Sunday, 1 April 2012

Cash over Price Control

I had made an interesting trip to Alwar, the location of a pilot project on direct cash transfer of subsidies that finance minister Pranab Mukherjee mentioned in his budget speech. This one related to kerosene subsidy. The project started only in December so it is probably too early to draw any conclusive lessons from it but it definitely shows a way forward.
I had gone to Alwar to do a story on the project for The Telegraph. Following is the link to the story. I had to stick to a tyrannical word count limit but have the more detailed piece below the link.

Sorry, Cash Only

There’s a small crowd outside Rohitash Kumar’s fair price shop at Gunsar village in the Kotkasim block of Rajasthan's Alwar district.  The monthly supply of subsidised kerosene has arrived and villagers have come for their quota of three litres each.  
Shyam Lal hands over Rs 135 and gets his can filled -- almost Rs 90 more than what those in other blocks of Alwar pay for the same amount of kerosene. 
No, the tailor with a below poverty line (BPL) ration card can't afford to pay Rs 44.50 for a litre of kerosene, three times more than the Rs 15.25 that people in the rest of Rajasthan pay. It’s just that the district administration refunds the extra money he has paid, directly into his bank account. So he winds up paying the same as others in the district.
In December 2011, a dramatic experiment to deliver subsidies directly to the poor, in cash, started in Kotkasim.  So far, the central government has been subsidising fuel prices by capping the prices at which they are sold in the market.
Kerosene is now sold at Rs 44.50 a litre in all fair price shops in Kotkasim. That’s the open market price set by oil companies. However, it is sold through the public distribution system (PDS) at a highly subsidized price (Rs 15.25 in Rajasthan) and the central government pays the difference to the oil companies. For the pilot project at Kotkasim, the central government gave the subsidy amount to the district administration which transfers it to eligible ration card holders.
Why make a poor person pay extra and then return the amount?  Direct cash transfers are widely believed to be a more efficient way of helping the poor, than prices artificially low. For as the Economic Survey of 2010-2011 points out, government price controls "invites adulteration, pilferage and corruption".
Kerosene is a case in point. The interim report of the government's Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertilisers pointed out that the use of kerosene for cooking in urban and rural areas has fallen -- proof that subsidised kerosene was being diverted for other purposes, including to adulterate diesel.  Letting everyone buy at the market rate and then compensating the poor through cash transfers, both documents say, not only checks such diversion but also ensures that only the poor get subsidised goods.
In 2011, the petroleum and natural gas ministry invited state governments to take up direct subsidy experiments. Rajasthan pitched for the project on kerosene subsidy and picked Alwar for the experiment.
Alwar collector Ashutosh A.T. Pednekar and district supply office Lalit Jain spent two months on awareness campaigns, holding lengthy sessions with consumers, ration shop owners, wholesale dealers as well as representatives of rural local bodies. Finally, the backing of the zilla pramukh and the village pradhan – both women – saw the project taking off.
Of the 25,000 ration card holders in Kotkasim, those with a double gas connection were weeded out. The project now covers around 20,000 ration card holders. All of them were told to open zero-balance, no-frills bank accounts into which the subsidy would be deposited (even if they had an existing bank account). Till March end, 16,000 such accounts had been opened.  Interestingly, nearly 90 per cent of the card holders did not have a bank account till then and were brought into mainstream banking. “We never expected that this project would help us in financial inclusion,” says Pednekar.
There are some minor glitches that need ironing out. Bank accounts have to be opened in the name of the ration card holder, who is the head of the household. In a few cases, the head of the household has died and the name has not been changed. Such families cannot avail of the subsidy.
The administration is planning to integrate the smart cards issued under the National Rural Employment Guarantee Scheme (NREGS) with this system. Then the subsidy can be transferred directly into the NREGS accounts, avoiding the need to open new accounts. It is also considering roping in the business correspondents of banks who will come to individual’s homes and operate the accounts, as well as mobile banking, considering the penetration of mobile phones is very high. Hari Prasad, a BPL ration card holder, hasn’t availed of the scheme because he hasn’t had time to go to the bank and see if the advance subsidy has been deposited. The Rajasthan Grameen Bank (which has opened the bulk of the accounts) doesn’t have an sms alert facility, he complains!
Yet the project had to battle with public scepticism. When told they would be compensated after they bought kerosene, people flatly refused to play along. Nor were they confident when told they would be given one month’s subsidy in advance. Pednekar than got the state government’s sanction to give three months’ subsidy in advance. With accounts getting credited with Rs 263 (three months subsidy), resistance from the consumers disappeared. Those with a single gas connection get a lower subsidy.
