Sure, DBT Will Give A Huge Spending Boost, But It Ain’t Happening Yet

The great spending boost that the economy is likely to get from food and fertilizer subsidy being given in cash may just have to wait.

What will the full rollout of cash payouts in place of subsidised food grains mean for the economy? A Rs 45,500 crore income increase for targeted households, says DBT: Opportunidades India, a report put out by Ambit Capital on November 4.

This, the report says, could translate into a spending boost in the range of Rs 6,800-18,000 crore, assuming that 15-40 per cent of this incremental income will be spent on consumer non-durables (from food to soaps to cosmetics).

There could also be a multiplier effect, with households spending the extra income on productivity-enhancing activities like purchasing nutrients for livestock, nutrients for farms and productive assets. The demand will also spur the local economy to supply what people will want to buy.

The report also expects another multiplier effect in terms of government spending. The direct benefit transfer (DBT) will help the government, it estimates, reduce the food subsidy bill by 20 per cent, thus saving Rs 25,000 crore (the cost of procuring and reaching subsidised food grains to eligible families). At least part of this could get channelled into spending on infrastructure, which will also have a trickle down effect, the report argues. The report could be on a bit of a weak ground here – this assumes good intentions on the government’s part.

Extending DBT to fertiliser and petroleum could, the report projects, mean a potential saving of Rs 47,600 crore in 2016-17 going up to Rs 66,700 crore in 2019-20 (0.3 per cent of gross domestic product).

In February, a Crisil Insight report, Cascading Cash, Catalysing Consumption, had also highlighted the spending push that cash transfers can give to the economy.

But this spending boost depends on a full rollout of cash transfers in lieu of food. The Ambit report cites a government commitment to roll out direct benefit transfer of food subsidies from 2016-17 onwards. Unfortunately, that may just not happen.

The government is very clear that the DBT in the case of food will not involve giving cash in lieu of food grains. It is not going beyond experimenting with the idea. This is an area which will yield the biggest saving to the government and the largest spending push.

In September, two pilot programmes on cash transfers in lieu of food started in the Union Territories of Chandigarh and Puducherry. These are very small pilots. A third pilot was to start in Dadra and Nagar Haveli but that has not happened. The central government has said it will help any state that wants to undertake a pilot programme on cash transfers, but barring Rajasthan no state has shown interest. But Rajasthan too has not moved beyond this expression of interest.

The DBT pilot in Dadra and Nagar Haveli did not take off along with the other two because even the beneficiaries were not willing to participate in it. People were getting their monthly rations without much difficulty and did not want the existing arrangements to be disturbed. The other factor that works in favour of the existing system is that the ration shops are closer than the banks.

While it might be relatively easy to roll out cash transfer programmes in well-administered and largely urban areas, that may not be the case in states with large rural areas and where governance systems are weak. In many states, the list of beneficiaries of the public distribution system is not digitised and there are a large number of bogus ration card holders. States are loath to clean up the list, because of the political implications.

There are also issues related to the financial infrastructure that is to be put in place. Bank branches may have been opened and Jan Dhan accounts created but banks are just not equipped to handle the additional work pressure that even pilot programmes will entail. Seeding of bank accounts with Aadhaar and payment gateways are still problematic.

Above all, the issue of what happens to the procurement and distribution chain has not been resolved. A complete shift to cash transfers is incompatible with the current system where the government procures and distributes food grains. Even if it hands over distribution to the private sector, the problem of minimum support prices and procuring from farmers will still have to be dealt with. Even Shanta Kumar, who headed the committee on restructuring the Food Corporation of India, had admitted that MSP and procurement will need to continue to support farmers. He had suggested that food stocks in excess of buffer norms could be used to regulate and stabilize the market. But this wholesale reform of the food economy is not something that the government is likely to get into right now.

So cash-for-food is not something the government is going to push very aggressively. The DBT in the case of food is going to be limited to Aadhaar-linked ration cards and biometric-based transactions, where the beneficiary will have to visit the ration shop and get the monthly rations after verifying identity through a POS machine.

Cash transfers for fertilizer subsidy is also not on the cards. Right now, the fertilizer subsidy is a producer subsidy; a system where farmers get cash will necessitate a revamping of the existing model, again not something the government is getting into right now.

This means that DBT will be limited to schemes where the government is anyway paying out cash – NREGA wages, housing subsidies, scholarships, pensions. Instead of people going to a government office and collecting cash or cheques (which provides scope for corruption, harassment and diversion), the money will now go directly into bank accounts. Shifting to DBT in these cases will not mean more money in people’s hands; getting the money will only become easier.

So the great spending boost that the economy is likely to get from food and fertilizer subsidy being given in cash may just have to wait.