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2 March, 2016

Why Budget Did Not Raise Income Tax Ceiling To Rs 5 Lakh Despite Jaitley’s Past Advocacy

The minister of finance, Arun Jaitley, did not make any changes in the tax slabs in the budget for 2016-2017 which was presented yesterday.

The basic exemption limit continued to be at Rs 2.5 lakh and other tax slabs also continued to remain the same. This is typically one section of the budget which excites the salaried middle class. But Jaitley had nothing to offer on this front.

Interestingly, when Jaitley was in the opposition he had demanded that the income tax ceiling be increased to Rs 5 lakh, from the Rs 2 lakh level that had prevailed, at that point of time. As he had said in April 2014 “Direct Tax should be reduced. If the Income-Tax limit is raised from Rs 2 lakh to Rs 5 lakh, 3 crore people will save Rs 24 crore which will lead to a small impact of 1 to 1.5 percent of National Tax Fund.”

On February 29, 2016, Jaitley presented his third budget as the finance minister. Nevertheless, even now the income tax limit is at Rs 2.5 lakh, half of the Rs 5 lakh limit that Jaitley had demanded when he was in opposition.

The question is why? The simple answer is—politicians in opposition behave very differently from those in power. But there is a better answer than this.
Take a look at the following chart reproduced from the Economic Survey for 2015-2016, which was released on February 26, 2016.

What does this tell us? It shows us very clearly that the income tax exemption limit has risen at a much faster rate in India than the per capita income.

As the Economic Survey points out: “We can calculate in some sense the “missing taxpayers” in India—not those who are evading taxes altogether or under-reporting taxes but those who have legitimately gone under the tax radar due to “generous” government policy.”

And who are these missing taxpayers? These are those taxpayers who got left out because the income tax threshold has been raised from the level of Rs 1.5 lakh in 2008-2009. As the Economic Survey points out: “If the threshold had been maintained at Rs. 1,50,000 (the threshold limit in 2008-2009)….we find that there would have been an additional 1.65 crore units incorporated within the taxation system (In 2012-2013 and an addition of about 39.5 percent) and tax revenues would have been about Rs 31,500 crores greater.” The tax to GDP ratio of the country would have gone up by 0.32% if the income tax exemption limit had not been raised.

The amount now, will be more than Rs 31,500 crore. And this is quite a lot of money for a government which is likely to see its expenses go up in 2016-2017, after the recommendations of the seventh pay commission increasing the salaries of central government employees and pensions of retired central government employees, are accepted.

What this also tells us is that Jaitley’s calculation of increasing the exemption limit to Rs 5 lakh, costing only Rs 24 crore, was basically wrong. When the tax-exemption limit went from Rs 1.5 lakh in 2008-2009 to Rs 2 lakh in 2012-2013, it cost the government Rs 31,500 crore. Increasing the limit to Rs 5 lakh would cost considerably more.

In fact, there is a lesson or two India can learn from China on this front, the Economic Survey points out: “Chinese success in bringing more citizens into the individual income tax net owes to setting a reasonable threshold for paying taxes and not changing it unduly. In contrast, in India, exemption thresholds for income taxes have been consistently raised.”

This has led to a situation where as many Indians are not paying income tax, as could have, if the exemption limit had not been raised at a much greater rate than the per-capita income.

Of course, Jaitley did not know all this when he was in the opposition. But now he is in the government and has access to the best possible economic brains in the country, as well as data, on which he can base his decisions on. Clearly his demand to increase the income tax exemption limit to Rs 5 lakh, when he was in the opposition, was just based on a whim and not any numbers.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huff Post India on March 2, 2016

2 March, 2016

Pulse of the matter

The Economic Survey of 2015-2016 is a lovely document which goes into great detail on what is wrong with India on the economic front and offers good workable solutions to solve these problems.

One of the points that the Survey makes is regarding the Indian agriculture becoming cereal centric. The reason for this lies in the fact that the government procures rice and wheat from the farmers at the minimum support price(MSP). While the government announces an MSP for 23 crops, it largely buys only rice, wheat and some cotton. For sugarcane there is an MSP like engagement where the government fixes prices and the sugar mills are legally obligated to buy sugarcane from the farmers at that price.

As the Survey points out: “In principle MSP exists for most farmers for most crops, it’s realistic impact is quite limited for most farmers in the country. Public procurement at MSP has disproportionately focused on wheat, rice and sugarcane and perhaps even at the expense of other crops such as pulses and oilseeds.”

