The finance minister’s Budget speech proposed a radical change in subsidies: instead of trying (and failing) to provide subsidized goods to the needy, the government would provide cash transfers. This would cut leakages in subsidies, which former Prime Minister Rajiv Gandhi estimated at 85% of outlays.
By June, a task force headed by Nandan Nilekani is to work out modalities for the scheme using biometric smart cards. This will prepare the ground for launching cash transfers in lieu of subsidized kerosene, LPG (cooking gas) and fertilizers by March 2012.
This deadline looks too hasty. I have long urged cash subsidies to replace subsidized goods and services that do not reach the needy. Yet i must warn that many pitfalls lie ahead. Scoundrels who have found a thousand ways to sabotage existing programmes will try to sabotage cash transfers too. We need to proceed cautiously, constantly devising new ways to combat new attempts at sabotage. Speed will be the enemy of success.
In the last decade, conditional cash transfers have worked well in Brazil, Mexico and Chile. These countries give poor families cash transfers subject to conditions like sending children to school and health clinics. However, these are relatively high-income countries with almost universal literacy and 75-80 % urbanization. This makes it relatively easy to identify, target and monitor cash transfers.
Conditions are far less favourable in India , which is still 70% rural, 30% illiterate, largely unbanked, and with zero or unreliable electricity in most rural areas. New biometric technology has shown a way forward. Telecom has penetrated even non-electric villages (cellphones can be charged by truck batteries). This makes mobile banking possible. Every villager can get a mobile bank account (though universal coverage could take years) that he or she can access through biometric technology, using fingerprints and irises.
Biometric smart cards will reduce, but by no means eliminate, leakages. There will still be problems of exclusion —the poor won’t get cards because of insufficient awareness, or because they are too intimidated by the formal application process, including upfront bribes. There will also be problems of inclusion —upper-caste sarpanches and their cronies will claim to be the needy. Such problems can be reduced by deploying NGOs as social auditors at the time of the smart card issue, but leakages will remain.
As time goes by, some people will get richer or poorer, some will die and others will be born. Until a really good state apparatus is created for updating data constantly, serious gaps will start appearing in the beneficiary list.
Rural cellphone towers are proliferating fast and will soon provide almost universal telecom availability, save in the most remote areas. This will facilitate mobile banking using biometric cards. But the process will need 3G broadband to be really effective, and this will take time.
Corrupt officials will continue demanding bribes —for issuing smart cards, for opening a bank account, even for cash transactions. Thugs have long confiscated ration cards of the poor, and can extort money from smart card holders too.
Fake cards and ghost cards of all sorts have been used in the past by crooks. Biometrics will make the use of fake cards more difficult, but not impossible.
So, any attempt to provide subsidies through biometric cash transfers will face challenges galore. The Nilekani committee cannot possibly anticipate and guard against all possible hanky-panky. An attempt to launch cash transfers nationally by 2012 will mean a thousand glitches and scams, giving the scheme a bad name.
Instead, the government should launch small pilot projects in 10-20 districts — some urban, some rural and some in remote areas without electricity. Some pilots can focus on a single item (kerosene, LPG or fertilizer), while other cases can cover all three.
Such experimentation will reveal a hundred glitches that need to be fixed before scaling up. Suitably modified pilot schemes should then be extended to more districts, and more glitches will come to light that need fixing. Only after extensive modification in the light of experience should entire states be covered. National scaling up, including remote states in the northeast, will probably take three years or more.
Most districts in the initial phase of experimentation should have good existing infrastructure. These will have the least glitches and shortcomings. It is important to start with a model that demonstrably works and gives the scheme a good name. This model can gradually be modified and extended to less promising areas.
Is it worth spending huge sums on a new technology that will still leak? Yes, indeed. Forget perfection, we should be happy to reduce leakages from 85% to 15%.