2024

Context: The article discusses the revival of the Nyuntam Aay Yojana (NYAY), a minimum income scheme, by the Indian National Congress party in preparation for the 2024 general elections. NYAY promises annual cash transfers of Rs 60,000-70,000 to women. The scheme was initially a part of the Congress's 2019 manifesto, targeting the poorest 20% of Indian families.

The article concludes by emphasizing the importance of effective implementation for such direct benefit transfer programs and poses the question of whether direct transfers are a valid policy choice.

In terms of outlays, central government spends around 9% on subsidies

So in the following article we are going to understand: 

• What is a subsidy 
• Main challenges in the Pre DBT era subsidies
• Advantages of DBT mechanism
• Challenges in the DBT regime
• Universal Basic Income

What is a subsidy?

• A subsidy or government incentive is a type of government expenditure for individuals and households, as well as businesses with the aim of stabilizing the economy. It ensures that individuals and households are viable by having access to essential goods and services while giving businesses the opportunity to stay afloat and/or competitive. 
• The Indian government provides subsidies across sectors, including agriculture, food distribution, fuel, social welfare, export promotion, power, education, healthcare, and housing, with initiatives such as fertilizer and crop insurance subsidies, LPG subsidies, direct benefit transfers, export incentives, power and renewable energy subsidies, scholarships, medical subsidies, and housing interest subsidies.

Earlier mechanism to deliver subsidy

Main challenges in the Pre DBT era subsidies: 

• Leakages:
  • It was a significant concern, as beneficiaries were not accurately identified, leading to ghost beneficiaries or duplications.
  • Lack of proper verification mechanisms allowed for the inclusion of ineligible recipients, resulting in resources being diverted away from the intended beneficiaries.
  • According to a World Bank report, leakages in the Public Distribution System (PDS) were estimated to be as high as 40% in some states before the implementation of DBT (World Bank, 2015).
• Middlemen and Corruption:
  • It often led to corruption and diversion of funds. The manual processes involved in subsidy distribution provided opportunities for corrupt practices, as middlemen exploited loopholes in the system.
• Inefficient Targeting: (Inclusion and exclusion error)
  • The traditional subsidy system's imprecise targeting mechanisms resulted in the provision of subsidies to individuals who did not genuinely require them, leading to the dispersion of financial resources broadly rather than reaching those who needed them the most. At the same time a lot of deserving beneficiaries could not be included. 
  • The Socio-Economic and Caste Census 2011 highlighted the inefficiencies in targeting, with a large number of undeserving households receiving subsidies (SECC, 2011).
• Delay in Payment:
  • The conventional subsidy system was often plagued by delays in the disbursement of funds to the beneficiaries.
  • Delays in subsidy payments could have severe consequences for individuals dependent on those funds, particularly in sectors like agriculture.
• Lack of Transparency:
  • It was evident in the absence of real-time tracking mechanisms for subsidy distribution.
• Financial Burden on Government:
  • The Economic Survey of India 2014-15 pointed out that the subsidy burden on the government was unsustainable, with leakages contributing to the fiscal strain (Economic Survey, 2014-15).

What is DBT?

• The DBT(Direct Beneficiary Transfer) is a scheme, where the welfare benefits provided by the Government are directly credited to the bank or postal account of the accurately identified beneficiary. The introduction of Direct Benefit Transfer (DBT) addressed these challenges by leveraging technology, Aadhaar, and bank accounts to streamline subsidy distribution, reduce leakages, and enhance the overall efficiency of welfare programs. Various studies and reports have since highlighted the positive impact of DBT in curbing corruption, improving targeting, and ensuring that subsidies reach the intended beneficiaries effectively.

Advantages of DBT mechanism:

• Massive reduction in leakages: DBT mechanism reduces the leakages of welfare benefits.
• Inclusive: Providing welfare benefits through cash transfer directly to the bank accounts of the beneficiaries is more inclusive compared to the in-kind benefits as it can cover more beneficiaries overcoming the geographical/ topographical challenges. 
• Cost-effective: Providing subsidies through cash transfers is cost-effective as it avoids the logistic costs involved in distribution of subsidised goods.
  • For example: The government estimated a gain of nearly ₹37,000 crore during the financial year 2019-20 through the Direct Benefit Transfer (DBT) mechanism.
  • Compare it to non DBT scheme which is distribution of subsidised food grains under PDS involves cost of procurement, storage and distribution. 
• Choice to the beneficiary: Rather than providing welfare benefits in-kind/subsidised goods, DBT provides choice to the beneficiary to purchase goods or service of his choice from the market.
• Addresses regressive nature of some subsidies: Most of the subsidies are regressive in nature benefiting the richer households more than the poor. Earlier LPG subsidies benefited rich more than the poor as rich consumed more LPG cylinders than the poor households. Introduction of DBT enabled the government to put a ceiling on the subsidy benefits provided to a household. 
• Doesn’t distort the market: Many subsidies provided in India involve price interventions. Such price interventions can distort the incentives of producers to increase their efficiency.
  • E.g., Fertiliser subsidies disincentivised many vintage fertilizer plants to improve their efficiency as they are assured of getting compensated for the difference between the cost of production and government’s determined subsidised price. The inefficient firms fail to optimally utilize the scarce resources like Natural gas.