This has effectively led to a situation where the government has large stocks of rice and wheat much above the buffer stock norms. But it also leads to a situation where there are frequent spikes in the price of pulses. In the recent past the price of tur dal (or pigeon pea) had touched Rs 200 per kg. Elections have been lost in the past on onion prices going up and given this, elections can easily be lost in the future with price of pulses going up.

Importing pulses is really not a solution because India is the number one producer as well a consumer of pulses in the world. As the Survey puts it: “Given that India is the major producer and consumer of pulses, imports cannot be the main source for meeting domestic demand.”

This means that the farmers need to be incentivised to produce pulses and at the same the yields on pulses also need to go up. The question is how can the government incentivise farmers to produce pulses and wean them away from producing rice and wheat.

As the report titled Price Policy for Kharif Crops—The Marketing Season of 2015-2016 points out: “A pertinent question arises as to why farmers are not wholeheartedly diversifying towards oilseeds and pulses. Based on Commission for Agricultural Costs and Prices’s interaction with a wide spectrum of farmers and also based on field visits, it emerged that farmers need a backup plan in the form of reasonably strong procurement machinery to be put in place to fall back upon when the prices fall below minimum support price.”

Along these lines, the Economic Survey recommends a “strengthened procurement system” for pulses. And the good part is that the finance minister Arun Jaitley has gone ahead with this suggestion in the budget.

As Jaitley said in his budget speech: “Effective arrangements have been made for pulses procurement… Incentives are being given for enhancement of pulses production. Rs 500 crores under National Food Security Mission has been assigned to pulses.”

Also, the government has plans of creating a buffer stock for pulses like it has for rice and wheat. As Jaitley said during his speech: “A number of measures have been taken to deal with the problem of abrupt increase in prices of pulses. Government has approved creation of buffer stock of pulses through procurement at Minimum Support Price and at market price through Price Stabilisation Fund. This Fund has been provided with a corpus of Rs 900 crore to support market interventions.”

Given the current structure of the agricultural economy these are steps in the right direction. With the government buying more pulses at the minimum support price, it will incentivise more farmers to grow them, improving the total production of pulses. This is very important given that pulses are a huge source of protein for vegetarians.

The other big problem with pulses is that most of it is grown on unirrigated land. As the Economic Survey points out: “In contrast, a large share of output in wheat, rice and sugarcane – in Punjab, Haryana and UP – is from irrigated land. In water scarce Maharashtra, all sugarcane is grown on irrigated land.

Meeting the high and growing demand for pulses in the country will require large increases in pulses production on irrigated land, but this will not occur if agriculture policies continue to focus largely on cereals and sugarcane.” A better procurement policy for pulses will help in increasing production.

Further, pulses have a low yield. In fact, the yield in India is lower than other key pulse producing countries like Brazil, Myanmar and Nigeria, which have better yields than that in India. Madhya Pradesh which is the main state producing pulses, has a yield of 938 kg per hectare. In comparison, China has yield of 1550 kg per hectare.

What has not helped is the fact that the yield has more or less remained flat. In 2007-2008, 826 kg of tur dal was produced per hectare. By 2013-2014, this number had risen to only 859 kg per hectare, at a rate of less than 1% per year (around 0.7% to be precise).

As Dharmakirti Joshi and Dipti Deshpande economists at Crisil Research point out in a research note titled Every third year, pulses catch price-fire: “Pulses account for about 20% of area under foodgrain production, but less than 10% of foodgrain output. Also, over time, production of pulses has failed to catch up with demand. Output has grown less than 2% average in the last 20 years, while acreage has grown even lesser at 0.8%. Not surprisingly, yield rose only 0.9%.”

In order to improve yields, either more pulses need to be grown under irrigated areas, or the unirrigated areas need access to irrigation. The second option will take a lot of time to achieve. Given this, it is important that farming of pulses is encouraged in areas which have access to irrigation. And that is precisely what Jaitley has tried to do with this budget.

There may be lot that is wrong with Jaitley’s budget, but he has got it right when it comes to pulses.
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared in The Asian Age and Deccan Chronicle on March 2, 2016

29 February, 2016

Why Does Economic Survey Not Talk About Subsidy on Stocks?

I know this piece is not going to go down well with a section of readers. Nevertheless, I think this is an important point and needs to be made.

