Rebooting India: Realizing a Billion Aspirations (13 page)

Prior to the 2014 Lok Sabha elections, the scheme was suspended by the government, which appointed a committee to study its effects. The Dhande Committee studied the effectiveness of the direct benefits system, and strongly recommended that it be restarted, with some minor tweaks to make it more consumer-friendly.
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Now branded as PaHaL (Pratyaksha Hastaantarit Laabh, or Direct Benefits Transfer), the direct transfer scheme was restarted and rolled out on an all-India basis on 1 January 2015. Prime Minister Narendra Modi commented, ‘The PaHaL Yojana will bring an end to black marketing, and subsidies will reach people more effectively. Its role in nation-building is important.’
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Thanks to these initiatives, for the first time, three hydrocarbons—petrol, diesel and LPG—are sold across India at market price.

Viral visited the Gujarat State Fertilizers and Chemicals Ltd (GSFC), a Vadodara-based urea manufacturing plant, to get a first-hand picture of how the fertilizer subsidy worked on the ground. Unsurprisingly, the process turned out to be incredibly intricate and cumbersome. The government would sit down with fertilizer manufacturers to figure out the estimated demand for a given year, after which it created a ‘movement plan’, detailing how the fertilizer would be transported across the country, and provided freight trains to GSFC. Freight would be subsidized only if the company stuck to the official transport plan. Government-approved methods would be used to calculate the manufacturing cost, and the government would reimburse GSFC for the difference between this number and the subsidized retail price. The final sale price itself was determined by a piece of legislation that specified subsidies for ninety-three different grades of chemical fertilizer. The reimbursement process was complex and beset by delays, so every factory equipped itself
with an army of accountants to chase down their money; an equal number of number crunchers in the government worked on tracking these payments.

Such an antediluvian system can hardly be expected to function smoothly. All across the country, farmers regularly complain of fertilizer shortages, particularly urea. Speaking to the owner of a fertilizer shop at a village near Vadodara, Viral was told, ‘The demand is so high that as soon as the urea arrives, people buy it right off the truck—it doesn’t even enter the warehouse.’ Urea makes up nearly half of India’s fertilizer market, and 80 per cent of all urea distributed and consumed is produced indigenously. The demand for urea is clearly driven by the fact that it’s cheap—other, unsubsidized fertilizers like diammonium phosphate are in abundant supply, but farmers are reluctant to use them since they cost more. Dumping nitrogen-based urea on their fields, farmers ignore the fact that they need to include other types of fertilizer in their arsenal if the soil is to receive the correct mix of nutrients. Speaking about the overuse of nitrogen-based fertilizers relative to other nutrient types, Ashok Gulati of the Indian Council for Research on International Economic Relations says, ‘This type of ratio is a disaster. It is keeping India from reaching the production levels that the hybrid seeds have the power to yield.’

The fertilizer industry is heavily dependent on worldwide market prices and the government’s fiscal situation, a dependence that gives rise to uncertainty and unease. Progress is often stymied by the financial disincentives that subsidies unwittingly create. Take the case of urea, which can be manufactured using either naphtha (derived from petroleum), or through a newer and cheaper process based on natural gas. Thanks to the inadequate natural gas infrastructure, plants in southern India still use the older naphtha-based process. Since it is more expensive, manufacturers receive a higher subsidy, leaving them with little incentive to move towards alternative manufacturing processes or to push for natural gas connections.

Those manufacturers who do use natural gas lay first claim to all resources, skewing the availability for other industries. When the
production of natural gas in the Krishna–Godavari basin dropped, supplies destined for urea manufacture remained unaffected whereas other industries had to make do with less or none at all. Trying to reconcile the fluctuations in natural gas prices versus the production costs of urea results in a constant state of financial flux, so much so that no new investment has been made in the fertilizer sector, either by government or by the industry.

