Weekend reading links

1. The rise of dual class voting shares in the US, where owners have outsized voting power and others very limited.

2. India's disinvestment target and realisation over the years from Livemint.

3. Tamal Bandopadhay advocates RBI exiting the monetary accommodation,

Withdrawal of excess accommodation in the form of liquidity sugar rush is akin to taking away the training wheels from a kid’s bike. Yes, training wheels help kids maintain balance and stay upright on a bike and pedal at an early age but they don’t teach them how to ride a bike. The fiscal health of the government is improving with higher tax collections, and consumer demand has started picking up. As the path looks less treacherous now, it’s time to remove the training wheels.

4. Sivakasi produces 95% of India's fire crackers and employs 800,000 to a million people. PTI has a story on the poor state of work conditions of these workers,

For all the hard work, workers approximately get anywhere between Rs 290 to Rs 500-Rs 570 per day as wages and a bonus ranging between 20 and 27 per cent in addition to Provident Fund and Employees State Insurance Scheme cover. The pay structure is only indicative and applies to organised, licensed and properly run units and about 55 per cent of the workforce is women. Remuneration, in some big units as well, covers aspects like the "piece rate" concept and working hours (up to 4 and 8 hours) and pay varies depending on the kind of work done while hazardous processes like chemical filling are mostly assigned to men... Unlike well-defined and mandated practices to ensure safety in regulated, licenced units, workers in unlicensed and illegal firecracker manufacturing cottage industry are exposed to grave hazards and a chunk of accidents.

5. Jean Dreze on the risks with Aadhaar enabled bank payments through Banking Correspondents. Some useful suggestions to limit the risks,

There are ways of reducing the vulnerabilities of AePS. For instance, BCs could be required to make manual if not digital entries into printed customer passbooks. That would act as a permanent, verifiable receipt that cannot be denied to the customer so easily (a blank entry would be incriminating). Ensuring that BCs are clearly identified in transaction records would also help. So would SMS alerts, when the customer has a mobile number. Roaming BCs should perhaps be banned, at least in states with low literacy levels. And most importantly, better grievance redressal facilities must be made available to the victims of AePS fraud.

6. In the aftermath of the German elections, Gideon Rachman makes an interesting observation,

It is the US and the UK where politics seem increasingly prone to “angst, aggressiveness” and all those other unattractive, supposedly Teutonic, qualities. These days, it is German public life that is characterised by the virtues the British often attribute to themselves — calm, restraint, rationality and compromise. The recent German election and its aftermath underline the point. It was a close contest, but the losers accepted the results gracefully. Nobody tried to claim that the voting was rigged or that their opponents were “scum” — or represented a mortal danger to the country.The Social Democrats now look set to lead a German government for the first time since 2005. But a transition of power will not bring about an abrupt rupture in policies or an attempt by the political opposition to paralyse the government, as is happening in the US. The SPD’s Olaf Scholz, who may become chancellor, ran as a continuity candidate. As my FT colleagues reported, voters saw Scholz “with his quiet demeanour, long experience in government and pragmatic politics, as Merkel’s natural successor”. How very different from the leadership profiles of Donald Trump or Boris Johnson... One difference between Germany and other large western nations is that high levels of immigration have not radicalised the mainstream right.

7.  This on grade inflation in India's Board examinations is very disturbing,

CBSE Class X and XII boards have passed a record 99.04% and 99.37% students respectively, with those scoring above 95% jumping 38% and 81%. This extraordinary uptick is echoed across state boards. For example, Maharashtra HSC results have witnessed a gravity-defying 1,000% rise in the 90% category... grade inflation was an epidemic even before the pandemic. Before the 95% club more than doubled in the 2020 Class XII CBSE boards, it soared by 39% in 2019.

HT: The Ken 

8. I've not yet had the occasion to write about Byjus, the $18 bn valued Edtech startup making it the world's most valuable Edtech firm. But The Ken here points to some interesting aspects about Byjus. 

9. India laptop market fact of the day,

A report by EY and ICEA in 2019-20 had said India imported laptops with a value of $4.21 billion, which accounted for a staggering 86 per cent of the $4. 85 billion per annum laptop market. Out of this, 87 per cent was imported from China. Further, India’s laptop imports have increased by 42 per cent from $2.97 billion to $4.1 billion in five years. Only a handful of companies, including HP, Dell and Lenovo, manufacture laptops locally and in very limited numbers, either on their own or with third-party players. According to government estimates, the value addition in India is not more than 5-10 per cent.

In this context, the decision by Dixon Technologies to leverage the Production Linked Incentive (PLI) scheme to make upto 1 million Acer laptops in India and increase local value addition to 25%. 

10. Interesting data that once again points to India's missing middle class,

Residential property sales have been stagnant. In the eight major cities, sales have been stuck at around 3 lakh units a year since 2012 (last year it was about half that). India is second from bottom on the Knight Frank Global House Price Index. There has been no growth in the sales of passenger vehicles for 10 years — about 2.7 million units in 2012, 2.7 million in 2015, 2.7 million in 2019 and 2.7 million in 2020, according to the Society of Indian Automobile Manufacturers. The government says this is because of Uber and Ola, but ride-hailing apps have not stopped the growth of passenger vehicle sales in the United States, where they went from about 10 million in 2009, the year Uber was founded, to 17 million. In China, sales doubled from 12 million to 24 million in this same period. In India, the sales of two-wheelers have been stagnant for six years, with 16 million sold in 2015, then 17 million in 2019, and 15 million in 2020. Something that has not received attention outside of the business dailies is that sales of commercial vehicles have stopped growing, with 6 lakh sold in 2015, then 7 lakh in 2019 and 5 lakh in 2020.

This snippet on manufacturing is striking, 

Automobiles are about half of India’s manufacturing sector. Because auto sales have stagnated, manufacturing’s share of GDP fell from 16 per cent to 13 per cent after the launch of Make in India in September 2014. An analysis by the Centre for Economic Data and Analysis in May found that jobs in manufacturing halved from 51 million in 2016 to 28 million today. This aligns with the issue that is highlighted by automobile sales.

The numbers need to be checked, and if true they are disturbing.

11. Rwanda is another cow loving country, and that too with milk bars,

In 2006, President Paul Kagame introduced the “Girinka” program, which aims to give every poor family one cow. The program has so far distributed over 380,000 cows nationwide... The program (Girinka means “may you have a cow” in the local language) is one of the development projects that have garnered Mr. Kagame support nationwide... As milk production increased in this landlocked nation, so did the number of people who moved to urban areas for education and employment. And so were born the milk bars, which allowed farmers to sell their surplus milk and let customers drink copious amounts of it to be reminded of home. Most milk bars are in Kigali, the country’s most-populous city, with 1.2 million people.

Aadhaar in eligibility identification - a reality check

There is no doubt that Aadhaar has been a game-changer and a market catalyst in many areas of the Indian economy. The India stack has been truly transformational in areas like fintech. But what about its role in welfare services delivery?

