JAM Trinity and Subsidy Delivery System

JAM is an acronym which stands for Jan Dhan Yojna, ADHAAR and Mobile number. It is seen as the biggest reform regarding direct subsidy transfer in terms of cash. Currently there are multitude of subsidy schemes running for the poor through multiple channels. This entails a huge cost along with other problems of corruption, lack of transparency etc. This is where the government hopes that the JAM trinity can help. With ADHAAR will help in biometric identification of citizens with accuracy; Jan Dhan accounts and mobile numbers will facilitate direct transfer of cash in the accounts, thus, rebuilding the social safety system.

Problem With The Current System Of Delivery Of Subsidies

Besides corruption, inefficiency, lack of transparency let us have a look at other problems that currently plague our system of disbursal of subsidies:

Price Subsidies are often Regressive

By the term regressive means rich households benefits more than a poor households. In some cases, by simply selling goods below cost, the government ends up delivering unintended benefits to the rich. Let us have a look on some facts from the Economic Survey 2014 -15:

  • Poorest 50 percent of households consume only 25 percent of LPG. Rest of the subsidies benefits the poor.
  • Most water subsidies are allocated to private taps, whereas 60 percent of poor households get their water from public taps.
  • Poor households capture only 10percent of the total electricity subsidies whereas rich households capture 37 percent of subsidy.
  • Majority (51 percent) of subsidised kerosene is consumed by the non poor and almost 15 percent of subsidised kerosene is actually consumed by the relatively well-off (the richest 40 percent). Only 46 percent of total consumption of subsidised kerosene is by households with a Below Poverty Line (BPL) or Antyodaya Anna Yojana (AAY) card.

Therefore the above data shows that the actual aim with which subsidies are introduced is not fulfilled.

Price  Subsidies Distorts Market Ultimately Hurting The Poor

The current system of subsidies distorts the incentives of consumers and producers leading to misallocation of resources across sectors and firms.

Consider for instance, the High MSP for Wheat and Rice results in their over cultivation and under cultivation of non MSP supported crops. This not only raises the procurement cost of wheat and rice but also leads to their wastage due to lack of warehousing facilities with the food corporation of India. Further supply-demand mismatch raises prices of non-MSP supported crops and makes them more volatile. This contributes to food inflation, ultimately hurting the poor more.

 Subsidies Used to nourish Vote Bank

A high MSP and price subsidy for water was introduced in Punjab and Haryana to increase the food production through green revolution. However subsequently these subsidies have not been withdrawn and one of the reasons was the fear of political class of losing their vote bank of large farmers.

This has resulted into misuse of water thereby leading to salinisation of soil and drop in the water table of these areas. This has huge implications for the small farmers who could not switch over to expensive fertilizers and does not have the capacity to bear the cost of water pumps like rich farmers to make the soil more fertile.

Leakages In Delivery Of Subsidies

It is one of the most serious challenges of our public distribution system. Over 15 per cent of PDS rice, 54 per cent of wheat and 48 per cent of the sugar is lost in leakages. The fiscal cost of these leakages is also large – for example, about Rs. 5800 Cr for PDS rice and Rs. 12,600 Cr for PDS wheat. However the leakages cannot be attributed solely to corruption there are systematic issues involved.

Identification of Beneficiaries

Studies have shown that are our PDS system is inherently prone to large inclusion and exclusion errors. One of the indicators of the problem is the existence of ‘Ghost Cards’ in several states. Ghost Cards are cards made in the name of nonexistent people. This results in advancing undue benefits to unintended beneficiaries and exclusion of entitled beneficiaries.

Should Subsidies Be Eliminated?

Subsidies play a vital role in the economy of the country as they ensure equitable utilization of the resources for the people. Different countries provide subsidies according to the level of their economic development. Developed countries provide subsidies to their population for improving standard of living whereas the underdeveloped countries provide subsidies for meeting bare minimum needs of the vast majority of population.

In India various problems inherent in the public distribution system has raised a debate whether do we really need subsidies?