Challenges in the DBT regime:

• Inclusion/Exclusion errors: Status of beneficiary is dynamic. The aim of social protection is to ensure that person comes out of below poverty at some point of time. But absence of continuous evaluation of schemes and their beneficiaries results in providing benefits to unintended beneficiaries. For example, most of the welfare benefits provided today are based on Socio economic Caste Census survey conducted in 2011.
• Misutilization: The DBT mechanism for providing welfare benefits are often criticised for their potential misuse by the beneficiary, as there is a chance that the cash is not utilized for the intended purpose. 
• Inflation: Providing subsidies through direct cash transfer schemes may give more choice for the beneficiaries to consume goods and services from the market, but expose them to the market volatilities like inflation. 

Often times UBI is suggested as a measure to resolve issues being faced by DBT. 

Universal Basic Income

• Under a UBI, the government gives a “basic” income to every citizen in the country — from the richest person to the poorest one, regardless of whether they work or not. 
• But there is a flip side to UBI: The government also rolls back all types of subsidies — from food to fertiliser to train tickets to medical bills.
  • The idea is simple: Just give everyone a minimum income amount, cut down the bureaucratic costs involved in running scores of welfare programmes, and simply tax everyone in such a manner as to fund the UBI. The truly needy people will get a minimum help while anyone who doesn’t actually need the UBI help will find it taxed away.

The discussion questions the feasibility of UBI due to affordability issues and the political challenges associated with reducing existing subsidies. It notes the persistence of direct benefit transfers in Indian politics, with both the Congress and the ruling party implementing similar schemes.

The article explores the argument for providing cash directly to the poor, challenging traditional notions that doing so would make people lazy. It cites examples from developing countries where direct cash transfers have been successful in alleviating poverty and stimulating local economies.

Context: Recently International Monetary Fund (IMF) has raised concerns about the long-term sustainability of India's debts. It cautioned that general government debt is likely to exceed 100 percent of India's gross domestic product (GDP) in the near future. In this context let us discuss the need for managing public debt in India and how far India’s debt levels are sustainable.

Central government's debt stood at 57% of GDP at the end of March 2023(General government debt is around 85% of GDP) and the ratio of public debt to GDP is expected to increase over the next financial year.

Need to manage public debt: 

• Interest Burden: In FY22, interest payments accounted for 20% of Centre's total expenditure. Using substantial resources for interest payment of previous debt reduces government funds available for investment in infrastructure and critical public services.
• Cost of Borrowing: Accumulation of large amount of debt can erode government's credibility in financial markets and lead to higher interest rates on new borrowings.
• Crowding out of Private Investment: If government borrows excessively, it competes with private borrowers for available funds in financial market. This leads to higher interest rates for borrowing and may discourage private sector from taking loans.
• Capital Flight: High-level of public debt can erode investor confidence and this may lead to reduction in both Foreign Institutional and Foreign Direct Investments.
• Fiscal Capacity: Excessive debt can impact government's fiscal capacity and can lead to trade-off between Revenue Expenditure and Capital Expenditure.
• Inflationary Pressures: Excessive borrowing from Central bank can lead to increase in money supply which in turn can cause inflationary pressures.

Sustainability of India’s debt can be assessed by the factors, below:

• Low currency risk: Till March 2021, 95% of Government's total net liabilities were denominated in domestic currency, and 5% constituted sovereign external debt, implying low currency risk.
• Low interest risk: Till March 2021, Public debt in India was primarily contracted at fixed-interest rates, with floating internal debt constituting only 1.7% of GDP, thus, insulating debt portfolio from interest rate volatility.
•  Maturity of debt: Over last few years, proportion of dated securities maturing in less than five years has declined, whereas long-term securities have shown an increasing trend, thus reducing rollover risk in medium-term.
• Stable government’s debt profile without undue pressure on yields as majority of outstanding debt of government(G-secs) is subscribed by commercial banks, insurance companies and provident funds.
• Interest rate growth differential: IRGD refers to the difference between the average interest rate that governments pay on their debt and the (nominal) growth rate of the economy. This has been negative for India which implies higher growth rate viz-a-viz interest rate, hence, public debt comes with low fiscal costs and an eventual decline in debt-to-GDP ratio.

Thus, India should pursue counter-cyclical fiscal policy and take up debt in times of crisis to boost economic growth in a sustainable manner.