When conceived, one of the primary motivators of Aadhaar was the need for a unique identifier to enable more effective targeting welfare benefits. Then, state and central governments in India were grappling with the problem of egregious inclusion errors - duplicate and non-existent beneficiaries for various schemes, especially the Public Distribution System (PDS). Aadhaar was thought to be the solution to this problem.

And it cannot be denied that Aadhaar has nearly eliminated the issue of duplicate or bogus (the person itself not alive or existent) through enrolment and physical screening. However, sceptics argued that in the process of Aadhaar screening, significant numbers of eligible poor would be screened out, as a collateral damage. But it was thought that over time - as technology improved, databases got cleaned up, stakeholders got used to it, and redressal mechanisms were streamlined - this problem of exclusion errors would disappear. Unfortunately, that has not proved to be reality.

The real problem lies in the use of Aadhaar in the targeting of beneficiaries, especially through screening them out by linking multiple databases. It was all along known, though not explicitly acknowledged and clarified by all concerned (including the government), that beyond elimination of duplicates and non-existent beneficiaries, in the Indian context Aadhaar's role in targeting was limited.

The supporters of Aadhaar argued that, apart from the duplicates and the non-existent, it could provide the accurate unique identifier that can help link multiple databases on employment, vehicle registration, tax payments, electricity consumption, bank loans and so on. This, it was claimed, could be a game changer in targeting social benefits. 

The problem with this argument/claim lies in the quality of the validating databases. Apart from 10-20% of Indians who are either employed, or own vehicles, or have taken loans, or purchased property, the vast majority have no formal signatures of their existence. In other words, at least 80% of Indians have no formal database on which they exist reliably so as to be used for Aadhaar-based validation. 

In this scenario, the government ends up using various questionable datasets for Aadhaar screening. Governments also force people into various formal database inclusion requirements so as to generate digital trails for subsequent Aadhaar validation. 

Most importantly, since their primary objective is to eliminate inclusion errors, none of the various software applications of state and central governments to enrol and process welfare schemes do not have  the requisite safeguards to prevent egregious exclusion errors. This is a manifestation of the inclusion errors elimination bias within governments. I blogged about it here. 

Finally, and surprisingly, technology itself has not held up well and has been a major contributor to the problems with Aadhaar implementation. The apparently simple activity of biometric validation - biometric capture, validation with Aadhaar database, and the data communication - has its struggles, especially but not only in the rural areas of the country.

The consequences of all these efforts to use Aadhaar in welfare services delivery end up doing great damage, often more than offsetting their beneficial effects. 

A recent article in the Indian Express points to the problems with Aadhaar-linked validation on accessing PDS and other welfare schemes benefits. It reproduces the salient findings of a Lokniti-CSDS Survey conducted during the 2019 LS elections.

And the denials rates were very bad in the Bimaru states,

The survey findings speak for themselves and presents strong evidence to support the concerns about the unqualified use of Aadhaar in welfare services delivery, especially in targeting. I've blogged earlier on Aadhaar's targeting challenge here. 

The point here is not to advocate abandoning the use of Aadhaar in welfare services delivery. Instead it is required to acknowledge the limitations of Aadhaar and the potential damage it can cause, use it where it serves the purpose, and also put in place mechanisms to address them while using Aadhaar. 

I have been surprised about the absence of good research which points to the collateral costs of Aadhaar-linked targeting. After all, it only required some surveys. It's also perhaps a testament to the misallocation of social sciences research priorities in and about India that issues of first-order importance not only get little or no attention but also get marginalised by bandwagon studies conducted by foreign researchers (which unfortunately only ends up fuelling the dominant but misleading narratives). 

It's interesting that these findings have come as a collateral benefit from an election survey conducted by an opinion polling agency, and not from mainstream research. 

See also this oped by Jean Dreze on the absence of a mechanism for poor for grievance redressal if their benefits are terminated due to Aadhaar validation problems. 

Limits to technology in development

There is only so much that technology can do with addressing state capacity weaknesses or public service delivery failings. There is no digital pathway out of poverty or for chronic development challenges.

A reminder of this comes in a good article by Reetika Khera on the problems of excessive technologisaiton of NREGS. When it was piloted in Rajasthan at the turn of the millennium, its implementation was simple,

At that time, a public worksite would be opened in the village, and everyone who showed up was allowed to have their name included on the muster roll (an attendance sheet). At the end of the fortnight, some work measurement (if only notionally) would be done, and the muster roll would be sent to the block office to process payments. The “mate" (a worksite supervisor) or panchayat secretary would collect cash from the block office, and, on the designated day, names would be called out at the worksite for receiving a cash payment and a food coupon.

And this is what technology did,

From e-muster rolls (eMRs) and e-fund management system (e-FMS) and GPS-enabled biometric attendance to geo-tagged NREGA assets, MoRD became the site of a techno-orgy. The less tech-ready the rural area, the more fanciful the tech-fix that was imagined for it. Before first-generation issues with NREGA had been resolved, it was loaded on with more objectives and more technocracy. Workers could no longer just show up for work: e-MRs, with pre-printed names of workers who had ostensibly demanded work, became the norm. NREGA 2.0 was soon burdened with Aadhaar. Aadhaar, in its early years, needed ready-made databases to boost its enrolment numbers. Workers in the NREGA database were sitting ducks: vulnerable and anxious about losing their entitlements, they flocked to enrol. In spite of clear instructions from the Supreme Court, MoRD found ingenious ways of making Aadhaar compulsory. For instance, when “demand for work" was entered in the software at the block office, it could only be registered for workers who had submitted their Aadhaar numbers. Job cards without an Aadhaar number linked to it were cancelled...

The next victim was the payment system. Payments were held up if Aadhaar numbers were not linked to the job card and/or bank account. MoRD surreptitiously made it compulsory to link NREGA bank accounts with Aadhaar numbers. Instead of deploying technology to make things easier for labourers, technocrats started using it to make their own lives easier by centralizing control. Administrators no longer needed to visit villages to monitor its implementation: they merely peered at the NREGA real-time portal, where all was well.

Her suggestion is to revive features of the original NREGS,

One, large worksites should be opened proactively in each gram panchayat without waiting for anyone to apply for work. Such worksites should remain open for the coming months. Two, anyone who shows up to work should be allowed to work. The requirement of demanding work formally must be relaxed. For this, uniquely numbered muster rolls issued to sarpanches and panchayat secretaries, without pre-printed names, can also be considered. Three, states could be allowed to pay wages as cash-in-hand, bypassing the banking system. Many are horrified at the suggestion that we revert to cash payments (it has been projected as th

The main cause of corruption), but there are important reasons to consider it now.

The payment system for many welfare schemes, including NREGA, is beginning to resemble a popular visual trope from India—a tangled web of electricity wires. Instead of simply linking each job card to a bank account to transfer wages, today, four numbers might be needed: job cards, Aadhaar, bank accounts and mobile numbers. As a result, transaction failures are high

In another area of development, education, the promise of technology appears to have hit a roadblock in the form of access. With schools lying shutdown due to the pandemic, supporters have see an opportunity to not only manage schooling in this time but also mainstream Edtech.

