India’s extensive subsidy programs suffer from considerable leakages and in recent years, numerous initiatives have been undertaken in order to minimize the leakages and ensure successful targeting.
Three years ago, India began reforming some of its subsidy programs to a Direct Benefit Transfer (DBT) system that transfers government benefits in the form of cash directly into recipients’ bank accounts. Under this initiative, the recipient uses the credit to purchase the non-subsidized (market) price of a good as opposed to purchasing the good, without receiving credit, at subsidized prices. The DBT is built upon a technological platform linking bank accounts, unique identification and mobile phone numbers. This is expected to improve targeting as the unique identification number determines eligibility to the subsidies and reduces the possibility of leakages as funds are directly transferred into a recipient’s bank account.
The first pilots involving DBT were launched in 2013 involving cash transfers for liquefied petroleum gas to Indian consumers. The Government has highlighted that this program has had numerous successes and has led to significant savings which has incentivized the Government to expand DBT to other subsidy programs. An independent review found high levels of customer satisfaction with this scheme with around 75 percent of the consumers enrolled in the scheme reporting receiving the subsidy in their bank account. Over the past year, two Union territories, Puducherry and Chandigarh, have implemented DBT programs in their PDS grain procurement programs.
Based on these successes, the Government of India is committed to the further scaling up of DBT projects. At a recent conference India’s finance minister Arun Jaitley expressed his belief that direct transfer payments are the future of India’s subsidy programs with the government aiming to more than double the number of DBT schemes in operation to 147 by March 2017. The Government is expected to start DBT trials for fertilizer subsidies in 16 districts in the near future. This is significant as effective fertilizer use is expected to support agricultural productivity increases in India. In the 2016-2017 budget the government has allocated around USD $11 billion for the entire fertilizer subsidy.
However, the scaling up of DBT across India faces a number of significant challenges. For the DBT system to work effectively, all recipients require financial access/inclusivity. The Government is pursuing financial inclusion through its Pradhan Mantri Jan-Dan Yojana program which aims for universal access to banking facilities with at least one basic banking account for every household. According to Government data, 240 million bank accounts have been opened so far as part of this program. However, there are concerns over a large number of dormant bank accounts (accounts with no funds), currently standing at 24 percent. Moreover, there are also concerns over the capacity of the country’s banking infrastructure to disburse funds to recipients effectively. India currently only has around 10,5 bank branches per 100,000 adults which is likely to cause many recipients to need to travel long distances to withdraw their funds, especially in remote rural areas.
Similarly, for the DBT to ensure effective targeting the Government has pursued its Aadhar program which entitles all Indian adults to unique identification numbers which are linked to recipients’ bank accounts thereby ensuring that the correct recipient receives the subsidy. Currently, around 75 percent of all Indian adults have been registered in the system, however only around 48 percent of bank accounts opened through the Pradhan Mantri Jan - Dhan Yojana are linked to Aadhar.
The DBT system is integrated with Prime Minister Narendra Modi’s drive for a digital India. Recipients are informed of their payments through alerts sent through a mobile phone. Similarly, a DBT platform was launched in August with the intention of allowing recipients and stakeholders to keep track of DBT developments. However, many rural parts of India have poor network coverage and not all recipients are likely to have mobile phones highlighting that further extensive and reliable network coverage and digital infrastructure will need to be developed as DBT programs expand.
By: Bas Paris