Subsidy reforms can wait, put the Aadhaar infrastructure in place!

India's economic weakness has rightly focused attention on its strained public finances. However, it may be misguided to address this problem as a subsidy-rollback, price-increase, expenditure reduction reform.

Just because 60% of rations supplied through Fair Price Shops does not reach the intended beneficiaries, neither does the Public Distribution System (PDS) become any less important nor we can wish away the reality that cheap rations are a life support for a significant proportion of Indians. In the circumstances, merely junking PDS, without putting in place a more effective alternative mechanism, is both bad politics and economics, besides being plain unjust.

It is bad politics because it is certain to vote the party out of power (remember, the new political darling of upper-middle class India has tried none of these innovations on subsidies in his state!). It's bad economics because of its adverse secondary effects - in the development of capable human resources and in laying the platform for sustainable economic growth. And unfairness... well, let's leave it at that!

Most media experts, commentators and academics shooting off their mouth (or pens) on subsidy reforms betray a limited knowledge of the complex political economy surrounding subsidies and over-estimate the effectiveness of technological quick-fixes. We need to come down from our all-knowing high-pedestal and acknowledge that there are no easy solutions, at least those that can be offered over an op-ed piece or television sound-bite, to reforming many of the larger subsidies. It is not vested interests alone that has sustained many of these subsidies (but not all), but the fact that there is a compelling logic to provision of those subsidies, though not the way they are being delivered.

At least at some level, the Government of India have realized the tactical importance of keeping food grains out of the first phase of Aadhaar-transfer based cash transfer scheme. The regime-altering cash transfer is taking place only with kerosene and LPG. In both, the market itself is heavily regulated, and the potential for any adverse effects of a shift on the beneficiaries are limited. In the remaining services, the only change is with Aadhaar-based validation.

However, detached from what is actually being implemented, the mainstream discussions on the issue give the impression of a government plunging headlong into a massive paradigm redefining cash transfer program for all subsidies, including food grains. It contributes nothing to improving the current implementation program. This is a reflection of the poverty of serious discussions on most public issues.

We wildly underestimate the difficulty of implementing such programs in the field, especially in such continental scale. There are hundreds of small, but critical, obstacles to be overcome, before any such arrangement stabilizes. It will easily take atleast a couple of years. Ideally, the first phase of Aadhaar-based cash transfers should have been limited to only ongoing accounts-based cash transfers (scholarships, pensions, JSY, and NREGS) and for validating the disbursal of in-kind transfers (like PDS). It should focus on resolving the implementational problems with Aadhaar enrollment, porting of user-department data, use of Point-of-Sale terminals, data communication, cash transfer process, budget releases, and so on. In fact, in the first phase, if we get just the Aadhaar validation and cash-transfer infrastructure and mechanisms right, without substantively changing any subsidy, that by itself would be a great achievement.

The backbone for Aadhaar-based cash transfer scheme has to be fully laid before we start pumping more complex cash transfers. Serious opinion makers should spend their energies analyzing these challenges and facilitating the process of stabilization, instead of putting the cart before the horse and talking about paradigm redefining subsidy reforms.

Truth to tell, the government has done itself and the program no favor by being strategically obtuse about the political positioning of the program. By projecting it as one of its main electoral planks, even before the delivery infrastructure is fully in place, it has negated whatever tactical nous it displayed by keeping the more complex subsidy transfers out of the first phase. It now runs the risk of discrediting a conceptually very good program, both ideologically and politically, even before it has had a fair chance at demonstrating its benefits.