But even before we come to issues like content and student-teacher engagement, the issue of internet access (never mind its quality) should be addressed. And, contrary to conventional wisdom, this is far from settled.

Just two states have at least 40% rural households with internet access.

The access challenges are well known and large as captured in this article,

According to a global survey by Pew, only 24 per cent Indians have access to smartphones. Not only does India lag among the list of emerging economies, there is also severe disparity in the ownership of smartphones between the genders: 34 per cent of men own smartphones as opposed to 15 per cent of women. The situation is no better when it comes to internet connectivity. “Many of my students are unable to access notes, audio clips and so on because they don’t have enough money to recharge their data packs,” says Rumi. According to a National Statistical Office (NSO) survey, only 23.8 per cent households in the country have internet connectivity and only 10.7 per cent have access to computers. So while students like Shruti are engaged in e-learning via apps such as Zoom and Microsoft Teams, teachers and students such as Rumi and Sangeeta are struggling to get by with low-resolution cameras and WhatsApp audios. The divide isn’t only between the rich and the poor, it exists between genders and states and is also determined by several socio-economic factors.

Further, like with all else, shutting down schools hurt children from the lower income categories, who are also those with lower learning levels and who are least likely to get any parental support in their learning process. In simple terms, lockdowns hurt the children from poorer income groups and causes permanent income loss.

It is imperative that primary schools open at the earliest, since early learning loss transmits forward and prolonged lockdowns are increasing the likelihood of permanent learning and income losses.

Yet another area where supporters proclaim a new dawn is fintech. I have blogged earlier here and here about its limitations. But here comes more evangelism from Navin Kukreja, who argues for "going completely digital",

By going completely digital, lenders will be able to lower their cost of operations. The benefit accruing from this can be eventually passed on to customers in the form of lower charges, fees, interest rates, etc. Digitisation should lead to better quality data becoming available to lenders. The more agile among them will be able to use it to offer better and more customised products to their customers. Digitisation will also enable borrowers from remote towns and cities to get access to credit from banks and other large lenders. One roadblock in the path of financial inclusion for credit products has been the need to be physically present to service borrowers. With digitisation, lenders with the right risk appetite and risk models will have the reach to deliver their products without the need to have branches and employees in specific locations. This could prove to be a turning point in bringing a significant part of the population under the umbrella of formal credit. Collections, too, could be digitised. Until now there has been a tendency to use “workforce in physical location” as the primary means to collect.

This assumes that everyone is linked to the digital system in such a way that their actions can generate digital trails which are sufficient to both make them credit-worthy enough as well as enable access to its use. In this context, The Economist has an entire survey which highlights the emerging limitations of artificial intelligence. 

Weekend reading links

1. Fascinating illustration of perception of probabilities,

2. Nice overview of the Unified Payment Interface (UPI) inter-operable immediate digital payment system that has been launched in India.

3. The FT captures the irony of Trump's misguided embrace of Saudi Arabia and ostracism of Iran as a battle between "good and evil",

While Mr Trump unleashed a storm of anti-Iran rhetoric, millions of Iranians danced and sang in cities across the country celebrating Mr Rouhani’s victory — scenes that would have been anathema to Saudi Arabia and other Gulf monarchies. The crowds lauded the 2015 nuclear deal, while gushing about the potential for reform and their desires for Iran to engage with the outside world.

And what it means for Middle-Eastern geo-politics,

What he instead tore up in Riyadh was any attempt to pursue what Mr Obama hoped would flow from the deal: regional detente between Sunni and Shia in which their regional champions, in Riyadh and Tehran, “share the neighbourhood”

The emphatic victory of Hassan Rouhani over hardliners is a great opportunity to bring Iran on to the fold. But that is something which neither Israel nor Saudi Arabia would want. And Trump is playing into their hands.

4. Nice snapshot of India's port infrastructure,

5. In the context of China's ratings downgrade, Times captures the staggering scale of China's credit expansion and debt accumulation,

When it comes to pumping money into a financial system, China has made the Federal Reserve in the United States and the European Central Bank look almost lackadaisical. It has expanded its broadly measured money supply by more than the rest of the world combined since the global financial crisis. Now it has 70 percent more money sloshing around its economy than the United States does, even though the American economy is bigger. China has accumulated its towering debt remarkably quickly. Goldman Sachs looked last year at how fast debt had accumulated relative to the size of the economy in 55 countries since 1960. It found that by the end of 2015, China was already in the top 2 percent of all credit expansions — and its debt shot up even higher last year. All of the other large expansions occurred in very small economies, some of which essentially lost control of their finances.

And all this is excluding the shadow banking system as well as the off-balance sheet wealth management products of banks. Incidentally this is China's first ratings downgrade since 1989!

6. Predictably the Chinese officials have lashed out at the rating agencies. But, here the Indian government may have a much more compelling reason for nursing a grudge against them. Ananth points to this very good article and the graphic is pretty much self-explanatory,

Consider this,

The GDPs of Italy and Spain are projected to grow at much lower rates than India’s and Indonesia’s. The level of government, corporate and household indebtedness is significantly higher than India’s and Indonesia’s. Italy and Spain share India’s problem of a high level of bank non-performing loans (NPLs). The one metric in which the two countries outperform India and Indonesia is GDP per capita. Yet Fitch and S&P rate Spain two notches higher than India and Indonesia, while Moody’s has assigned a rating that is one notch higher. Further, S&P has assigned a positive outlook on Spain’s rating but a stable outlook on India’s rating. Similarly, Fitch and Moody’s have assigned ratings to Italy that are a notch higher than India’s sovereign rating, while S&P rates India and Italy on a par. This is despite Italy’s ratio of bank NPLs to total gross loans being more than twice India’s NPL ratio!

And the reason is the bucketing methodology that rating agencies follow,

The impediment to the rating agencies upgrading India’s sovereign ratings lies in their methodologies. The sovereign rating methodology factors economic strength, institutional strength, fiscal performance, and susceptibility to event risk to assign ratings. The rating agencies categorise countries into buckets based on their size (GDP), growth, volatility of growth and per capita income, among other factors. The emphasis on per capita income is because countries with higher per capita incomes are better equipped to withstand cyclical volatility and are endowed with higher debt servicing ability. India’s low per capita income has resulted in its sovereign rating being lower than countries with higher deficits and indebtedness and lower growth prospects.

7. A perspective on how much renewables are transforming global electricity markets,

Today, renewables account for an average 23 per cent of global power output. Denmark has breezy days when all its power comes from wind and Germany hit a record 85 per cent share from renewables one day last month.

8. Adam Gopnik draws an interesting conclusion from the contrasting responses of the conservative establishments in the US and France during their respective recent elections,

In France, as in America, the election pitted an extreme right-wing nationalist against a moderate technocratic liberal, but in France the leaders of the “Republican” right recognized the extreme nationalist right as a threat to democratic values and, after one round of voting, supported Macron, a man of the center-left who had served in a Socialist government. In this country, the leaders of the Republican Party made the opposite choice. 

