PDS reform using Aadhaar, the Kotkasim way

India's quest to keep its fiscal deficit in check depends on Kotkasim block in Rajasthan's Alwar district. Kotkasim is running a pilot project with a potential to reduce India's growing subsidy bill, which last year stood at 2.5 per cent of its GDP.u00a0It involves direct cash transfer of kerosene subsidy into the bank accounts of poor using Aadhaar unique identity scheme.u00a0The project to deliver subsidies directly to the poor started in Kotkasim in December last year. Kerosene is now sold in all the Public Distribution System (PDS) shops there at Rs 44.50 per litre, the open market price set by public sector oil companies. In the rest of the country, it is sold at a highly subsidised price - Rs 15.25 per litre in Rajasthan - and the central government pays the difference to oil companies. In Kotkasim, the central government gives the subsidy amount to district administration, which transfers it to eligible ration card holders.u00a0

Long way to go: With UIDAI's turf war with the home ministry not fully resolved yet, only 60 crore Indians are scheduled to get Aadhaar numbers by June 2013

The project covers around 20,000 ration card holders, who had to open zero-balance, no-frills bank accounts for getting the subsidy. Initial public resistance was overcome by the district administration by transferring three months of subsidy in advance to the bank accounts. Results of the project have shown that substantial economies in subsidy outgo can be achieved by use of Aadhaar platform. Kotkasim, which was was selling its entire allotted stock of 84,000 litres of kerosene a month before the project started, is now selling 22,000 litres - ample proof that subsidised kerosene was being diverted for other purposes, mainly to adulterate diesel. By using Aadhaar, the subsidy has gone directly to the target households who can then use it to purchase items from PDS shops at market price.

Last year, the World Bank's "Social Protection for a Changing India" report said that experiences in India - in Bihar - and in many other countries have highlighted the benefits of targeted cash transfers. The same point has been made in government's economic surveys, by Kirit Parekh Committee on oil pricing reforms and by Nilekani's Task Force on direct transfer of subsidies. Letting everyone buy at the market rate and then compensating the poor through cash transfers not only checks diversion and pilferage but also ensures that only the poor get subsidised goods.

Meanwhile, little has been heard from corresponding pilot projects using the Aadhaar platform to make payments for MGNREGA in Jharkhand, for LPG distribution in Mysore and for opening of bank accounts in Tumkur in Karnataka. The government has also designed a scheme to transfer fertiliser subsidies directly to farmers using Aadhaar numbers.

In his budget speech this year, the finance minister said that a system for electronic transfer of subsidies using Aadhaar platform will be operational by December 2012. But a similar promise was made by him last year: the government was to provide a direct cash subsidy on kerosene and fertilisers by March 2012. Let us hope that the government can at least keep its promise to extend Aadhaar enabled payments for subsidies in 50 selected districts within the next six months.

But the road ahead is not easy. With UIDAI's turf war with the home ministry not fully resolved till now, only 60 crore Indians are scheduled to get Aadhaar numbers by June 2013. Even if everyone has an Aadhaar number, the banks do not have the reach to cover all the villages across the country. The political economy of PDS, where ruling parties dispense patronage by giving out licences to run PDS shops, is going to vehemently oppose the proposal for direct transfer of subsidy. Calling it "an anti-people scheme of the Centre", Trinamool government in Kolkata has already rejected cash transfer of subsidies. It will "continue to distribute kerosene in the manner it is being done at present through the PDS". Cash transfers are also being opposed by influential activists of the NAC, who believe that the poor can't be trusted with cash, and must only be given items in kind.

The success at Kotkasim nevertheless gives us hope. Given political will and administrative support, India stands a good chance to reform its Rs 2.16 trillion subsidy programme by using the Aadhaar platform. u00a0

Sushant K Singh is Fellow for National Security at the Takshashila Institution and editor of Pragati-The Indian National Interest Review