India’s Rs. 3.8 lakh crore subsidies don’t always reach the poor

Which are India’s most effective subsidies, the ones that best reach the poor?

Chief Economic Advisor Arvind Subramanian devoted considerable space in the Economic Survey released on Friday to subsidies, how much they cost, whom they really go to, and how leaky they are.

In terms of cost, the combined subsidy for rice and wheat clearly accounts for the largest share, a third of India’s total subsidy bill.

It would appear that the Public Distribution System (PDS)-delivered grains and staples are actually best at reaching the poor. This has been borne out by other research, like the 2011-12 round of the National Council for Applied Economic Research’s India Human Development Survey, which showed that the poor were indeed most likely to use PDS shops.

Two of the worst performing subsidies – the fertiliser subsidy and the water subsidy respectively – have not been quantified, but of them, the Survey says that the fertiliser manufacturers derive the maximum benefit from the fertiliser subsidy since farmers have elastic demand, and the water subsidy goes to private taps, while 60% of the poor get their water from public taps.

But the relatively good news ends there.

Over half of all the wheat allocated through the PDS, and over 40 per cent of kerosene and sugar never reached the consumer in 2011-12, Mr. Subramanian calculates. The Economic Survey recommends using technology-led solutions including mobile phone technology and Aaadhar cards in order to better target subsidies, and a shift to cash transfers.