That difference made all the difference. The space between François Fillon, the defeated right-wing candidate, and Macron is, in ideological terms, every bit as large as the space between, say, Marco Rubio and Hillary Clinton. But Fillon understood that a Marine Le Pen in power would be a threat to the nation’s constitutional structure. The irony was that the French, with their (mostly unearned) reputation for craven surrender and opportunism, held fast to their deepest principles, while mainstream American rightists discarded theirs.

9. India's job market is ringing alarm bells, loud and clear, with even the much vaunted IT sector jobs hiring on the decline,

The overall index for April 2017 was 10.9% lower than a year ago. That means new job creation in the month was 10.9% lower than April 2016. What’s more, the overall index for April 2017 was lower than where it was in July 2015. Compared to April 2015, the index is up a mere 1.8%, indicating the glacial pace of job creation. Among sectors, the worst hit was the information technology (IT)-software industry, which saw a 24% year-on-year drop in hiring. Apart from stricter employment norms abroad, automation too has impacted new job creation. Other key industries like construction and business process outsourcing/IT enabled services too saw a 10% and 12% decline in hiring, respectively, showed the index... Meanwhile, city-wise, six out of eight metros saw a decline in hiring activity in April compared to a year ago. The hiring index for Delhi/National Capital Region, Mumbai, Chennai and Bengaluru saw a dip of 28%, 18%, 29% and 28%, respectively.

Staying on the topic of India's labour market, Livemint raises doubts about the quality of the Quarterly Employment Survey (QES) of the Labour Bureau which captures data from establishments employing more than 10 workers. But the QES sample may be unrepresentative since more than 80% of its workers are regular and 96% are full-time, whereas the 2011 census data showed that 75% of workers nation-wide are employed for more than six months a year and the NSSO survey 2011-12 shows that only 18% of workers had regular wages or salaried employment.

10. Finally, on the new theory of financial markets by Andrew Lo, Adaptive Market hypothesis. Lo, one of the foremost critics of the efficient market hypothesis and its random-walk view of market movements, argues that the markets develop and adapt over time in an evolutionary manner. Lo calls human "rationalising beings" and not "rational beings". He writes,

The Adaptive Markets Hypothesis is based on the insight that investors and financial markets behave more like biology than physics, comprising a population of living organisms competing to survive, not a collection of inanimate objects subject to immutable laws of motion. This simple truth has far-reaching implications. For one thing, it implies that the principles of evolution—competition, innovation, reproduction, and adaptation—are more useful for understanding the inner workings of the nancial industry than the physics-like principles of rational economic analysis. It implies that market prices need not always reflect all available information, but can deviate from rational pricing relations from time to time because of strong emotional reactions like fear and greed. It implies that market risk isn’t always rewarded by market returns. It implies that investing in stocks in the long run may not always be a good idea, especially if your savings can be wiped out in the short run. And it implies that changing business conditions and adaptive responses are often more important drivers of investor behavior and market dynamics than enlightened self-interest—the wisdom of crowds is sometimes overwhelmed by the madness of mobs.

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.

Bridging the PC-MHA divide on Aadhaar

The Planning Commission (PC) and the Ministry of Home Affairs (MHA) are slugging it out on who should run the prestigious unique identification number project. The decision will be made this week.

Apart from the turf-battles that are commonplace in government, the debate is also one about the fundamental objective of such identity markers. The PC sees Aadhaar as providing a platform to more effectively deliver welfare benefits and improve governance in general. The MHA sees the biometric identity cards as a marker to identify citizens and track immigrants for national security considerations.

Both are obviously divergent objectives. But the country needs both. In simple terms, the debate is superfluous since it should not be a debate about one of them but should be about both. Fortunately, a critical analysis of the objectives of both sides reveals that the differences may not be irreconcilable.

Stripped off all the rhetoric, there are two fundamental issues at the heart of the present controversy. First, MHA questions the rigour associated with the data being collected by UIDAI. Second, it also raises questions about who should control this data and the terms governing its sharing and use.

All this can in turn be reduced to four basic questions. Who should be the enrolment agency? What should be the rigour of data capture process? Who should manage the data? What should be the protocols that define the use of the collected data?

Evidence so far regarding the enrolment process appears to point towards the UIDAI's model of decentralized enrolment, through state-level registrars, being more effective than the RGI’s centralized National Population Register (NPR) model. If any proof of this were needed, one only needs to look at the progress of enrolment in the respective states - 8 million enrolments in the NPR to UIDAI’s 100 million.

The MHA is right to be concerned about the rigour of the enrolment process. But that does not mean that the process should be so rigorous, with the type of multi-step screening now mandated, as to virtually ensure that the enrolment will take years and maybe even decades. The slow progress of NPR enrolments is itself an indicator of the difficulty of pushing ahead with this enrolment strategy. However, it is possible to do a multi-track enrolment whereby the data collected by the Registrars can be topped up with a more rigorous re-validation so as to meet the NPR requirements.

In any case, as the NPR enrolments gather momentum, more invasive MHA enrolment processes will raise concerns about privacy and are bound raise bigger controversies and legal challenges. It is possible to continuously, over a ten year period, build-up the data rigour, through a phased-out manner of validation and rigour enhancement.

Organizationally and in terms of professional competence, there can be little doubt that the UIDAI is better positioned than the Registrar General of India (RGI) in managing the technology platform and database. In any case, given that most of the hardware infrastructure is already in place or its procurement is in progress under the control of the UIDAI, it is only appropriate that it continue and complete the process.

A workable solution to the whole project may be for the UIDAI to manage the technical issue of database management and the MHA to govern the terms of use based on defined protocols. These protocols should be use-specific, and the MHA should have the prerogative, in consultation with all stakeholder departments, to define them. The UIDAI could then administer the process of database sharing with different user departments, based on the protocols defined by the MHA.

This four-pronged approach would enable a reconciliation of the apparently contradictory aims of the two wings of the government. All this should be brought under a legislative framework and should be defined in the Parliamentary Bill that would give statutory basis to the entire process.

The Aadhaar number has benefits that go much beyond its immediate utility by way of enabling user departments to eliminate fraud arising from duplicate, ghost, and impersonation of beneficiaries. The more long-term and functionally high-value utility of the Aadhaar number will come from linking up multiple department databases using the Aadhaar number. Smart data analytics can help reveal inconsistencies within each database and help minimize and even eliminate many categories of inclusion and exclusion errors. It will not only ensure that ineligible beneficiaries are screened out, but also prevent eligible beneficiaries from being excluded.

The massive amounts saved from the elimination of these inclusion errors can be used to improve the quality of service delivery and in other public infrastructure investments. Aadhaar holds equally impressive potential benefits for the private sector. A secure and reliable Aadhaar database and Aadhaar-linked bank accounts will help reduce business transaction and contract costs in many sectors.

There are certain very valid data protection and privacy concerns associated with the Aadhaar project. For a start, it is important to immediately bring the Aadhaar project under a statutory mandate and formulate an enabling policy framework that governs the terms of its use. Adequate care can be taken to ensure that privacy concerns are addressed and only the basic data is made shareable across departments. As already indicated, there should be clear protocols and rules governing the sharing of information across departments.

