Direct Benefit Transfer Scheme and Government Subsidies

The article focuses on the linkage between Direct Benefit Transfer Scheme (DBTS) and government subsidies which are often mismanaged resulting into a burden on the fisc.

Created On: Mar 18, 2016 10:10 ISTModified On: Mar 22, 2016 11:43 IST


Government of India has launched welfare schemes for the underprivileged section of the society from time to time entailing huge cost to the exchequer in the form of subsidies.

Indian government has been providing subsidy on both merit and non-merit goods. These include subsidy on education, health, fertilizer, power, oil, foodgrains, kerosene and LPG. Out of all these subsidies, petroleum subsidy and subsidy given on foodgrains, kerosene and LPG under the Public Distribution System (PDS) constitute the major challenge for the government in managing subsidies.

These subsidies though necessary from the viewpoint of welfare function of any government, however, demands efficient management so that the subsidy reaches the right person and in time without becoming a burden on the fisc. Numerous surveys and studies have revealed that subsidized goods and welfare benefits have not been reaching to intended beneficiaries.

Subsidy Burden on Government

According to the Economic Survey 2015-16, the subsidy bill for BE 2014-15 was placed at 2.60 lakh crore rupees which was 2.0 percent of GDP. In the post financial crisis period, the subsidy bill increased from 2.2 percent of GDP in 2009-10 to 2.5 per cent of GDP in 2012- 13.

As a percentage of Non-Plan expenditure, the subsidies increased from 23.9 percent in 2010-11 to reach 28.1 percent in 2012-13 before falling to 24.2 percent and 23.4 percent in the years 2013-14 and 2014-15 respectively.

The estimated direct fiscal cost of petroleum and food subsidies is about 378000 crore rupees or about 4.24 percent of GDP.

Prima facie, price subsidies do not appear to have had a transformative effect on the living standards of the poor, though they have helped poor households weather inflation and price volatility.

In light of the above problem of managing subsidy, the government introduced the Direct Benefit Transfer Scheme (DBTS) in 2013.

What is DBTS?

The Direct Benefit Transfer Scheme (DBTS) provides for direct transfer of money into the bank accounts of eligible persons identified and covered under various Government welfare programs. The money transferred directly into the beneficiary account is the difference between the market price and subsidized price, which is in proportion to the quantity uplifted from the market.

The scheme has been compared with the Brazilian Bolsa Familia. But it differs in that it brings together the delivery of a diverse range of existing social programmes in India, such as social pensions, student scholarships and employment guarantee scheme payments.

Initial Phase of DBTS

The DBTS root lies in the Dilli Annashree Yojana launched by the Delhi Government in December 2012 which used DBT mechanism for delivering entitlements. The scheme transferred 600 rupees per month to the account of the senior-most female member of the eligible household. This was the first cash transfer scheme for food security in the country.

Subsequently, the Direct Benefit Transfer Scheme (DBTS) was launched by the then Prime Minister of India Manmohan Singh on 1 January 2013 in 20 districts of India. The scheme was inaugurated at Gollaprolu in East Godavari district on 6 January 2013. By the end of March 2013 it was envisioned to be cover 26 social welfare programmes in 43 districts of 16 states.

It was launched by linking it with biometric-based Unique ID programme Aadhaar so as to eliminate ‘duplicates’, i.e., one person getting benefits multiple times, and ‘ghosts’, i.e., non-existent people getting benefits.

This phase also envisioned the use of Micro-ATMs and use of Banking Correspondents (BCs) to leverage the Core Banking infrastructure of commercial banks for transfer of benefits.

DBT for LPG Consumers (DBTL) Scheme

The DBTS for LPG consumers (DBTL) was launched at Tumkur near Bangalore on 1 June 2013 by the Union Minister of Petroleum & Natural Gas, M Veerappa Moily in 20 high Aadhaar coverage districts. Under this, the subsidy on LPG cylinders in the districts was provided directly to consumers in their Aadhar linked bank accounts.

Later on 15 November 2014, NDA Government under Prime Minister Narendra Modi introduced the Modified Version of DBTL Scheme in 54 districts in 11 states including all in Kerala. Under this, LPG consumers who have not yet availed the benefit will be able to get cash subsidy amount transferred into their accounts to buy Liquefied Petroleum Gas (LPG) cylinders at market price. It was extended in the rest of the country on 1 January 2015 under the scheme PAHAL.

On 1 January 2016, riding on the fiscal success of DBT in LPG, the Union Government decided to launch the similar DBT for kerosene subsidy. This was aimed at cutting down the diversion and black marketing of the fuel.

DBTS for Kerosene

According to government estimates, the subsidy outgo for kerosene for the financial year 2014-15 was about 24799 crore rupees. Also, the allocation of subsidized PDS kerosene at 86.85 lakh kilolitres was more than the consumption at 71.3 lakh kilolitres.

In light of this, Union Government announced in January 2016 to launched the DBTS in Kerosene. It will be rolled out in 26 districts across eight states from 1 April 2016 including Chhattisgarh, Haryana, Himachal Pradesh, Jharkhand, Madhya Pradesh, Maharashtra, Punjab and Rajasthan.

In order to incentivise states to implement DBT in kerosene, they will be given cash incentive of 75% of subsidy savings during the first two years, 50% in the third year and 25% in the fourth year.

The JAM Solution

Eliminating or phasing down subsidies is neither feasible nor desirable unless accompanied by other forms of support to cushion the poor and vulnerable and enable them to achieve their economic aspirations. The JAM Number Trinity – Jan Dhan Yojana, Aadhaar and Mobile numbers – allows the state to offer this support to poor households in a targeted and less distortive way. It was introduced in Economic Survey 2014-15.

Besides this, government is also mulling upon introducing Mobile Money and using the Post Office network to directly transfer the subsidy into the beneficiaries account.

DBTS and Subsidy Saved

One of the primary goals of launching DBTS was reducing the burden of subsidy on the government through proper management of it. This could be done through reducing leakages in the many welfare programmes by solving the ‘problem of exclusion’, i.e., identifying the right beneficiaries.

According to the Economic Survey 2015-16, since the introduction of DBTL the subsidy bill for BE 2014-15 was placed at 2.60 lakh crore rupees which was 2.0 percent of GDP compared to 2.5 per cent of GDP in 2012- 13.

Further, as a percentage of Non-Plan expenditure, the subsidies decreased to 24.2 percent and 23.4 percent in the years 2013-14 and 2014-15 respectively after increasing from 23.9 percent in 2010-11 to reach 28.1 percent in 2012-13.

The deregulation of diesel price in October 2014, along with the introduction of direct benefit (subsidy) transfer into the bank accounts of domestic LPG consumers, coupled with a sharp decline in global crude oil prices will help contain the petroleum subsidy bill. The centre saved around 14000 crore rupees in fiscal year 2014-15 due to weeding out of the fake and, duplicate LPG connections through DBTL.

With the introduction of Jan Dhan Yojana, the number of bank accounts is expected to increase further and offering greater opportunities to target and transfer financial resources to the poor. Indeed, the government is already attempting this transition in certain areas by paying cooking gas subsidies directly via Direct Benefit Transfer into the bank accounts of 9.75 crore recipients.

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