  • The key argument put forth is that beneficiaries become dependent on subsidies thereby making them lethargic. It kills innovation and interest of the people. Further it is said that subsidies are a tool of vote bank politics and help politicians create their elections agenda. So Increase in subsidies will only result in keeping the political constituents happy without benefiting the intended beneficiaries.
  • According to the Economic Survey, about 3.78 lakh crore or 4.2 per cent of GDP, is currently spent on key subsidies. But subsidies have not been able to achieve the purpose with which they were introduced. As early as 1985, Prime Minister Rajiv Gandhi noted that less than 15% of the allocations meant for the poor actually reached them. And even today the situation remains the same. Despite of continuously rising subsidy bills, malnutrition and hunger have not come down. Money wasted in inefficient distribution of subsidies is money that is not available for other developmental activities of the government.
  • In fact, most of the subsidies are not for the poor but for the rich. So taxpayer’s money is being wasted in subsidizing the rich. Besides this it raises the already rising fiscal deficit, thus, putting a huge burden on the government
  • Most vociferous argument in favor of dismantling of subsidies is that the need of the hour is to have an ‘enabling Government’. Government should not try to directly deliver to the citizens everything that they need rather empower disadvantaged sections by ensuring that they get basic education and health services and receive adequate nutrition and food.

Despite of all the above problems policy makers need to analyze that the issue is not about removing subsidies but about how to make them effective so that they reach the target consumers and people are benefited from it. The process of disbursal of subsidies should be transparent, targeted and-in many cases-temporary. However these three Ts are missing from most subsidies in India.

The JAM TRINITY expects to not only address the current problems but will also increase the intended beneficiaries in the existing cost.

Moreover, India is a welfare state which has the responsibility of satisfying minimum needs of the poor people. If a country shuns away from its responsibility, esp. when it has not even raised enough capacity in the market to absorb its people, then it will only witness dissatisfaction and disharmony among the people. As an enabling government the country has tried to ensure basic services to the poor people according to the resources at its disposal. For example, Right to education etc. But till all the basic services (education, health etc) reach every hook and corner of the country the government should continue with its responsibility.

Further, it is great folly on the part of policy makers and taxpayers to view subsidies as merely an ethical act. Providing subsidies is also an economic act as the growth of the country depends on the productivity of its population.

Also, when the government gives subsidy it is not only benefitting the individual but its benefits trickle down to the whole country. For example,  subsidizing the fertilizers or seeds enables the farmers to raise production of the crops thereby ensuring food security of the country.

Therefore, there is no doubt that India needs to continue its subsidy regime though disagreements remain on the scope of coverage and method of delivery.  Even the honorable Prime Minister has reiterated that leakages in subsidies must be eliminated without eliminating the subsidies themselves.

How Jam Trinity Will Help?

We have discussed above that eliminating or phasing down subsidies is neither desirable nor feasible for India till other forms of support are provided to disadvantaged sections for achieving their economic aspirations.

The JAM Trinity allows the state to provide this support in a more targeted and inclusive manner.

Till December 2014, around 720 million had been allocated ADHAAR number and this is expected to exceed 1 billion by 2015.Once each and every citizen will have an ADHAAR number then most pertinent problem of duplicity of identity and ghost cards can be eliminated.

Linking the ADHAAR number to an active bank account is a key to implement cash transfers. Already the government has linked around 100 million bank accounts with registered ADHAAR numbers. This will further increase with the introduction of Jan Dhan Yojna thereby helping to better target and transfer financial resources to the poor. A recent study15 reported evidence from Andhra Pradesh where MGNREGA and Social Security payments were paid through Aadhaar linked bank accounts. Households received payments on average 10 days faster with the new Aadhaar-linked direct benefits transfer system, and leakages reduced by 10.8 percentage points.

Moreover, with 900 million cell phone users the mobile money facilitates complementary mechanism of offering direct cash transfer to large number of population. Compared to bank accounts there are more mobile users in rural areas which are increasing at the rate of 2 million every month. Therefore it will ensure last mile connectivity. Moreover ADHAAR includes the mobile number of a customer the operational bottlenecks required to connect mobile numbers with unique identification codes is also small. With increasing number of mobile operators applying for payment banks the mobile money platforms offer tremendous opportunities to direct Aadhaar based transfers.