However, none of this can detract from the undeniable benefits associated with the Aadhaar project. The dangers and concerns are far outweighed by the substantial benefits in improving governance.

Power sector reforms - farm power and tariff revision

The Business Standard reports that the Union Power Ministry have advised State Governments to transfer the massive losses, estimated at Rs 1.06 lakh Cr at end of 2009-10, off the balance sheets of state distribution utilities. It has also advised that states take action to ensure no further cash losses.



If the bailouts or restructurings happen, it will be the second time in almost a decade that state distribution utilities have received such help. At the turn of the century, as part of the first flush of reforms in electricity sector across the country, many state electricity boards were bailed with a Rs 41,400 Cr package. State governments assumed the debts and issued long-term bonds.

Like with the earlier bailout, the present need for bailout appears to have been triggered by similar reasons - the near inevitability of widespread defaults to central generating utilities by state and private sector distribution utilities. This is a clear sign that very little appears to have changed with the sector except in processes and formalities.

In fact, for all the structural reforms that have been enacted in the sector over the past decade, central and state governments have refrained from addressing the twin-elephants in the room - limiting free power for agriculture and regular increases in power tariffs. Unbundling, private sector participation in generation, liberalization of regulatory restrictions in transmission and distribution, and operational improvements like loss reduction, can only get you to the starting line.

Any earnest and meaningful effort to reform the sector has to place farm sector reforms and periodic tariff revision at its center. There is nothing secret nor mysterious about this. Any trading enterprise can survive only if its cost of purchase and service delivery matches its price of delivery. In simple terms, the power procurement cost plus the transmission and distribution cost have to match the aggregate tariffs.

In fact, its importance for the long term health of the sector itself cannot be over-emphasized. The problems faced by privatized distribution utilities in Delhi, who too have massive pending dues with generators, is a reflection of the magnitude of the problems. If the present trends are allowed to continue, it will adversely affect the prospects of private sector generation too. Unlike state generation utilities, private generators will not be able to manage their operations without regular payments on their power sales.

In many respects, the current sorry state of affairs is a serious indictment of the state and central power sector regulators. It is also a classic case of how easily important reforms can be subverted and given lip-service in implementation. It also drives attention to the important issue of tariff revision and the need for public conditioning to accept such revisions.

1. The Electricity Act 2003 and the various state regulatory acts clearly mandates that utilities should not bear state subsidies and state governments should transfer upfront (and not reimburse) the subsidy amounts to utilities for all subsidies being implemented by them. The regulators are supposed to safeguard the interests of the regulated utilities through the annual tariff revision filings. They are mandated to fix tariffs in a manner that reflects utilities' cost of power procurement, a reasonable level of operational efficiency improvements (read loss reduction), and required capital and operational expenditures.

But regulators across states have made a mockery of this, accommodating the interests of their paymasters, the state governments, at the expense of the utilities they were statutorily mandated to protect. Tariff filings in most states have been reduced to a charade, an academic exercise, and most often unprofessional at that, that has no relevance to realities in the field. Regulators, barring a few occasions, have failed to exercise their due powers and force states to bite the bullet on tariff and farm power related issues.

2. The policies of state governments since the reforms were initiated is a classic example of how easy it is to subvert well-intentioned and critical reforms. States have not raised tariffs on domestic consumers for many years now. Assuming inflation and the general increase in cost of procurement, the real subsidy has increased massively. Free power to farmers has remained a holy cow. Even the issue of mere metering of agriculture services raises unbelievable amount of passions.

Even with the latest crisis facing utilities, and despite being fiscally constrained, state governments are unlikely to take any meaningful steps to address this issue on a sustainable basis. It will require commitment at the highest levels to stand even a reasonable chance with pushing through such reforms.

3. Despite nearly two decades of liberalization, the one area where public debate, both in the political realm and in popular media, has remained entrapped in the mindset of the bygone era is that relating to cost-recovery and tariff revision. We cannot shy away for too long from the inevitable fact that consumers have to pay the full cost of any service consumed by them.

Public and political opinion needs to be conditioned into accepting the reality that there are no free lunches. Apparent free lunches are unsustainable and cause serious indigestion down the line. Reforms are not just cheap talk. For any meaningful reforms in sectors like utility and municipal services, important structural reforms have to complement with cost-recovery in service delivery. In simple terms, the culture of free or subsidized delivery has to end. At best, cost-recovery can be ensured in the aggregate through some form of cross-subsidization.

There can be a silver-lining to the crisis. If utilities are to be bailed out, it is a great opportunity for all stakeholders - regulators, state and central governments - come together and agree on some minimum steps with reforming farm power and tariff revision. This blog has always talked about scalable and practical steps in public policy reforms. However, the time may have come to stretch the definition of practicability given the serious magnitude of crisis facing power sector in India. I can think of three such minimal set of steps

1. All agriculture services should be metered. Leave alone bringing in efficiency and accountability in farm power consumption, this is an absolute essential requirement for many upstream reforms. For example, current estimates of distribution losses are badly flawed in the absence of any reliable estimate of agriculture consumption. It is common practice for utilities and regulators to use this as a sinkhole to doctor various operational efficiency and tariff figures that suit their respective agendas.

2. There is scope of considerable reforms with the terms of free farm power supply. To start with, free power supply should be restricted to only certain types of farmers, with the restriction being confined to easily enforceable or detectable parameters or proxy parameters. As I have blogged earlier, governments should move over to a system of fixed monthly units for agriculture consumption, to be reimbursed into the farmers accounts when they pay their monthly farm and domestic supply bills. Its benefits are manifold and the availability of Aadhaar, atleast in certain areas, makes the logistics simpler.

3. Periodic tariff revision, for all categories of consumers, must be made mandatory. In fact, even a simple, rule of thumb increase based on inflation or some other fixed parameter, will be one of the biggest boost for the sector. Just as was done to encourage unbundling of state utilities in the first generation of reforms, state governments should be directed to enter into MoUs or agreements with their utilities or mandate rules that define the terms for periodic tariff revisions. A mandatory and automatic requirement to periodically revise tariffs, agreed between all states and the centre can overcome, atleast partially, the political and collective action problems that accompany such hard reforms.

Mathew Effect in Poverty

The experience from Great Recession has once again conclusively shown that as the economy weakens, the under-privileged and disadvantaged are the most vulnerable. It is doubly ironic that these people are suffering in a recession caused by those at the top of the social and income ladder, most of whom have been spared the worst and many are even prospering. Clearly, the poor are paying for the sins of somebody else!

Consider these three graphics from the impact of the Great Recession on the American society. People with a four-year degree — who have an unemployment rate of just 4.3 percent — are barely experiencing an economic downturn. It should come as no surprise that not only were the least educated most vulnerable during the plunge into recession but also the least successful during the recovery. In fact, those with the best education levels enjoyed an increase in employment rate during the recession.



Among all industries, those with lower than high school education performed much worse than those at the higher end.



This graphic captures the magnitude of the disparity



A more rational analysis would explain this irony as the natural order of things in a modern economy. Not only are those at the lower end of income ladder more vulnerable to recessions and slowdowns, they are also among the least likely to benefit from any booms or upturns.

