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Delinking the LPG subsidy from Aadhaar, the UPA has damaged the cash transfer scheme.

February 1, 2014 12:12:20 am

In a combination of bad economics and bad political signalling, the cabinet committee on political affairs (CCPA) has decided to put on hold the Aadhaar-linked direct benefits transfer on LPG. It also raised the number of subsidised LPG cylinders per person from nine to 12. This extra spending is difficult to justify — RBI governor Raghuram Rajan rightly said that a subsidy has to be misdirected if 97 per cent of the population falls within its net. But what is worse is that this suspension of LPG cash transfers has undercut one of the UPA’s most promising initiatives, and called the utility of Aadhaar into question.

The efficiency gains of Aadhaar-backed transfers are undeniable. Not only do they sharply target subsidies — for example, in the case of cooking gas, individuals with multiple gas connections were identified — they also allow individuals to face the true marginal cost of their decisions by pricing products (like gas cylinders) at market rates, and encourage private participation in sectors where consumers are subsidised. In Moily’s estimate, the government could save Rs 12,000-14,000 crore if direct benefits transfers were fully implemented. The success of the LPG transfer would have provided incentives to join the Aadhaar network. It was, indeed, the perfect platform to begin Aadhaar-backed direct benefits transfers, to be extended to some or all of the Centre’s approximately Rs 2,20,000 crore food, fertiliser and fuel subsidy. It did not depend on the support of state governments or their bureaucracies — the Centre merely needed to coordinate with the three relatively well-run LPG distribution PSUs. By Petroleum Minister Veerappa Moily’s account to Parliament, the LPG cash transfer was doing well, implemented in 291 districts covering 9.22 crore consumers. Moily also informed Lok Sabha of the willingness of 11 states/ UTs to launch a similar scheme for kerosene.
Given the Supreme Court ruling that Aadhaar can not be a prerequisite for accessing government schemes, and the consequent difficulty of widening the network of Aadhaar-linked bank accounts, the government’s decision to delink it is understandable. But by suspending the scheme rather than making it optional, it is putting the brakes on transfers that are successfully taking place. The UPA has shown a damaging lack of confidence in the idea, one that will be hard for Aadhaar to recover from.

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