A suggestion for a more efficient subsidy regime.
In India, we are facing a situation of subsidy costs spiraling out of control. Today the subsidies are for food-grains, kerosene, LPG, diesel and fertilizers (in case of farmers) and even interest(interest subvention). I suppose there also may be other type of subsidies, which lead to dual pricing with resultant distortion of markets, wrong targeting and leaks. The current subsidy regime is unsustainable. But considering the poverty levels, subsidies cannot be stopped all together. At the same time as per the latest economic survey, those who consume more, end-up getting more subsidies, and large portion of the population gets smaller percentage of subsidies. To the bottom 80 percent of passenger households only 28.1% of benefits accrue, due to cheaper Railway fares. The bottom 50% of households consumes only 25% of LPG.
We need a scheme to manage Social Benefits creatively. I propose that regime of subsidies be replaced by a Flexible Social Benefit Plan.
We need to devise a Flexible Social Benefit Plan (FSBP). Here each family gets a specific amount every month that can be used only for selected expense categories. Each family can use this as per their needs and as per their choice. We can use a scheme similar to credit card rewards. So if a person does not need cheap rice, he can use the amount for school education.
Direct Cash Transfer using JAM Trinity (Jan-Dhan, Aadhaar and Moible) and FSBP can go in unison, by using a debit card that recognizes certain category of expenses as Social Benefits. The Flexible Benefit Plans are already part of compensation plans of employees in the private sector and are well-accepted.
While Direct Cash Transfer in lieu of individual subsidies is being implemented, FSBP can improve on it. Here are some reasons FSBP can do better.
- Direct cash transfer may get used for alcoholism or expenses that state did not intend, leaving a family still in distress.
- Giving flexibility on use of social benefit will also reduce price distortion in markets. Since the benefits are spread across multiple categories of items, it is unlikely to produce inflation.
- By liberating markets from dual pricing scheme, we can attract more competition.
- We will know, given a choice, what is the mix of social benefits people need, thereby optimizing on procurement/supply and evening out prices across categories. This will lead to overall reduction in the “social cost” borne by the government.
- We can expand the allowed categories to include education and health and empower people to get out of poverty trap.
- We can allow for FSBP points to be accumulated and realized at their convenience. The bouquet of benefits can be expanded to include use of services such as Railway fares and any service where Government incurs social cost.
- We can also enable families to realize social benefits in instruments like PF, so that those whose current needs are met can save for rainy day.
The implementation can be through a Debit Card, coupon/pass book or mobile money.