For a start, those at the lower end of the income ladder obviously do not have the wealth to cushion them from any dips in their incomes, just as those at the other end can draw down from their pots. But more critically, the dynamics of modern economies - education-premiums, skill-bias etc - militates against those initially disadvantaged or under-privileged. A form of Mathew Effect - "For to all those who have, more will be given, and they will have an abundance; but from those who have nothing, even what they have will be taken away" - is a distinguishing characteristic.

Therefore, as economies globalize, the case for a strong, universal, and dynamic social safety net becomes ever more relevant. People are more exposed, often directly, to global economic forces, many of which may adversely affect their livelihoods and push them into poverty or deepen their existing poverty-stricken condition. Further, unlike earlier times when economic mobility was mostly upwards and at a slower pace, such mobility is becoming increasingly rapid and also involves two-way movements.

In the circumstances, if economies are to cushion their vulnerable sections of population to the vagaries of these global economic forces, a social safety net should be a priority. This comfort is also necessary to increase the political acceptability of policies that involve trade liberalization and making labour markets more liberal and flexible.

The dynamic nature of these changes in income status also means that increasingly social safety entitlement programs should have an automatic entry and exit provisions. Those who suddenly fall into poverty (by say, an easily identifiable event like job loss or migration back into his village etc) should be able to avail of the social safety benefits just as those who experience an increase in incomes should drop-off. This automaticity, like with unemployment benefits in the US, will minimize the role of governments, with all its political dimensions, and make these programs more efficient and less distortionary.

At some time, when Aadhhar becomes more universal, and integrated national databases are available, it may be possible to have such dynamic poverty programs in India too. For example, those who get a government job could be declared ineligible for food rations with immediate effect. This will address one of the current biggest problem with entitlement programs in India - absence of sunset clauses.

The price volatility problem with cash transfers

I have blogged earlier that price volatility, especially with food grains, is the most difficult challenge with cash transfers. One of the strategies to overcome this is to provide a large enough subsidy, inclusive of a volatility buffer, so that even if price increases, the buffer will cover for the increase. The nutrient-based subsidy (NBS) for non-urea fertilizers under implementation since April 2010 uses this strategy to cover for price volatility.

It is therefore instructive to examine the experience with NBS in fertilizers. Under this model, fertilizers are sold to farmers at its decontrolled MRP (minus the subsidy) and the subsidy amount paid separately to the fertilizer companies. The nutrient-wise fertilizer subsidy is fixed once a year, based on its market and import prices, and with a reasonable buffer to cushion the producers against price fluctuations over the year.

What has been the progress report with this subsidy regime in operation for more than a year now? A recent report in Businessline highlights the sharp volatility in the prices of fertilizers, as reflected in the manner in which the subsidy fixed for 2011-12 (operational from April 1, 2011) was sharply revised between November 2010 (when it was originally fixed) and March 2011 (when the subsidy amount was frozen). It now appears that even this may have to be revised.

Recent imports of DAP have been for $612 per tonne (or Rs 27,540 per tonne), which with duties, freight and other charges will retail at about Rs 30,735 per tonne. Against this, the MRP of DAP is currently at Rs 10,750 a tonne and the NBS payable from April 1, 2011 is Rs 18,474 (fixed assuming a landed import price of $580 a tonne), thereby grossing the company Rs 29,224 for every tonne of DAP. This deficit of more than Rs 1500 a tonne or Rs 75 a bag will either have to be covered through an increase in subsidy or passed on to the farmer.

Given important state elections coming up, it is almost inevitable that despite the original decision to fix the subsidy once a year, the subsidy rates will be revised again. Similarly, even on MoP, where global suppliers are apparently pushing for a landed price of $420 a tonne (which is more than the current reference rate of $390 a tonne), a subsidy revision looks certain.

Further, there is also the problem of market expectations that get formed by the subsidy price announcements. Since India is one of the largest fertilizer importers, its procurement decisions and prices signals get embedded into the global market prices. Though the subsidy rates announced includes a volatility buffer, the market prices naturally get anchored at the upper end. As the Businessline report says,

"For 2010-11, the Centre had fixed the NBS rates on nitrogen (N), phosphorus (P), potash (K) and sulphur (S) with reference to corresponding import prices of $310 a tonne on urea, $ 500 on DAP, $370 on muriate of potash (MoP) and 190 a tonne on sulphur. For 2011-12, the Centre – in a bid to talk down world prices – initially, on November 19, pegged these reference prices lower at $280, $450, $350 and $125 a tonne. But with global prices showing no signs of easing, the Centre, on March 9, announced new NBS rates for 2011-12 based on higher landed prices of $350 for urea, $580 for DAP, $390 for MoP and $180 for sulphur."

The Businessline report also quotes industry sources who claim that the government's decision to tinker with the DAP reference price has contributed to the steep increase in its import price in recent months. Also, the NBS regime has had no effect on lowering the subsidy burden. In fact, subsidy burden is also projected to go up by Rs 30,000 Cr to Rs 82, 245 Cr, up from the budgeted provision of Rs 52,837 Cr for 2010-11.

The experience of fertilizer highlights the difficulty of managing price volatility and also ensuring access to fertilizers (or food grains) at affordable prices. The much greater price volatility and political sensitivity associated with food grains means that any buffer will have to be much larger. Far from lowering it, the food subsidy outgo will therefore increase.

Admittedly, with fertilizers, given the reasonably integrated national market, it may be possible to calibrate subsidy to a price index. However, this approach cannot work with food grains whose prices vary so widely across the country at any point in time, that it is impossible to capture it in one index with any reasonable degree of reliability. So what is the way forward? More food for thought!

Who are the eligible beneficiaries?

In my previous post, I had drawn attention to the debate about whether the Aadhaar identity would help more effective targeting of welfare beneficiaries. I had argued that Aadhar-based identification would not help screen out those beneficiaries who do not meet the eligibility requirements.

In this context, one of the comments pointed to the psychological deterrent effect of any Aadhaar-based identity in screening out the ineligible. This works on the presumption that since Aadhaar localizes the identity and makes it easy to trace individuals, the possibility of being noticed when drawing benefits would deter the ineligible from accessing those benefits.

I am not sure about the effectiveness of such deterrent for two reasons. First, the margins between the eligible and ineligible are never cut-and-dry. For example, it is impossible to accurately avoid inclusion errors (ineligible getting included) when identifying people below or above the poverty line based on the standard income parameter. What should be the cut-off income? How do we quantify that income? Second, given the widespread poverty in the country, the numbers of people who straddle the blurred boundaries of eligibility are considerable.

In other words, a large number of people face the ambiguity about whether they are eligible or not to receive certain welfare benefits. In the circumstances, the deterrent effect gets considerably diluted. Where is the need to fear when many of your neighbours belong to the same category? In any case, given the difficulty with income quantification, how can anybody establish that you are not income poor (especially when the major share of incomes of those under scrutiny generally comes from the informal sector)?

