as well. Direct cash transfers may indeed be an opportunity to cut out leakages in the subsidy system and decrease India’s expenditure. However, the government must ensure that the proper infrastructure and knowledge is in place to allow these direct transfers to reach their recipients. 1.27 billion people depend on it.