In January 2016, the prime minister Narendra Modi during the course of a speech had said: “Why is it that subsidies going to the well-off are portrayed in a positive manner? Let me give you an example. The total revenue loss from incentives to corporate tax payers was over Rs 62,000 crore… Dividends and long-term capital gains on shares traded in stock exchanges are totally exempt from income tax even though it is not the poor who earn them.”

Not surprisingly, the Economic Survey released on February 26, 2016, under the leadership of Arvind Subramanian, the chief economic adviser, has a chapter titled Bounties for the Well-Off, dedicated to the implicit subsidies on offer to the rich.

The Economic Survey focuses on “seven areas: small savings schemes, kerosene, railways, electricity, LPG, gold, and aviation turbine fuel (ATF),” and calculates the implicit subsidies available to the rich. The total cost of the implicit subsidies works out to Rs 1.03 lakh crore, as per the survey. Now that’s a huge number.

One of the investment avenues that the Economic Survey calculates an implicit subsidy on is the public provident fund(PPF) scheme in which an individual can invest up to Rs 1.5 lakh every year. While calculating the taxable income, the amount invested in the PPF scheme can be claimed as a deduction. Further, the amount that the investor gets on maturity is also tax-free. This pushes up the effective returns on PPF.

As the Economic Survey points out: “The effective returns to PPF deposits are very high, creating a large implicit subsidy which accrues mostly to taxpayers in the top income brackets. The magnitude of this implicit subsidy is about 6 percentage points – approximately Rs 12,000 crore in fiscal cost terms.”

Along similar lines, the subsidy on the cooking gas cylinder is also captured by the rich. As the Survey points out: “LPG consumers receive a subsidy of Rs 238.51 per 14.2 kg cylinder7 (as in January 2016), which amounts to a subsidy rate of 36 per cent (ratio of subsidy amount to the market price). It turns out that 91 per cent of these subsidies are accounted for by the better-off as their share of consumption of LPG in the total consumption is about 91 per cent; while the poor account for only 9 per cent of LPG consumption and hence only 9 per cent of subsidies go to them.”

What Subramanian doesn’t talk about in the Economic Survey, are the issues on which Modi talked about in January i.e. the implicit subsidy on there being no tax on dividends earned through shares as well as no long-term capital gains tax on selling shares. The reason for that is obvious. It was said that prime-minister Modi was wrongly briefed on the issue at that point of time. And that is largely correct.

Companies distributing dividends, do pay a dividend distribution tax(DDT) to the government. Hence, to that extent the dividend is not tax free in the hands of the investor. If there was no DDT, the shareholders would have received a higher dividend. Nevertheless, the tax is just a better way for the government to collect tax, than collecting it from the investors who earn dividends and then hoping that they declare the divided while filing their tax returns and pay a tax on it.

As far as long term capital gains on shares are concerned, currently there are no taxes to be paid, if the investor sells shares, after holding them for a period of one year or more. The government collects a securities transaction tax (STT) every time an investor buys or sells shares, through a stock exchange.

The STT is collected in lieu of there being no long-term capital gains on selling of shares. In 2014-2015, the government collected close to Rs 6,000 crore through the STT. Also, like DDT, STT is just an easier way of collecting tax, in comparison to the long-term capital gains tax.

Nevertheless, it still does not explain why Subramanian did not calculate the implicit subsidy on there being no long-term capital gains tax on selling shares. A calculation would have told us whether the long-term capital gains tax that could have possibly been collected is more than the amount that the government is collecting through STT.

If the difference is substantial, then the government needs to look at taxing long-term capital gains as well, in the years to come. Obviously, this move will not go down well with the rich who benefit from this implicit subsidy. As David Foster Wallace writes inThe Pale King: “We’ve changed the way we think of ourselves as citizens. … We think of ourselves now as eaters of the pie instead of as makers of the pie.”

Also, it needs to be pointed out that many stock market investors do not like the idea of a long-term capital gains tax on stocks. They also justify the short term capital gains tax at 15%. This rate is much lower than the highest rate of 30% that needs to be paid on all other kinds of income.

The logic is as follows. Stock market investment is risky in comparison to other forms of investing where the amount of money invested is more or less guaranteed. Also, through the stock market entrepreneurs raise capital and investors need to be encouraged to invest in new businesses, and hence, there is no long-term capital gains tax on stocks.

While this may have been valid in the twentieth century, it is worth asking whether this continues to make sense. As the celebrated British economist John Kay writes in Other People’s Money—Masters of the Universe or Servants of the People? : “The first companies to obtain listings on modern markets were companies like railways and breweries, with large requirements for capital for very specific purposes. Building a railway is expensive, and once you have built it the only thing you can do with it is run trains. You cannot use a brewery except to brew beer. Early utilities and manufacturing corporations raised large amounts of money in small packets from private individuals.”