This challenge will remain with or without Aadhaar and raises the question of what is the most appropriate method to identify welfare beneficiaries. In this context, I am reminded of George Akerlof's famous paper that advocates the use of "tagging" - which tags (identifies) people and then makes specific transfers (or concessions) to them - in taxation. Tagging eliminates the ambiguity arising from eligibility parameters (like income) and enables easier differentiation of the eligible from the ineligible.

What are the most effective tags to identify poor people eligible to receive welfare benefits? The commonest tags are height, weight, looks, gender, age, educational qualifications etc. These are all, for obvious reasons, unsuited for identification of the income poor.

Among the more effective likely tags could be the nature and/or size of ones house. For example, a person living in a temporary or semi-permamnent house could be treated as income poor. Alternatively, the carpet area of the house, discounting for locations, could be used as tags for income levels. Either way, it becomes possible to verify and mark out a person who claims benefits despite failing the eligibility norm. Though administration of house-type based tags too raises concerns, it does look a more promising approach to screen beneficiaries than the current practice of identification based on incomes.

It is possible there are more effective tags, especially for certain subsidized products. In any case, irrespective of whether Aadhaar is used or not, the problem of beneficiary identification, with a reasonable degree of accuracy, has to be satisfactorily resolved.

Pitfalls in cash transfer implementation

The decision by the Union Government to replace the current subsidy regime in fertilizers, cooking gas and kerosene with a system of cash transfers in a phased manner has triggered off an intense debate about cash transfers. This post will summarize the most relevant and common objections to cash transfers and critically examine each of them.

1. It does not resolve the targeting problem

The biggest criticism of Aadhaar is that it leaves the critical issue of beneficiary identification, or targeting, unresolved. The Aadhaar identification merely validates whether the particular individual has come to receive his welfare benefit. It does not say anything about whether the individual is, in the first place, eligible to receive the benefit itself. The means testing of the beneficiary for his or her eligibility is essentially an administrative process.

There are four possible sources of leakages in any welfare program – beneficiary impersonation, ghost, duplicate, and ineligible beneficiaries. Aadhaar-based identification can easily eliminate the first three possibilities. It ensures that benefits are transferred only to the registered beneficiaries. However, ineligible beneficiaries cannot be immediately addressed with Aadhaar. The concern about failure to ensure targeting is therefore only partially correct.

Aadhaar-linked processes are a definite and significant improvement on the prevailing system of beneficiary identification and benefit disbursement. Its effectiveness will improve incrementally as Aadhaar is adopted by a critical mass of user departments so that databases can be shared to screen out the ineligible. In any case, Aadhaar cannot be a substitute for the administrative failure in keeping the beneficiary selection process honest.

It also provides governments an excellent second-best tool to effectively target benefits on petroleum products like cooking gas and fertilizers that are currently universally subsidized. Any such change in regime will be a qualitative and substantial improvement on the current universal subsidy regime.

2. Cash transfers cannot factor in price volatility

The most serious concern about cash transfers, one that deserves the strongest consideration, is on the issue of price volatility. Critics point to the possibility of sharp and sudden price fluctuations, especially for food grains, and argue that this would adversely affect the consumer’s purchasing power. They argue that unless subsidy amounts are calibrated real-time to in response to local market price, a virtually impossible task given the diverse and fragmented nature of rural markets, the cash transfers will fail to achieve its objective.

It is undeniable that prices of commodities, especially food-grains, fluctuate sharply across regions (even within districts, between the head quarters and rural interiors) and over even small time-periods. I have blogged about this here and here. To the extent that the ultimate objective is food or fuel security, or making available these commodities at affordable prices, price volatility poses serious problems.

The new nutrient-based fertilizer subsidy regime overcomes the problem of price volatility by providing a large enough subsidy to act as a buffer against reasonably large manufacturing cost increases. The subsidy transferred to the manufacturers, which is fixed once a year, is deliberately kept high so as to discourage manufacturers from indulging in any market manipulation. It is also hoped that with this subsidy, even if costs increase, the subsidy will cover the increased costs and keep fertilizer prices affordable. However, it has to be admitted that this approach may not be practical for products like food grains and other products.

In the circumstances, at least in the initial phases, it may be more appropriate if cash transfers for products like food grains are restricted to areas where the volatility is least. Urban markets experience less price volatility and they are also more closely integrated into each other. Therefore, an arrangement where the subsidy amount is indexed to the relevant inflation measure is likely to address most of the concerns on price volatility. It has to be admitted that this strategy does not address local price shocks and sudden spikes which cannot be accurately captured on a pan-Indian inflation index.

3. The cash transferred will be frittered away on wasteful expenditures

One of the long-held opposition to cash transfers revolves around the premise that recipients are likely to fritter away their cash on wasteful expenditures. This is all the more so in rural areas, where men are more likely to manage household finances. The widespread self-control problems that bedevil human beings, as highlighted by research in behavioral psychology, adds credence to this claim.

Consider the case of a beneficiary who receives cash transfers on fertilizers and cooking gas into his account, besides NREGA wages and other welfare transfers. There is the possibility that these multiple and often lumpy inflows into a single account would be diverted for other purposes, especially on wasteful expenditures, thereby defeating the purpose of such transfers.

Such concerns can be effectively addressed through vouchers, smart cards, and structured savings bank accounts. The retailers can be reimbursed their subsidy on production of the vouchers for the subsidized product received from the beneficiaries. Debit cards with purchases restricted to only the prescribed commodities can also be used to administer cash transfers. Transfers to the account of the woman family member can also help address such concerns to some extent.

Finally, there are multi-tier savings bank accounts. Insights from recent research in behavioral economics show that use-directed sub-accounts within the main account, designed to take into consideration people’s "mental accounting choices", may be more effective at optimal management of multiple inflows. Accordingly, savings accounts, with say, food or fertilizer sub-accounts, can combat people’s behavioral urges to spend their cash transfer incomes on other expenditures.

In any case, there are doubts on the assumption itself. A study of unconditional cash transfer schemes in 15 Eastern and Southern African countries by S Devereux, J Marshall, J MacAskill and L Pelham indicates that the fungibility of cash transfers does not necessarily undermine the intended outcomes. They also found that recipients used the freedom of choice provided by unconditional cash transfers in a wide range of ways that directly or indirectly benefited children, from purchase of food, groceries, health and education services to investments in farming or small enterprise.

4. It does not address the issue of consumer choice

Another serious objection comes from those pointing to the limited consumer choice in most Indian markets. Since cash transfers are meaningful only when citizens have choice, what use is this cash when people have little or no choice with schools or hospitals? It is a reality that many parts of the country and millions of people have no access to hospital facilities. Further, such presentation of choices, far from creating competition among service provides, only adds to the rent-seeking opportunities. It amplifies the power of the entrenched sub-optimal interests.

Similarly, in most parts of rural India there are typically just one or two retailers for any product. The resultant lack of competition renders any claims of choice disingenuous. If the exclusive government outlets, say ration shops, are closed down, the possibility of price gouging (atleast on certain occasions) by the local kirana shop owner cannot be ruled out.

