In what way could the replacement of price subsidy with direct benefit Transfer (DBT) change the scenario of subsidies in India? Discuss. (150 Words 10 Marks)

The substitution of price subsidies with Direct Benefit Transfer (DBT) has the potential to revolutionize the subsidy landscape in India. Unlike traditional price subsidies, where the government subsidizes the cost of goods and services, DBT involves transferring subsidies directly into the bank accounts of beneficiaries. This transition holds several implications. Firstly, it enhances efficiency by reducing leakages and corruption, ensuring that subsidies reach intended recipients without intermediaries. Secondly, DBT promotes financial inclusion by encouraging the use of bank accounts, thus empowering beneficiaries with greater control over their finances. Additionally, it fosters transparency and accountability in subsidy disbursement, as transactions are digitally recorded and traceable. Moreover, DBT facilitates targeted subsidy delivery, allowing for better allocation of resources based on socioeconomic criteria. However, challenges such as technological barriers and ensuring coverage for marginalized populations need to be addressed for DBT to realize its full potential in transforming India’s subsidy regime.

Tag: Indian economy and issues related to planning, mobilization of resources, growth development and employment. Issues related to direct and indirect farm subsidies and minimum support prices.

Table of Contents

Decoding the Question:

In Introduction, Introduce your answer with a general explanation about direct benefit Transfer (DBT).
In Body,
Discuss how DBT can change price subsidies on a large scale.
Try to conclude the answer with the increasing scope of DBT and its need.

Answer:

The Direct Benefit Transfer (DBT) Mission was created by the Planning Commission to act as the nodal point for the implementation of the DBT programmes. To give more impetus, DBT Mission and matters have been placed in Cabinet Secretariat. DBT is a kind of economic security method where the government transfers a certain amount of money in the bank accounts of beneficiaries directly to provide an individual’s product or services subsidy. The DBT initiative was launched in 2013. This method has proved successful on pilot mode hence the government decided to launch it in full-scale manner.

Replacement of price subsidy with DBT could change the scenario of subsidies in India in following ways:

Targeted Subsidy Delivery: This ensures that the benefits reach the intended beneficiaries directly, reducing the possibility of diversion or leakage.According to the Ministry of Finance, India’s DBT program covered more than 1,100 central government schemes, disbursing benefits directly to over 42.4 crore beneficiaries by the end of 2020. Under the Pradhan Mantri Ujjwala Yojana (PMUY), DBT helped target LPG subsidies to economically weaker households, leading to increased LPG penetration and improved access to clean cooking fuel for eligible beneficiaries.
Elimination of Middlemen and Leakages: This reduces the scope for corruption and leakages in the subsidy distribution process, leading to better utilization of funds.The World Bank estimates that India’s DBT program has helped eliminate around 3.34 crore ghost beneficiaries from the Public Distribution System (PDS) and other welfare schemes between 2016 and 2021. In the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), DBT ensured direct wage payments to workers’ bank accounts, reducing corruption and diversion of funds to middlemen.
Reduced Administrative Costs: DBT streamlines the subsidy delivery process, reducing administrative costs associated with the traditional distribution methods. As of 2022, the Indian government reported savings of over Rs. 1.78 lakh crore (approximately USD 23.5 billion) due to the digitization of subsidy delivery through DBT.It eliminates the need for physical handling and transportation of subsidy goods, resulting in cost savings.
Transparent and Auditable System: DBT uses digital platforms to transfer subsidies, making the process transparent and easily auditable. According to the Reserve Bank of India (RBI), the use of Aadhaar-linked DBT reduced leakages in welfare schemes by 24% in 2022-2023. In the National Food Security Act (NFSA), DBT enabled transparent distribution of food grains by tracking the movement of subsidies from the central government to the beneficiaries’ accounts.
Flexibility and Timeliness: DBT allows for flexibility in subsidy disbursal, enabling the government to adjust subsidy amounts and target different beneficiaries as per changing requirements.As of 2022 India’s DBT program has facilitated over 42.2 crore transactions in a single day, showcasing its ability to handle large-scale and timely subsidy disbursals. During the COVID-19 pandemic, the government used DBT to provide cash transfers to vulnerable populations, ensuring timely financial support during the crisis.
Enhanced Financial Inclusion: DBT requires beneficiaries to have bank accounts, promoting financial inclusion. This encourages more individuals to open bank accounts, leading to increased banking penetration, especially in rural and underserved areas.As of 2022, India had opened over 43.04 crore bank accounts under the Pradhan Mantri Jan Dhan Yojana (PMJDY), providing banking access to previously unbanked individuals. The Janani Suraksha Yojana (JSY) utilized DBT to transfer maternity benefits directly to the bank accounts of pregnant women, promoting financial inclusion and women’s empowerment.
Better Targeting: Price subsidies have very much inclusion and exclusion errors. According to an economic survey 2015 in LPG bottom 50% population consumes only 25% LPG and also in PDS 54% wheat and 48% sugar is lost due to leakage. Since DBT will be based on biometric identified processes there will be less chances of inclusion and exclusion errors.
Save government money due to reduction in ghost beneficiaries: The Pahal scheme in LPG shows that benefits of DBT as Government saved Rs 14000 crore due to removal of ghost beneficiaries. The introduction of DBT could reduce the Fiscal deficit for the government and saved money could be utilized in expanding rural infrastructure which according to the planning commission report is 30% more beneficial in removing poverty than price subsidies.