But does that continue to hold good? Do entrepreneurs continue to use the stock market to raise capital for new ventures? As Satyajit Das writes in The Age of Stagnation: “The nature of stock markets has been changed by alternative source of risk capital: the high cost of a stock market listing, particularly increasing compliance costs; increased public disclosure and scrutiny of activities, including management remuneration; and a shift to different forms of business ownership, such as private equity.”

What this means is that more and more entrepreneurs are now raising money through other routes, in the initial stages of their business. This becomes clear in the Indian context from the fact that the number of initial public offerings have come down over the years. But entrepreneurs continue to raise through other routes like private equity, venture capitalists, debentures etc.

The stock market only comes into the picture when these initial investors want to offload their stocks in the firm. As Kay puts it: “Stock market is not a way of putting money into companies, but a means of taking it out.”

Hence, all the logic about investors needing to be encouraged to invest in new businesses doesn’t really hold anymore because most of the time, companies now come to the stock market only when they are looking for an exit option for their big initial investors.

In fact, Subramanian and his team could have done some analysis around this issue and told us what portion of the initial public offerings over the last few years raised fresh capital and what portion was investors trying to exit. This is something that the chief economic adviser clearly needs to look at in the next Survey.

And as far as risk of investing in the stock market is concerned. That still remains. But that is the choice that the investor investing in the stock market is making. Why should the government compensate him for it? Beats me.

The column originally appeared in the Vivek Kaul Diary on February 29, 2016

26 February, 2016

Economic Survey: Indian Companies Are Trapped In A Chakravyuha

The Economic Survey released before the budget is brought out by the chief economic adviser to the ministry of finance. Arvind Subramanian is the current chief economic adviser.

In the second chapter of the Economic Survey of 2015-2016, Subramanian makes a very interesting point: “The Charkravyuha legend from the Mahabharata describes the ability to enter but not exit, with seriously adverse consequences. It is a metaphor for the workings of the Indian economy in the 21st century.”

What he means here is that Indian companies continue to operate, irrespective of the fact whether they make money or not. In a free market as firms innovate and grow, they end up pushing out other firms which shut down. But that doesn’t seem to be happening in India.

As the Survey points out: “In principle, productive and innovative firms should expand and grow, forcing out the unproductive ones. So surviving firms should be much larger than new ones…In the US the average 40-year old plant is 8 times larger (in terms of employment) than a new one. Established Mexican firms are twice as large as new firms. But in 2010 India the average 40-year-old plant was only 1.5 times larger than a new one.”

In fact, the situation has deteriorated since the late 1990s. In 1998-99, the ratio of the average 40-year-old plant in comparison to the new ones was 2.5. What this tells us is that “there are not enough big firms and too many firms that are unable to grow, the latter suggesting that there are problems of exit.”

What this basically means is that firms which should be shutdown are not shutting down due to various reasons. Hence, there is an exit problem. A situation that is best expressed by the Hotel California song, sung by The Eagles: “You can check out any time you like, but you can never leave.” As the Survey points out: “India unlike many countries seems to have a disproportionately large share of inefficient firms with very low productivity and with little exit.”

The public sector enterprises lead the pack. The accumulated losses of sick public sector enterprises as of 2013-2014 had stood at Rs 1.04 lakh crore. Then there is the civil aviation sector (read Air India) which has seen losses for seven straight years in a row. In 2013-2014, the losses were at Rs 2,400 crore.

Over and above this there are power distribution companies owned by various state governments with accumulated losses of Rs 2.3 lakh crore. Also, there is the problem of public sector banks, which have seen a fresh infusion of capital of Rs 1.02 lakh crore between 2009-2010 and the first half of this financial year.

What this tells us is that many firms which should have been shut down long back are still in operation. In case of public sector enterprises, it is because of the government continuing to bail out these firms. As the Survey points out: “Exit is impeded often through government support of incumbent, mostly inefficient, firms. This support—in the form of explicit subsidies (for example. bailouts) or implicit ones (tariffs, loans from state banks)—represents a cost to the economy.”

What does this mean? It means that the government keeps loss making firms going by bailing them out. The trouble is that every extra rupee that the government spends on the bailout of these firms by taking on their losses, it has to borrow. And for every rupee that the government borrows, there is one rupee less for the private sector to borrow.