This concern loses its relevance outside the rural context. Even the smaller cities offer enough choice with retailers, schools and hospitals. Urban residents, who enjoy such choices, can therefore benefit from cash transfers. In any case, given the widespread prevalence of predatory practices like hoarding among retailers even in the smaller towns, such policies will have to be complemented with strong administrative actions to curb these practices.

5. It is a smokescreen to roll-back Government

The strongest critics from the left view a "roll-back the government" agenda behind the cash transfer movement. They see cash transfers as the first step in a systematic campaign to divert attention from more fundamental issues. They express the fear that the focus on cash transfers would slowly displace critical basic welfare issues like investments in primary education and health care, food and fuel security, and so on.

They portray cash transfers as a convenient excuse for governments to abdicate on their responsibilities, "We have done our side of the bargain. We provided you cash, now you go and buy whatever you want". Governments, they argue, will transfer cash to students, patients, and farmers, and leave investments in schools, hospitals, and irrigation to the vagaries of market forces. Similarly, cash transfer in place of food grains, run the risk of seriously imperiling food security. Such ideological arguments are never easy to refute. It may be more effective to tackle them on similar ideological grounds, though its success is not assured.

In conclusion, the concerns of price volatility and choice are not easily refuted. They also remain formidable obstacles to widespread adoption of cash transfers. However, urban markets, which are less susceptible to random and local price shocks and may offer adequate choice, are best placed to receive cash transfers.

Accordingly, it is preferable that the first phase of cash transfers be implemented in towns and cities and for products with less price volatility and choice problems. Food grains distributed through PDS are vulnerable to sharp price fluctuations. The concerns of food security raised by skeptics are not easily refutable. Besides, any failures arising from cash transfers in food grains could become a rallying point for opponents calling for aborting the cash transfer scheme. Cooking gas and fertilizers, and less so kerosene, with their centralized distribution network, are less vulnerable to these concerns.

It is undeniable that urban areas are more suited for cash transfers in all these products. However, this dual subsidy regime, wherein city residents get cash transfers whereas villagers continue to receive subsidies through the conventional channels, may generate its set of problems.

This will be all the more so for food grains and kerosene, and especially during periods of price volatility. In this context, it is important that subsidy benefits are disbursed to consumers in all areas through an Aadhaar-linked system, irrespective of whether they receive cash or not.

What the UID will not do

I have blogged earlier about the numerous exciting possibilities offered by the UID project in radically enhancing the ability of governments to effectively deliver the myriad government welfare programs and subsidies.

The importance/uniqueness of the UID is in vastly expanding the ability of governments to more accurately target and deliver a much wider range of subsidies. More specifically, UID-linked bank accounts create the channel to deliver subsidies as a cash transfer directly to the individual. However, it needs to be clearly borne in mind that the UID is not a panacea for every welfare benefit delivery problem. It is only an improvement, albeit a major one, on the existing welfare delivery channels.

This message assumes importance in view of the increasing number of articles that have been appearing expressing apprehension at the persistence of delivery channel failures even after the UID is implemented. It needs clarification that these peristent failures are less an indictment of any inadequacy of the UID number and more a testament to the complexity of delivering welfare assistance in such massive scale and under complex socio-economic environments as we have in India.

In any case, here are a few major generic problems that will persist even after the implementation of the UID project.

1. It will not, atleast in the initial stages, contribute much to the accurate identification of beneficiaries (or means-testing). The list of beneficiaries eligible to receive the benefits will have to be determined following a purely administrative process. So, even after implementation of the UID project, the problem of ineligible beneficiaries availaing of welfare benefits will remain.

However, as the database grows and becomes more universal, it becomes possible to leverage the network effect (arising from membership of larger numbers of specific categories of programs) and screen out atleast the ineligible applicants.

2. As a corollary, the UID can be of only limited use in covering all the excluded eligible beneficiaries, which is a major problem with programs like the PDS.

3. UID will not address the last-mile leakages. Thus the leakages by way of under-weighment at the fair price shop of the distributed rations or reductions in the amounts paid out as welfare pensions or NREGS wages (at the cash disbursal point by the Business/Banking Correspondent, BC) cannot be avoided.

4. It cannot certify the quality of works carried out under wage-employment programs like the NREGS. Further, it cannot also address leakages by way of, say, man over-reporting (extra man-days claimed), unless the attendance at the work site is taken by UID authentication.

5. Even if the dual-price mechanism is dismantled for foodgrains, petrol, diesel, and fertilizers, and an arrangement to transfer the subsidy to the UID-linked bank account of the individual is introduced, the possibility of market manipulation by wholesalers and retailers to restrict supplies and/or increase the prices for fertilizers and food grains will remain.

Addressing petroleum and diesel subsidies

I have blogged recently about how developments in UID and TFI opens up considerable opportunities in re-designing various subsidy disbursement channels to both improve targetting and increase its economic efficiency. This includes the possibility of transferring subsidies directly as cash (into the UID-linked bank account of the beneficiary) and thereby dismantle price controls or more accurately target the subsidy (like in case of PDS) towards its intended beneficiaries.



However, addressing the most salient and much-debated petroleum subsidies could be much more difficult. Since petroleum is directly or indirectly consumed by everyone in different forms, accurate targetting becomes very difficult. Apart from the difficulty of estimating the relative impacts of the higher prices, such direct cash transfers are also too complex to administer.

Compounding the problem is that eliminating price controls, while politically difficult, will also have a ripple-on effect on the economy. Unlike all subsidized products, petroleum is a critical input in the production of most other goods and services. Its price is a function of the cost of production of all these goods and services. Most critically (and politically damagingly), a sudden dismantling of the subsidy will surely have a cascading impact on the prices of food and other essential commodities.

Here are a few possible theoretical solutions. The first one to have a dual pricing system (a la PDS for petrol and diesel) and then target the subsidies as cash transfers through UID-linked accounts is both a step backwards and comes up against the aforementioned problem of cascading effect. The second one is to eliminate price controls and disburse subsidies, using the UID-linked bank accounts, as a revenue-neutral cash transfer to an identified group of beneficiaries. This will mitigate any possible inflationary impact of rise in petroleum prices and thereby smoothen the sudden shock arising from it. The cash transfer can have a built-in sunset clause whereby the subsidy would decrease continuously and expire over a period of time.

Another alternative would be prepare a widely-debated (build some level of consensus) self-acting action plan (even a legislation, linked to say the Fiscal Responsibility and Budget Management Act!) to gradually phase out the subsidies. This action plan can be back-ended and fairly long-drawn out to mitigate any adverse impact and manage inflationary expectations. Finally, a more optimistic alternative is to wait for global petroleum prices to fall to $30 a barrel and then use the resultant price cushion to dismantle price controls and thenceforth let the domestic retail market prices respond to the global market prices. But the problem with this approach is that when the reckoning comes, instead of dismantling the price controls, the clamour will be to pass on the benefits of lower price to the consumers!

The government's current policy on petroleum subsidies is clearly to make piece-meal increases when the crisis deepens. Such efforts come up aginst stiff political opposition, even within the ruling party's, and for every successful effort there are possibly three or four failed ones!