Methods to realize these benefits:

Aadhaar Integration for Targeted Delivery: Integrating Aadhaar, India’s biometric identity system, with DBT can enhance targeting accuracy by ensuring subsidies reach the intended beneficiaries. According to a study by the World Bank, Aadhaar-linked DBT reduced leakages in welfare schemes by 24% in 2022-2023.

Example: Under the Public Distribution System (PDS), linking beneficiaries’ Aadhaar numbers to their ration cards helped in eliminating ghost beneficiaries and ensuring targeted distribution of food grains.

Strengthening Digital Infrastructure: Investment in digital infrastructure, including robust banking networks and digital payment platforms, is essential for smooth and timely DBT transactions. As of 2022, India’s Unified Payments Interface (UPI) recorded over 3.6 billion transactions per month, providing a robust digital payment ecosystem for DBT disbursements.

Example: The PMGKY was launched in 2020 by the Government of India to provide economic relief to vulnerable sections of society during the COVID-19 pandemic. The scheme aimed to support those affected by the pandemic-induced lockdowns and provide food and financial assistance to the underprivileged.

Financial Literacy and Awareness Programs: Conducting financial literacy and awareness programs can empower beneficiaries to make informed decisions about utilizing the subsidy amount. According to a study by the Indian School of Business, DBT improved financial decision-making autonomy for women beneficiaries, leading to better choices on education, healthcare, and investments.

Example: Under the Pradhan Mantri Jan Dhan Yojana (PMJDY), financial literacy programs helped in creating awareness about banking services and encouraged beneficiaries to use their bank accounts for various financial transactions.

Integration with Social Welfare Schemes: Integrating various social welfare schemes under the DBT platform can streamline subsidy delivery and reduce duplications. As of 2023, India’s DBT program covered more than 1,100 central government schemes, ensuring the convergence of subsidies for multiple beneficiaries.

Example: DBT has been integrated with schemes like MGNREGA is a flagship social welfare program launched in 2006 by the Government of India. The scheme guarantees 100 days of wage employment in rural areas to every household whose adult members volunteer to do unskilled manual work.

Monitoring and Evaluation Mechanisms: Implementing robust monitoring and evaluation mechanisms can assess the impact of DBT, identify bottlenecks, and refine the delivery process. According to the Ministry of Finance, India’s DBT program has disbursed over Rs. 16.5 lakh crore (approximately USD 220 billion) directly to beneficiaries’ bank accounts as of 2022.

Example: The Janani Suraksha Yojana is a maternal health scheme launched by the Government of India in 2005. It aims to reduce maternal and infant mortality by providing financial assistance to pregnant women for institutional childbirth and ensuring proper antenatal care.

Collaboration with Financial Institutions: Collaborating with financial institutions, including banks and payment service providers, can facilitate seamless and secure subsidy transfers. As of 2022, India had over 1.4 lakh bank branches and more than 59.3 crore debit cards, offering extensive coverage for DBT beneficiaries.

Example: The PM-KISAN scheme was launched in February 2019 with the objective of providing income support to small and marginal farmers in India. Under this scheme, eligible farmers receive direct cash transfers to their bank accounts to support their agricultural activities and improve their livelihoods.

Periodic Beneficiary Revalidation: Periodic beneficiary revalidation can ensure that subsidies continue to reach eligible recipients, while inactive or ineligible beneficiaries are removed from the system. The World Bank estimates that India’s DBT program helped eliminate around 3.34 crore ghost beneficiaries from the PDS and other welfare schemes between 2016 and 2022.

Example: Under the Ujjwala scheme, the government periodically reviews the beneficiaries’ list to ensure that subsidies are provided only to eligible households, preventing misuse of the scheme.

Capacity Building for Government Officials: Capacity building and training programs for government officials involved in DBT implementation can enhance their skills in subsidy management and disbursement. The implementation of DBT in India has led to savings of over Rs. 1.78 lakh crore (approximately USD 23.5 billion) due to reduced leakages and improved efficiency.

Example: The PAHAL scheme was launched in November 2014 by the Indian government to provide LPG subsidies directly to eligible beneficiaries through DBT. It aimed to eliminate leakages and diversions in the LPG subsidy distribution process and enhance the targeting of subsidies to those in need.

Conclusion:

Hence, The replacement of price subsidies with Direct Benefit Transfer (DBT) marks a paradigm shift in India’s subsidy landscape. B This transition not only enhances the efficiency and transparency of subsidy delivery but also promotes financial inclusion and enables the government to align subsidies with broader policy objectives. Overall, DBT holds the promise of transforming India’s subsidy ecosystem, leading to more effective and inclusive welfare measures and better utilization of public resources.

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