Fertilizer subsidies have helped ensure food security by maintaining a steady baseline of agricultural productivity. However, we’ve seen that artificially low prices set in place a vicious cycle of fertilizer abuse, degradation of soil quality and declining crop yields. Trying to balance the needs of farmers against those of the manufacturers has left the government footing an enormously expensive subsidy bill—nearly Rs 730 billion in the 2014–15 Budget—while the entire fertilizer industry stagnates in the absence of any incentives to improve production, and agricultural productivity deteriorates thanks to indiscriminate and unbalanced fertilizer use.
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Dwelling upon all these concerns, the Task Force on Direct Subsidy Transfer made a series of recommendations. As in the case of LPG, the task force recommended the creation and implementation of a fertilizer transparency portal which farmers can use to track the availability of stock. The window for the application of fertilizers is short; farmers sometimes have to queue for days to buy fertilizers, and still may not receive adequate supplies, as we saw in the case of Kripa Shankar. A transparency portal will eliminate long queues and waiting times, and allow for better planning so that crop health is unaffected. A second recommendation was the sale of fertilizers at market price, first to retailers, and later to farmers themselves, using a direct transfer model.

In 2006, Seethamma from Manjunathpur, a slum area in Mysore city, would get up at four in the morning with the hope of securing cooking fuel for her family. She walked with a fuel can to the public distribution
shop (PDS) in Yadavagiri, which is two kilometres away and would wait for four to five hours until the kerosene cart arrived. She would be joined in the long line by many others, including schoolchildren. Even after such a long wait, she may not get her monthly quota of 6 litres of kerosene (reduced from 8 litres), as the kerosene cart may not come at all. She would follow the same routine in the following days until the kerosene cart arrived. At the time, PDS kerosene was sold at Rs 9 per litre, whereas diverted PDS kerosene was available in the black market for Rs 35 per litre.

Seethamma’s story was recorded in a 2010 study carried out by the International Institute for Sustainable Development that examined India’s attempts at kerosene subsidy reforms.
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It is an excellent illustration of the many problems bedevilling the Indian government’s efforts at providing cheap domestic fuel to those too poor to buy LPG. By supplying subsidized kerosene to people below the poverty line, the Government of India effectively insulates consumers from the volatility of world oil prices. For example, the kerosene subsidy per litre jumped from Rs 17 in 2011 to Rs 28 in 2012, thanks to an upsurge in world oil prices. The customer never noticed the difference since the subsidized price remained fixed; the resulting financial burden fell entirely upon the government. In 2013–14, the nation’s kerosene subsidy bill was over Rs 300 billion.

While the cost of the kerosene subsidy is borne by the central government, the PDS that actually supplies kerosene to consumers is administered by the state. As subsidized kerosene wends its way from supplier to consumer through multiple levels of government, opportunities for pilferage and adulteration arise alongside. A landmark study by the National Council of Applied Economic Research (NCAER) found that 38 per cent of all subsidized kerosene ends up in the black market. The fiscal cost of the leakages within the PDS kerosene distribution network add up to an estimated Rs 100 billion, and in a further indictment of the system’s inefficiency, cutting the PDS allocation by as much as 41 per cent would still be enough to meet the country’s kerosene consumption.

The massive discrepancy between the market value and the
subsidized price provides a fertile breeding ground for the emergence of kerosene mafias, who exploit this pricing system for their own gain. In one attempt at thwarting these criminals, a blue dye was added to subsidized kerosene so that it could not be sold for commercial use. However, the incentive for arbitrage was so high that people actually set up processing plants to remove the dye so that you couldn’t tell subsidized and regular kerosene apart. The scheme was a failure and eventually the dye-addition programme was halted. Further incentive for subversion arises from the fact that the kerosene subsidy is not uniform across the country; a person holding a Below Poverty Line (BPL) card in New Delhi is entitled to 20 litres of subsidized kerosene, whereas the same person in Bihar can only get 3 litres a month.

