Both the Central and State Government subsidize the price of wide range of products with the expressed intention of making them affordable for the poor. Rice, wheat, pulses, sugar kerosene, LPG, naptha, water, electricity, diesel, fertilizer, iron ore, railways- these are just a few of the commodities and services that the Government subsidises.          

There is always a question over how much of these benefits actually reach the poor.

• Price subsidies  are often regressive: It means that a rich household benefits more from the subsidy than a poor household.
  • Price subsidies in electricity can only benefit the (relatively wealthy) 67.2 percent of household that are electrified.
  • The poorest 50 percent of household consume only 25 percent of LPG.
  • Majority (51 percent) of subsidized kerosene is consumed by the non-poor and almost 15 percent of subsidized kerosene is actually consumed by relatively well-off (the richest 40 percent).
  • A large fraction of price subsidies allocated to water utilities- upto 85 percent- are spent on subsidizing private taps when 60 percent of poor household get their water from public taps.
  • Controlled rail prices actually provide more benefits for wealthy household than poor households.

• Price subsidies can distort markets in ways that ultimately hurt the poor.
  • This contributes to food price inflation that disproportionately hurts poor household who tend to have uncertain income streams and lack the assets to weather economic shocks.
  • High MSPs and price subsidies for water together lead to water-intensive cultivation that causes water tables to drop, which hurts farmers, especially those without irrigation.
  • In order to cross subsidise low passenger fares, fright tariffs in railways are among the highest in the world. This reduces the competitiveness of Indian manufacturing and raises the cost of manufactured goods that all households, including the poor, consume.
  • Benefits from fertilizer price subsidies probably accrue to the fertilizer manufacturer and richer farmer, not the intended beneficiary, the farmer.
• Leakages seriously undermine the effectiveness of product subsidies.
  • Recent academic research on the subject of PDS leakages (kerosene, rice, wheat etc.) has found that leakages are falling through still unacceptably high.

PDS LEAKAGES

Items	Rs. (In crores)
Kerosene	10000
Rice	5800
Wheat	12600

THE POSSIBILITIES OFFERED BY CASH TRANSFERS

Recent experimental evidence documents that unconditional cash transfers- if targeted well- can boost household consumption and asset ownership, reduce food security problems for the ultra-poor and opportunities for leakage.

THE JAM NUMBER TRINITY SOLUTION

The JAM Number Trinity- Jan Dhan Yojana, Aadhaar and Mobile numbers- allows the state to offer this support to poor households in a targeted and less distortive way.

• As of December 2013 over 720 million citizens had been allocated an Aadhaar card. By December 2015 the total number of Aadhaar enrolments in the country is expected to exceed 1 billion. Linking the Aadhaar Number to an active bank account is key to implementing income transfers.
• With the introduction of Jan Dhan Yojana, the number of bank accounts is expected to increase further and offering greater opportunities to target and transfer financial resources to the poor.

Two alternative financial delivery mechanisms below:

• Mobile Money
  • With over 900 million cell phone users and close to 600 million unique users, mobile money offers a complementary mechanism of delivering direct benefits to a large proportion of the population. And this number is increasing at a rate of 2.82 million per month.
  • Aadhaar registrations include the mobile numbers of a customer, the operational bottlenecks required to connect mobile numbers with unique identification codes is also small.

• Post Offices
  • India has the largest Postal Network in the world with over 1,55,015 Post Offices of which (89.76 percent) are in the rural areas.
  • Similar to the mobile money framework, the Post Office can seamlessly fit into the Aadhaar linked benefits-transfer architecture by applying for an IFSC code which will allow post offices to start seeding Aadhaar linked accounts.

Converting all subsidies into direct benefit transfers is therefore a laudable goal of government policy. Even as it focuses on second generation and third generation reforms in factor markets, India will then be able to complete the basic first generation of economic reforms.

Targeted cash transfers via JAM enable more precise subsidy delivery and reduce leakages through digital and postal channels. The memorandum argues that many price subsidies are regressive and leak-prone, and recommends converting subsidies into Direct Benefit Transfers using the JAM Number Trinity-Jan Dhan accounts, Aadhaar and mobile numbers-to improve targeting and reduce leakage through delivery channels such as mobile money and Aadhaar-linked post office accounts.