Similarly Post Office networks provide connectivity to geographically isolated areas. It can (either as payment transmitter or a regular Bank) can seamlessly fit into the Aadhaar linked benefits-transfer architecture by applying for an IFSC code which will allow post offices to start seeding Aadhaar linked accounts.

If the JAM Number Trinity can be seamlessly linked then the aim of providing basic necessities to the poor can be achieved.

The entire system is inherently leak proof as it will also reduce the number of government departments linked in the distribution process thereby curtailing the opportunities for leakage. Various studies show that value of fiscal savings due to lower leakages were larger than the cost of implementing the programmes. Over the long-term, this will not only give high returns to public investment (as a tax) but will also lead to lower burden on the taxpayer. Therefore it will have multiple benefits for the economy: like lower subsidies and fiscal deficit will also mean a better credit standing for India.

Moreover with National food security act coming into force the financial burden of procuring and delivering food grains, related costs and other factors will increase. In addition to this serious shortfall in the government’s storage capacity with incidents of rotting food grains being reported is bound to be a cause for concern. But with JAM TRINITY into place the cash will be directly delivered into the bank accounts thereby decreasing the cost as well as

Therefore besides fiscal discipline the concept will also advance financial inclusion to some extent. It will cause minimum distortion to the market forces and will boost household consumption and asset ownership.

Ultimately JAM trinity can augment the effectiveness of anti poverty programmes. Thus it’s a “game changing reform” that will allow transfer of benefits in a leakage-proof, well-targeted and cashless manner.

IS JAM TRINITY – ULTIMATE SOLUTION?

Despite of all its benefits discussed above, various well known economists like Jene Dreze have raised concerns about high tech cash transfers as foundation of India’s social policy.

To implement the concept of JAM trinity we have to overcome various challenges like lack of infrastructure facilities in terms of access to banking facilities especially in remotest areas, privacy and security issues in ADHAAR. Although the government has pushed the Jan Dhan Yojana with much fanfare, but as of now, there is no reassuring data on the usage of these bank accounts. Therefore the required infrastructure is not in place and is unlikely to be ready any time soon.

But the critics argue that the even if the required technological set up will be put in place in future then still JAM trinity ultimate solution?

Critics are of the view that cash transfers are no doubt important as a part of welfare schemes like giving scholarships to students, old age pension etc. However it cannot be the sole mechanism of our welfare schemes.

To start with providing cash to the poor may lead to consumption of wasteful products like alcohol rather than spending on necessities like food. Then in kind transfers and public services too are equally important.

A transition to cash transfers may dilute public entitlements. For example, a cash transfer does not take into account the rate of inflation thus affecting the purchasing capacity. Apart from this channeling all or even a large fraction of development funds directly to beneficiaries would mean ignoring important public infrastructure and rural development projects.

One of the most important challenges in implementation cash transfers is unfavorable social attitudes. For instance : The nutritional requirements of the pregnant women and children are catered through programmes like Janani Suraksha Yojana and Integrated Child Development Services (ICDS).But if we switch to cash transfers away from PDS in a patriarchal society which does not consider the nutrition of women and children especially girls important then the move may prove counterproductive. It is highly likely that money may not be used for the intended purpose. It will multiply our problems given the fact that India already stands at very low ranking in terms of maternal mortality rates and under five mortality.

Therefore given the social attitude India cannot rely on cash transfers fully. Even if it has to be introduced then it must be accompanied by social awareness campaigns that would make these DBT transferred funds to be used for their intended purposes.

Moreover the international experience provides little support to the policy of disbursing all subsidies in cash transfers. Even Brazil’s much talked Bolsa Família programme (cash transfer) constitutes just 0.5% of its entire social sector spending (Brazil spends around 25% of GDP in social sector programmes).Also the programme has succeeded predominantly in urban areas. Further the cash transfers in countries like Brazil has expanded the role of the state where as in India cash transfers will lead to withdrawal of the state and the effects are therefore likely to be different.

Converting all subsidies into direct benefit transfers is a laudable goal of government but this transition should be brought gradually. It must be first allowed in those sectors where such social challenges do not exist – like in the case of LPG cylinders. Even the Shanta Kumar committee report on restructuring India’s food procurement and distribution system, for instance, recommended a shift to cash transfers initially in the large cities.

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