The supply of subsidized foodgrains through the PDS is equally inefficient; leakages in rice and wheat distribution cost nearly Rs 200 billion, while more than half of all wheat entering the PDS network is lost to pilferage. The public hunger for PDS reform was amply demonstrated in the state of Chhattisgarh, where Chief Minister Raman Singh won back-to-back elections on the strength of his initiatives to revamp the state’s PDS network. In another attempt at reform, a pilot project using Aadhaar to verify the identity of PDS beneficiaries was launched in two districts of Andhra Pradesh in 2012. Once the scheme was implemented, households received their payments ten days faster on average. According to government reports, the introduction of Aadhaar authentication saw a savings of 10–12 per cent in terms of unclaimed provisions, and a state-wide rollout could save the state government Rs 24 billion. The Economic Survey of 2014-15 pointed out that the value of the savings generated by plugging the leaks in PDS distribution was eight times more than the entire cost of implementing the programme. Harpreet Singh, commissioner of the Andhra Pradesh civil supplies department, was quoted as saying, ‘This system is helping us in exactly measuring the stock movements at the shop level on a daily basis. It makes the whole process so transparent that there is no scope for hiding any information at any level’.
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The entire PDS distribution network of the Krishna district in Andhra Pradesh now uses Aadhaar-linked
authentication; monthly savings run to the order of Rs 80 million, and A. Babu, the district collector who has driven the implementation of this scheme, says that the system is the ‘best gift to an administrator like me’.
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The recommendations made by the task force in the case of PDS subsidy reform were along similar lines as other subsidies. The first was to introduce the direct transfer scheme for kerosene subsidy in two phases, given that it is administered at both the central and state government levels. In the first stage, state governments could transfer cash to beneficiaries; in the second stage, the payments would be transferred directly to the individual’s bank account.

What other steps could be taken to overhaul the PDS network? One suggestion came from the government-organized task force for an IT strategy for PDS. Investigating the use of technology to build a modern, efficient PDS, the committee recommended setting up a professional company, the PDS Network (PDSN), which would manage everything from procuring goods to supplying them to consumers. The creation of the PDSN was announced in the 2012 Budget speech, but the idea has foundered in the absence of a champion to promote it. The Food Security Act, designed to provide subsidized foodgrains to nearly two-thirds of the country has been signed into law; the time is ripe to revive the concept of the PDSN, building a distribution system that delivers benefits to deserving citizens while curbing pilferage and fraud.

No attempt at subsidy reform can be successful unless it tackles one of the most fundamental flaws in the system—the lack of a uniform and reliable method to identify beneficiaries. With Aadhaar in the picture, the government now had in its hands a powerful tool that would allow them to deliver with precision subsidies to only those who needed them. Aadhaar came with another benefit as well: it could allow the government to track the movement of payments through the system. It could even be used to create a database that
linked all subsidies to all Aadhaar holders so that you could now see which subsidies a particular individual was claiming. This kind of cross-linked database offers enormous possibilities for both data mining and fraud detection. For example, fertilizer subsidy trends can be analysed to determine when and where fertilizer stocks should be moved around the country. A pension recipient claiming maternal benefits is a likely instance of fraud, and should be further investigated. None of these insights would be possible without building an Aadhaar-linked subsidy database.

How does the Aadhaar-based direct subsidy transfer system work? This is accomplished through an innovative application, the Aadhaar Payments Bridge that we have mentioned earlier. The APB is a centralized payments platform that allows the government to send a payment directly to an individual using only their Aadhaar number and a payment amount.

Email IDs allow you to send a message to a specific person over the internet, and mobile numbers allow you to call a specific person over the telecom network. In both cases, it doesn’t matter if the person is in the same city or on another continent. In a similar vein, the role of Aadhaar in the payments platform is to act as a ‘financial address’. It allows payments to be sent to a specific individual, irrespective of which bank they hold an account with. On one side of the platform are multiple government departments, funnelling in subsidy and welfare payments. On the other side are multiple banks, allowing customers to withdraw money. Both sides use Aadhaar as the identifier, either to send subsidies to the right person, or to ensure that the right person is claiming the money from their account. The entire system is now transparent, and every rupee can be followed from the time it enters the system as a government-issued payment to the time it ends up in the hands of the recipient.