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Subsidies subsidise the civil servant, not the poor

Updated November 05, 2014

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Direct cash transfers would do better than sustaining public sector subsidies that have failed to address poverty. — AP/file
Direct cash transfers would do better than sustaining public sector subsidies that have failed to address poverty. — AP/file

The intricate web of subsidies obstructs the flow of resources to the poor; alleviating poverty can get a boost by eliminating the middleman.

Researchers argue that direct cash transfers would do better than sustaining the public sector subsidies that have failed to address abject poverty.

A big proponent of direct cash transfers to the poor to avoid public sector inefficiencies has landed a very important portfolio in India. Arvind Subramanian, a former IMF economist and a renowned trade expert, has been appointed as India’s new chief economic advisor.

Given his candour and interest in poverty alleviation, it is likely that aggressive and bold policies will soon be aired in India.

Also read: The rhetoric of poverty reduction

While India built a Mount Everest of public sector subsidies, costing hundreds of billions of dollars, Pakistan experimented with new ideas and approaches for poverty alleviation.

The Benazir Income Support Programme (BISP) was implemented in 2008 when Dr Subramanian was still convincing the Indian establishment to consider direct transfers to the poor.

Instead of trading mortars at the Line of Control, the two establishments can exchange notes on how best to fight poverty and build a prosperous and sustainable future for their populace.

Also read: Sindh mulls Rs3bn cash subsidy for eight million poor

In a 2008 paper, Arvind Subramanian and colleagues explain the logic and the need behind direct cash transfers to the poor.

They observed that centrally sponsored schemes (CSS) in India were plagued with inefficiencies and waste. Such schemes were mostly process driven to sustain an army of paper-pushing public sector employees who failed to measure the outcomes of these schemes.

The result is that a small amount of the total allocated funds reach the poor. A review of a scheme in Maharashtra revealed that only 21.6 per cent of the funds reached the needy.

Dr Subramanian and colleagues identified at least four limitations with the status quo.

Inefficiency: The schemes did a poor job of identifying and reaching out to those in real need.

Leakage: Where the subsidies reached the non-deserving as well.

Participation costs: The forgone earnings to qualify for the subsidy.

Administrative costs: The large costs associated with delivering these schemes.

They identified two key challenges that resulted in the inefficiencies, namely: a deeply ingrained culture of immunity in the public sector and weak local governments.

Several officers have been arrested for bunglings, but hardly any one is ever convicted.

Dr Subramanian and colleagues tally the cost of subsidies administered by the centrally sponsored schemes (CSS) in India. They further added the costs of other fuel and food subsidies and estimated a sum of Rs180,000 crore in 2008.

They also estimated 70 million households to be below the poverty line in India. If the entire sum was disbursed directly among those below the poverty line, it would result in a cash transfer of Rs2140 per month, which in fact, is a sum higher than the low-income threshold for rural India. Such cash transfers enable individuals to buy groceries at even market prices.

The Pakistani experience

Pakistan has done a phenomenal job on this front. The launch of BISP in 2008 has been a great success. The program was launched with US$425 million to aid 3.5 million households.

By 2012-2013 the program had expanded to Rs70 billion and provided assistance to 5.5 million families.

Also read: BISP striving to reduce poverty: Baig

A key element of the programme was the success with targeting efficiency. The BISP used the poverty score card to identify those who required assistance. The qualified families receive a monthly support of Rs1200, which is disbursed every three months.

The National Rural Support Program (NRSP) has also run successful programs involving direct cash transfer to the poor.

The NRSP launched Community Investment Funds (CIF), which extended cash to village and local support organisations. CIFs are essentially credit revolving funds that extend financial support to the unbanked (those abandoned by the commercial banks) or those who do not qualify for micro finance.

Similarly, the NRSP also offers income generating grants as cash or cash equivalents to the very poor. The cash or the live stock is managed by the household in collaboration with the community organisation.

Health, hospitalisation, and accidental death insurance is yet another scheme that pays the insurance premium directly to the insurance companies and the insured are free to buy appropriate insurance.

Lastly, microfinance programs are available to those who are either at the poverty line or just below or above it.

Also read: Half of country’s population living below poverty line

The underprivileged are resourceful and entrepreneurial. Setting up schemes that provide direct assistance to the needy will go a long way in alleviating poverty.

The key, however, is to keep the middleman out of the middle.