The extent of diversion of subsidised kerosene earlier soon became evident. The block is allotted 84,000 litres of kerosene a month. Before the project started, the entire stock would get sold. Since December, however, monthly sales have averaged 22,000 litres, around a quarter of the allocation. This brings down the subsidy bill by three-quarters. Currently, though, the saving is only notional as advance subsidy has gone into all bank accounts.
How did this happen? Earlier, people would collect other’s ration cards and use them to buy subsidised kerosene. That’s no longer possible. Anyone going to ration shops in Kotkasim now has to pay Rs 44.50 a litre. But since the subsidy goes into the bank account of the ration card holder, the actual purchaser only gets a higher bill. “Once I get the money, why will I give it to someone else,” laughs Subhash, another Gunsar villager. With the market price of kerosene higher than that of diesel (Rs 42 a litre) it no longer makes sense to buy it as a substitute for the latter.
But the authorities can’t track what happens to the kerosene once it is sold. So, a person buying kerosene for Rs 15.25 can still sell it for, say Rs 25, pocketing both the government subsidy and a Rs 10 profit. That’s possible, admits Jain, but the whole process is more inconvenient. Going to the shop with a bunch of ration cards and a large container is far easier and more cost-effective than collecting three litres each from individuals. What’s more the price difference between kerosene and diesel also comes down, since the ration card holder is selling it at a Rs 10 premium, instead of just handing over his card as he did earlier. “The whole transaction has become less attractive,” he points out.
To be sure, not all the reduced sales are a sign of diversion. Many eligible ration card holders who never took their kerosene quota are not availing of the scheme. The government giving them close to Rs 90 every month is not incentive enough. Others who have got the subsidy in their accounts but are using part of it to pay someone to cut the mustard stalks in their fields for use as fuel! They are pocketing the subsidy and not buying kerosene as well.   Some card holders are migrant labourers working outside Alwar who come home only during the agricultural season. Sales could pick up then.
But there are also people like Rani Devi of Kotkasim village who genuinely need more than the monthly quota of three litres. She used to borrow her neighbours’ cards and buy more than her quota. Since December, however, she hasn’t been able to do so. She now has to pay the market price for the extra kerosene. “How can I afford it,” she laments.
The project, notes Pednekar, has helped the administration sift genuine users from non-users. Since close to 70 per cent of kerosene allocation to Kotkasim is not being sold, the administration is thinking of doubling the monthly allocation to six litres a month, which will help people like Rani. The administration plans to study the kerosene lifting pattern closely, identify the non-users and then ask them why they are not buying kerosene.
The reduced sales have cut the earnings of fair price shop owners. Rohitash and Mahipal, the manager of a fair price shop in Kotkasim village, used to sell close to 3,000 litres a month before the project started. Since December, however, monthly sales have averaged less than 500 litres. With a commission of 90 paise a litre, earnings from kerosene have plunged from Rs 2,700 a month to around Rs 450 a month. Anticipating this, dealers and wholesalers had put up stiff resistance to the project. The administration has now decided to allow them to sell non-PDS commodities like tea, salt, fortified flour under the state government’s Raj brand name. The government, says Pednekar, is planning to add more products and also help spruce up the shops.
Could this become the model for all future subsidy delivery? The initial results are too tentative to base policy decisions on, cautions Rajasthan’s principal secretary, food and civil supplies, J. C. Mohanty. The experience in Alwar, which is a relatively better off district, will be different from some of Rajasthan’s poorer and backward districts, he points out. There may be more ghost customers in Alwar than in some of the poorer districts where the share of genuine customers may be more. The state government will get the project evaluated by a professional research body once it completes a year. It has, however, taken up a petroleum ministry offer for a one-time grant of Rs 100 crore to implement the system state-wide. The petroleum ministry made this offer to the food and civil supplies secretaries of all states at meeting on 16 March. Apart from Rajasthan, Karnataka, Himachal Pradesh, Uttarakhand and Maharashtra have also agreed.  
A universal cash transfer scheme has its share of problems. Many poor people don’t have ration cards. Mohammed Ishaq, a roadside tailor in Delhi suburb Dwarka, has been running around for one for two years now. Rekha, a maidservant, has got a ration card but there is no fair price shop in the unauthorised colony in south-west Delhi where she lives. Nor has she been able to open a bank account. A direct cash transfer system will leave such people out of the benefits of subsidy completely.
The pilot project has one universal lesson, though. “The biggest learning is that it is very easy to enlist political and public support for reforms like this once things are explained properly,” says Mohanty. Indeed, now the zilla pramukh is asking for a similar cash transfer for domestic gas cylinders as well.
Change, clearly, is in the air.