Unfairness, Fair Price Shops and Direct Cash Transfers

FPSDirect Cash Transfer (DCT) is the slogan of the season. Nobody opposes the intention of DCT. But practically it has produced unimaginable difficulties. As the scheme is dealing with the lives of poorest poor people around the country, it ought to be handled carefully. The pilot project of DCT in Alwar district of Rajasthan is not giving good feedbacks. It is crucial for the government at the centre to take note of the discrepancies in the pilot project implementation. In fact, pilot projects are meant to check out the strengths and weaknesses before going large-scale. Any effort to silence critics and fair opinions will jeopardise the interests of the poorest poor Indians. Hope the government takes it rightly.
Bharat Bhatti and Madhulika Khanna in The Hindu writes about the pros and cons of DCT on 4 December 2012
The nondescript town of Kotkasim in the Alwar district of Rajasthan had its Peepli Live moment after it was chosen for a pilot experiment with “direct cash transfers” of kerosene subsidies. According to the district administration, the scheme led to net savings of 79 per cent in kerosene subsidies after it was launched in December 2011, by weeding out “fake users.” The administration further claims that if this were replicated in Rajasthan as a whole, it would lead to annual savings of about Rs. 920 crore for the State government. However, are these savings really driven by a reduction in the illegal diversion of subsidised kerosene? A quick investigation, based on discussions with residents and Fair Price Shop (FPS) dealers in three gram panchayats of Kotkasim, reveals a different story.

The direct cash transfer of kerosene subsidies works as follows. Instead of getting kerosene from the local FPS at a subsidised price of Rs. 15 a litre, as they used to do, households now pay the full market price (initially Rs. 45 a litre, later raised to Rs. 50). The subsidy, that is, the difference between the market price and the subsidised rate of Rs 15 a litre, is deposited into their bank accounts. The subsidy payments are supposed to be made every three months, with the first three-month instalment paid in advance when the scheme is launched.
Clearly, this scheme requires careful recording of kerosene purchases and close coordination among the FPS, the administration and the banks. When people buy kerosene, the FPS dealer notes down their account number in his sales register along the purchase details. This information is sent to the District Supply Officer (DSO). The relevant subsidies are then paid into bank accounts based on this information, every three months.
The main purpose of the scheme is to reduce leakages: if FPS dealers get the same price from their legitimate customers as from the black market, there is no incentive to cheat. That, at any rate, is how things are supposed to work.

Most of the consumers we talked to said they used kerosene for lighting lamps, and sometimes in cooking stoves. Further probing revealed that some people used to mix kerosene with diesel to run tubewell pumpsets as well, though this was from their own quota of three litres per month. Before the scheme was launched, households often bought extra kerosene by borrowing ration cards from others who did not purchase their full quota. These “proxy purchases” have more or less ceased under the new scheme, because the subsidy is credited directly to the cardholder. Many respondents complained bitterly about this.
On the other hand, in the earlier system, kerosene supplies often ran out (possibly due to illegal diversion). For this reason, many people were also willing to go along with the new scheme provided the subsidies were paid on time.
Old entries in the ration cards suggest that there was demand for kerosene from every household. Moreover, due to power cuts and a lack of alternative source of lighting, kerosene is a necessity in many households. Then why did the purchase decline so dramatically after the new scheme was introduced?
One major reason is the erratic payment (or even non-payment) of subsidies, due to lack of coordination with the banks. Even a year after the scheme was launched, many households have not been able to open a bank account. Since the subsidy transfer requires Core Banking Solutions (CBS) enabled bank branches, the post office accounts of MGNREGA workers were not considered. Many households are yet to receive any subsidy, despite shelling out Rs 500 to open a (supposedly “zero-balance”) bank account — for instance the SBI account holders of Bilahedi gram panchayat. Another major hurdle is the time and effort required to go to the bank and check whether the subsidy has been credited. Quite often, people have to visit the bank many times just to get this information. Even a single visit can take a full day because of the distance, long queues, and uncooperative bank staff. This is a major hassle, particularly for poor households.
Because of this erratic and cumbersome transfer of subsidies, the effective price of kerosene has actually shot up, leading to a dramatic decline in FPS purchases. Since the launch of the pilot in December 2011, some households have received two subsidy instalments (for three months each) and some have received one — but many others are yet to get any subsidy. Without assured and timely subsidy payments, people are reluctant — or unable — to buy kerosene at the “market rate”.
The worst-hit are the poorest households. For instance, Sumitra Devi of Kanhdka gram panchayat, a single woman, has been constrained to use her pension to purchase kerosene from the FPS at the market rate without receiving any subsidy. Apparently, her account number is yet to reach the bank.
The dealers’ story was consistent with what we heard from consumers. Kerosene sales dropped drastically in the very first month after the scheme was introduced. Subsequently, kerosene offtake by dealers also plummeted due to a dramatic increase in the amounts they had to pay upfront to get kerosene supplies. When the FPS transaction price per litre tripled (from Rs 15 to Rs 45), so did the cash advance — from about Rs 3,300 per 220-litre drum to Rs 9,900 per drum.

Dealers’ commissions, however, remained the same (per litre). Further, it takes much longer to recover the advance, because sales have crashed. Thus, the returns on investment are much lower, to the extent that many dealers have lost interest in supplying kerosene. Some of them are literally being forced to continue, just to show that the scheme is a success. Even if many dealers were diverting kerosene earlier, maintaining a sound incentive structure for them is very important for the sustainability of the system. Forcing them to purchase kerosene at a loss to ensure that the scheme continues is both unsustainable and unethical.

Pilot surveys are initiated to learn lessons from ground realities. Before scaling up, the shortcomings need to be rectified. However, till now there has been no objective assessment whatsoever of the scheme by the government. On the contrary, the administration is projecting the scheme as a grand success on the sole basis of reduction in total subsidy, without analysing (or revealing) its cause. Our investigation suggests that the main reason for the reduction in subsidy is the involuntary dropping out of legitimate buyers. The whole experiment looks like a desperate top-down attempt to successfully execute a “showpiece” at any cost. One dealer told us that the DSO had scolded him saying: Ramjibhi to 14 saal ke vanwaas par gae the, aap teen mahine scheme nahi chala sakte? (even Lord Ram was exiled to the jungle for 14 years, can’t you run the scheme for three months). Another dealer was told: Aapko scheme chalani hi padegi, Collector ko sammanit jo karwana hai (you will have to run the scheme since we have to get an award for the Collector).
Of course, if the real purpose of the experiment was just to reduce the amount of subsidy (if need be by driving legitimate beneficiaries out of the system), then, yes, it was a “success”. But if the purpose was to put in place a more effective and equitable system, the Kotkasim experiment is at best an opportunity to learn from failure.