Subsidies on various commodities and services are primarily intended   to augment welfare of vulnerable sections of the society. The underlying assumption is that containing prices through subsidy protects the disposable incomes or costs of some farm products by capping retail prices.  At present, in India, government subsidy first flows to producers and marketing agencies, and then is passed on to consumers. Achieving this objective depends upon efficient monitoring and administration to curb leakages, however, the delivery mechanism is plagued with corruption. Planning Commissions’ discussion paper describes Indian subsidy regime as being “unduly large, non-transparent, largely input-based and poorly targeted, generally regressive in its incidence, and inducing waste and misallocation of resources.[1]”

To strengthen the service delivery, the Finance Minister in this year’s budget speech revealed government’s intention to go for direct transfer to the targeted group viz., people below poverty line. The Interim Report presented by the Task Force on Direct Transfer of Subsidies on Kerosene, LPG and Fertiliser favours a new mechanism to transfer the subsidized amount to the bank account of the beneficiary instead of capping the market price. While the framework implied by the Task Force reads convincing; successful transition to the proposed system hinges upon its integration with complementary external factors such as, expansion of financial inclusion, identifying the targeted beneficiaries against unambiguous entitlement qualifications and quick and efficient roll-out of UID project.

Considering that only 30,000 out of 600,000 habitations have commercial bank branches and 57 percent of the population have savings account, execution of direct cash transfer scheme to bank accounts seems challenging [2]. Similar provision of direct payment of wages through banks is made under MGNREGS but studies reveal that this provision has created delays in wage disbursement [3]. The rural banks lack the capacity to handle large volume of transactions and the absence of technology delays the work further.

One of the reasons direct cash transfer is supported by government is that it facilitates better targeting of beneficiaries and it is proposed that UID will enable better tracking recipients of the benefits. Considering that the UID is in infancy, we remain unaware of its large-scale implementation issues and using that as primary identification criteria raises concerns. Moreover, UID is planned to be integrated with beneficiaries’ bank account, which requires time. These issues coupled with the criticism of direct cash transfers makes us think about efficacy of the new delivery mechanism.

Therefore, to ensure direct transfers would be administered more efficiently than current subsidy system, the government has to not only focus on executing the new programme but also strengthen other programmes to ensure effective implementation.