Economic Survey 2014: Government favours direct cash subsidies for BPL households

NEW DELHI: The government's pre-budget Economic Survey has suggested payment of subsidy in cash for those below poverty line through technologies like biometric identification observing that such support leads to distorted resource allocation which hamper changes in prices.

The Narendra Modi led government's first survey pointed that not all the money put into subsidy schemes reaches the poor while attributing rise in fiscal deficit after 2008-09 to increase in subsidies.

"Subsidy programmes are particularly problematic when they hamper changes in prices and the consequent shifts in resource allocation which must take place."

"Therefore, it is increasingly feasible to identify households below the poverty line and give them cash. The new technologies of biometric identification and payments through mobile phones have created a range of new possibilities for the design of programmes," the survey said.

The economic document further elaborated that programmes such as food subsidy have huge overhead costs. In other cases, such as the fertiliser subsidy, the expenditures generate a distorted resource allocation that hampers productivity, it said.

Citing an example, it said: "When the price of diesel rises, in the medium term the economy shifts away from diesel. But this adaption is blocked if the price of diesel is not actually raised. When the purchase price of cereals is raised, cereal production becomes more attractive, even though consumers might want more non-cereals."

"As per the Controller General of Accounts (CGA), the major subsidies in 2013-14 amounted to Rs 2,47,596 crore, well above revised estimates," the survey underlined.

It also added that food subsidy has been increasing owing to the widening gap between economic cost of procurement by the FCI and the central issue price fixed under the Public Distribution System.

In case of oil subsidies, the economic document raised concerns on the issue of under-recoveries of the oil marketing companies having been almost doubled to Rs 1,39,869 crore in 2013-14 from Rs 77,123 crore in 2007-08.

Quoting an IMF working paper titled 'The fiscal and welfare impacts of fuel subsidies in India', the survey said they were badly targeted, with the richest 10 per cent of the households benefiting seven times more than the poorest 10 per cent from these subsidies.

Similarly, the plan panel's food subsidies performance evaluation report has pointed that in the targeted PDS states, for every kg of grains delivered to poor, the government released 2.4 kg from the central pool, the survey added.