Whether subsidies should be given, or to what extent are they market-distorting, are matters of debate. But so long as we continue with subsidies, how to reach them to the intended beneficiaries is the main issue.
Currently, subsidy is largely provided ‘at source’. Thus, in the case of fertiliser or foodgrains and kerosene sold through the public distribution system, consumers pay below-market rates. The gap between the market price and the lower consumer price for these products is covered by the subsidy.
The Direct Benefit Transfer (DBT) system, on the other hand, entails consumers paying the full market price for the commodity upfront. The admissible subsidy is, then, transferred separately to their bank account. The experience of DBT in LPG cylinder distribution under the Centre’s PAHAL scheme points to its success in not only delivering the subsidy efficiently, but also resulting in substantial savings for the exchequer.
The challenge lies now in extending the DBT model to other subsidies, including those on agricultural inputs. That is where the recent example of Uttar Pradesh, which has successfully implemented DBT for seed subsidy, may be relevant. The programme was first tried out for providing subsidy on hybrid seeds in the 2015 kharif season. This was followed by DBT on all seeds — both certified varieties and hybrids — during rabi 2015-16. Central to it was the creation of a farmers’ database — containing their identity proofs, land particulars and bank account numbers — under a state government scheme called Pardarshi Kisan Seva Yojana. The database already covers over 40 lakh farmers and is growing by the day.
The DBT programme benefited around 1.5 lakh farmers in kharif 2015. They were given the freedom to buy seeds from any of the designated retail outlets operated by private companies at market prices, with the subsidy being credited separately into their bank accounts. While in the preceding kharif season, the UP government spent more than Rs 85 crore as subsidy on hybrid paddy, maize, jowar and bajra seeds, the outgo fell to less than Rs 25 crore in kharif 2015 post introduction of DBT. In this rabi season, too, farmers bought wheat, oilseeds and pulses seeds from designated government/semi-government and cooperative outlets at market-linked rates. The total subsidy amount, transferred directly into the accounts of approximately nine lakh farmers, came to Rs 127 crore. This again was lower compared to a bill of Rs 217 crore during 2014-15 rabi.
The main reason for the subsidy savings was the knocking-out of fictitious beneficiaries. In fact, the DBT system’s biggest achievement has been that many farmers received subsidised seeds for the first time, thanks to the transparent manner for identification of beneficiaries. In the earlier system of “at source” subsidy, there wasn’t any means to check who was getting the subsidy. And since the seeds were sold at below market prices, it led to paper transactions and diversion of subsidised material.
Under the new system, small and marginal farmers are approaching the designated outlets with a sense of entitlement, after having registered themselves online on the Agriculture Department’s DBT portal. Nor is there scope for embezzlement by seed stores in-charge, as the subsidy into the accounts of farmers can be transferred only after the money collected from them has been deposited in the treasury. The readily available database also makes it possible to provide certified seeds — that require replacement only once in three years — to new sets of farmers each season. This allows for faster diffusion of technology, unlike in the earlier system where the same set of big and influential farmers ended up getting new certified seeds every year.
The new system has other important spin-offs as well. The robust farmer-level data generated can be useful for planning purposes in different agro-climatic zones of UP. Also, the process of data generation and more farmers buying from designated state seed outlets has resulted in renewal of contact between them and the agriculture department, which again is beneficial for extension of technology.
There are, nevertheless, two major challenges in implementation of subsidy via DBT for all agricultural inputs. The first is the issue of upfront payment — not all farmers can pay market prices for say, fertilisers and wait for the subsidy to be credited to their bank accounts — and the second is the exclusion of sharecroppers by virtue of their not ‘owning’ land. The latter challenge can be addressed through changes in land leasing laws, which allow formal recognition of non-landowning cultivators.
As regards upfront payments, one solution could be through Kisan Subsidy Cards (KSC). Banks are now issuing Kisan Credit Card (KCC) to farmers, providing a credit limit of up to Rs three lakh linked to their landholdings. This credit limit could be split into two parts. While the existing KCC component would enable farmers to withdraw cash towards making payments towards labour or electricity/diesel for irrigation, the KSC sub-limit can be used only to make the upfront payments on subsidised inputs like seed and fertiliser. Such payments should, however, be allowed only through custom-made swipe machines, with the KSC limits getting ‘recharged’ when the subsidy amounts from the government are transferred into the farmers’ bank accounts. The KSCs cannot be used to draw cash from ATMs or to purchase other commodities; they can operate only on the special swipe machines kept at the designated seed/fertiliser stores.
Technology today enables subsidy on agricultural inputs to be delivered in an efficient, transparent and inclusive manner via DBT. It makes sense to start this with seeds. Once the system gets accepted by farmers, extending it to fertilisers and other inputs is a natural corollary.