Wednesday, November 28, 2012

FDI, DCT, Congress, BJP

Some folks seem to oppose FDI in retail trade and direct cash transfers championed by Congress, simply because those folks are, by nature, anti-Congress and pro-BJP.

I do not like the current Congress dispensation either.

Congress may have brought out Direct Cash Transfers primarily to attract the votes of the poor in the upcoming parliamentary election. However that alone should not be the reason to oppose this scheme.

BJP is yet to make its views on DCT, but you can safely assume that it will be negative.

This is a wrong approach. The right approach should be to evaluate this policy vis-a-vis BJP's own approach to Indian economy, growth and subsidy and then decide whether to support this or not.

Indian administrative set up is entirely corrupt. It is impossible to think of any department in a state or central government which is devoid of corruption. It may be only a thing of degree; some states may be less corrupt than some other states, but it will be impossible to find a state that is completely clean. Much of the money spent by the governments on the welfare of people is lost along the way. Again, there is no doubt here. The only argument is about what percentage is pilfered: Is it 15% or 85%?

What are the arguments against DCT?

(1) Subsidy itself is wrong. How long do we continue to provide such subsidies?
(2) Aadhar is faulty. Anybody can get an Aadhar card. This will encourage infiltration from Bangladesh.
(3) How is BPL determined? Who decides who should be included in the BPL list, which in turn will make them entitled to Rs 32,000 an year?
(4) Direct cash subsidy implies removal of indirect subsidies. This will impact those who are just above BPL, but may still need support.
(5) Grains in hand much better than cash in hand, as these folks will spend the cash on liquor.
(6) Indirect subsidy controlled the prices directly, and made cheap food, education and healthcare available directly to the poor. Direct cash may not be commensurate with the actual market prices of essential goods and poor may find life more difficult going forward.

Let me take each of the above.

(1) We can dismiss the first question straight away. We already provide subsidies. They were provided in an indirect manner. Whether we should provide subsidies (either direct or indirect) at all is a different question, not relevant to our current discussion.

(2) Aadhar seems shaky. There are many people who oppose the system because it violates privacy and because anybody can get an Aadhar card by giving random and spurious data. I don't think Aadhar card by itself entitles you to a subsidy package. With a bit of understanding of RSBY scheme (Rashtriya Swasthya Bima Yojana), I can say that the central government does have a list of BPL households on a district by district, taluk by taluk level across the country. This list may have a few dodgy households in it. Some genuine families may not find a place there. This problem exists even today. In Tamil Nadu, you can't easily get a ration card today. So, many deserving families don't get subsidised ration goods today. This will continue in the current model also. Some undeserving will end up getting extra Rs 32,000 cash while many deserving will not get it. But by and large, bulk of the population in this list will be genuine.

This is just my belief and how this will established and how the list will be cleaned up every year is to be left to the Central and the State Governments. We need to push them to come up with a workable mechanism.

I am less concerned about Bangladeshi infiltration as of now. I genuinely think it is a minor problem.

(3) & (4) How BPL families should be defined is a big question. I am sure various agencies we have follow different methods and thus come up with very different data. Also, what constitutes a poor in different states, from rural to urban regions should vary. It can't be a simple "annul family income" number. Also, the subsidy amount should ideally worked together with a state government. It need not be a flat Rs 32,000 per annum. Also, it may be desirable to consider multiple buckets (groups A, B C), who will get different subsidies based on the per capita earning of that particular family. It could be Rs 32,000 per annum to one group, Rs 24,000 per annum to another and Rs 15,000 per annum to the third.) This way, we can gradually reduce the shock to every group.

(5) Grains vs cash. It is quite possible that a whole lot of people may misuse the money and waste it on liquor or other vices. I suggest transferring the cash to the woman of the house rather than the "head of the household" who is usually a man. Women in poor households are more likely to spend the money wisely. They understand hunger and healthcare requirements better than men. Money in their hand will also make them more powerful in the family. In some cases, this may also make the women vulnerable to attacks from the man. It will have to be left to the law to deal with such situations.

(6) In the models of indirect subsidy, government purchased in bulk, thereby could get grains at cheaper prices. Now, too, the government can procure in bulk and sell goods through the ration shops. Only, the price will not be Rs 1 per kg. It will be Rs 10 or Rs 15 or whatever it is.

Now what could be the advantages?

The ration shop guys won't loot this and sell elsewhere at a higher price, because no one will pay any higher price than what is being charged. You can only arbitrage on subsidised goods, like the Tamil Nadu rice in Kerala market.

The ration shop fellow will have to be nicer to the public, because if he isn't, the folks will buy from a private shop. The price difference will be marginal. If the ration shop fellow is not nice, he may not have a job, because the shop will eventually be closed for want of customers.

People will not accept third rate, rotten grains because for that rate (Rs. 10/15, they can get decent rice elsewhere too). Now, they are forced to accept inedible junk, because they won't get them so cheap anywhere else.

Market shock can be best handled by few govt. run shops which will ensure that there is always a correctly priced alternative.

If the prices still increase for essential goods which were earlier indirectly subsidised, the government will have to take a look at whether direct cash transfer subsidy amount should be increased, and whether they can fund the increase.

I see enormous advantages in this model. This is certainly worth a try - even if it has been introduced by a Congress govt. for cynical political gains.


  1. Well said, Badri. Especially on Ration shop, the shop keeper won't provide remaining balance from what we purchase. Say, if my balance is Rs.5/- and he return me a detergent or some products rather than the exact money. Who knows, he may get some commission if he sell those products which is not related to govt stocks.

  2. Badri, Very good thinking, not sure the current government will follow any of the suggestion.

    If people are getting free money, what's the motivation for them to work? This process will bring the next level of people to change their attitude to bring them back to level-0, so that they will also get thieir pie.

    How their kids are motivated to educate and work? Is there any expectation set here, which will motivate them to improve the standard of living?


    1. The 'free' money given is not sufficient to live a happy life. It is given to keep them off hunger and malnutrition. The only way out of poverty for them is to educate their kids and look for gainful employment including self employment. This value must be taught in the schools.

      The subsidy or direct cash has no strings attached, from what I can read. One could consider the Brazil model of conditional cash transfer, linked to children's education, certain basic healthcare initiatives etc.

  3. Badri,

    Is the Direct Transfer Amount is linked/indexed to inflation ?. What i grains bought for Rs. 100/- about 10 years back, can we buy the same quantity/quality for Rs.100/- today also ?.

    I think that this Direct Transfer is a ploy by Government to reduce the fiscal deficit. As inflation grows, government won't increase direct transfer amount or it will increase only marginally (will not indexed to inflation). The poor will suffer.

    For eg. You should also be knowing that the scholarships offered by state governments and their criteria must be atleast 15/20 years old. Scholarship criteria is almost like Rs.12,000/- annual income which was set long long ago. So i don't think this direct transfer will work for the benefit of poor.


    1. It is just proposed now. I am sure there will have to be indexation linked to inflation. At the same time, there should be clear procedures for withdrawing the cash under certain circumstances. It should not become an entitlement forever. That will put a huge burden on the rest of the people.

      I am unclear how you can say this will not help the poor - just based on the argument on inflation, not knowing how government will deal with this aspect.

  4. In USA, the welfare (food stamps) are now given in the form of Debit cards and people can use in any shops and super market for food and necessary household items but not anything they like as the system tracks for what it is used and where. They had problems initially as I read once a lady used the card in 'Hawaii'. But now they have tightened the system as people cannot use for other than it is originally intended.I totally understand in India we don't have infrastructure to do these kind of things.