This means that the accumulated losses of Rs 1.04 lakh crore of public sector enterprises is money that the private sector could have borrowed. It also means that Rs 1.02 lakh crore spend through the fresh infusion of capital into public sector banks is money that the private sector could have borrowed.

If the government borrows more, it means there is less for the private sector to borrow, and in the process it has to pay a higher rate of interest than it typically would in case of lower borrowing by the government. This essentially leads to “greater interest costs and reduced private sector investment activity”.

Also, in a capital scare country like India, misallocation of capital to keep loss making companies running, is not quite the best thing to do.

It raises the question as to why does the government keep running loss making public sector enterprises? It also raises the question as to why does the government need to own more than twenty-five public sector banks?

Thankfully, the Narendra Modi government has made some effort towards sorting out the mess in the power distribution companies through the UDAY scheme. Some efforts have also been made towards sorting out the mess in the public sector banking space in the country, though clearly a lot more needs to be done.

But rather ironically the government continues to run loss making public sector enterprises. It continues to own telephone companies, an airline, hotels, a company which makes scooters and a company which used to make bicycles. It also owns a major stake in the country’s biggest cigarette company. How bizarre can it really get?

This also goes totally against the idea of minimum government and maximum governance that Narendra Modi had put forward in the run up to the Lok Sabha elections in 2014, but has since abandoned. One of the main reasons the government has held back in shutting down these companies is that it doesn’t want a run-in with the trade unions, which can get nasty.

Nevertheless, as the Survey points out: “In many cases where public sector firms need to be privatized, the problems of exit arise because of opposition from existing managers or employees’ interests. But in some instances, such action can be converted into opportunities. For example, resources earned from privatization could be earmarked for employee compensation and retraining.”

Also, many public sector enterprises have a large amount of land which can be monetized. This money can go into the government kitty and be used for the development of physical infrastructure. It can also be used to offer the employees an attractive compensation, so that they don’t come in the way of the government shutting down the firms.

As the Economic Survey points out: “Most public sector firms occupy relatively large tracts of land in desirable locations. Parts of this land can be converted into land banks and made into vehicles for promoting the ‘Make in India’ and Smart City campaigns. If the land is in dense urban areas, it could be used to develop eco-systems to nurture start-ups and if located in smaller towns and cities, it could be used to develop sites for industrial clusters.”

This suggestion makes a lot of sense. I hope Narendra Modi has found time to at least read this part of the Economic Survey.

The column originally appeared on Swarajya Mag on February 26, 2016

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

26 February, 2016

Economic Survey: There Is A Very Compelling Case For India To Move To Cash Transfer Of Subsidies

Price subsidies have been a very important part of the Indian government’s plan of trying to bring down poverty in the country. This entails selling commodities like rice, wheat and kerosene, at a price significantly lower than the market price through the public distribution system.

But the question is, do these subsidies work? The Economic Survey for 2014-2015 had said that: “Prima facie, price subsidies do not appear to have had a transformative effect on the living standards of the poor, though they have helped poor households weather inflation and price volatility.”

What are the basic problems with these subsidies? Subsidies are regressive. This basically means that the rich households tend to benefit more from them than the poor for whom the subsidies are meant.

Take the case of cooking gas which the oil marketing companies sell at a loss and are in turn compensated by the government. It turns out that the poorest 50% of the households consume only 25% of the cooking gas.

Further, subsidies don’t reach those who they are meant for. Around 46% of kerosene which has to be distributed through the public distribution system(PDS) is lost as a leakage. This basically means that the kerosene is siphoned off by those running the shops that constitute the PDS and the government functionaries involved. It is then sold in the open market.

This story plays out across other commodities distributed through the PDS as well. Nearly 54% of the wheat meant to be distributed through PDS is lost as a leakage. Around 48% of the sugar and 15% of rice meant to be distributed through the public distribution system is lost as a leakage.

Fertilisers also face a similar leakage problem. As the Economic Survey of 2015-2016 released a few hours back points out: “The government budgeted Rs 73,000 crore—about 0.5 per cent of GDP—on fertiliser subsidies in 2015-16. Nearly 70 percent of this amount was allocated to urea, the most commonly used fertiliser, making it the largest subsidy after food.”

Subsidised urea has three kinds of leakages. As the Survey points out: “(i) 24 per cent is spent on inefficient urea producers (ii) of the remaining,4 1 per cent is diverted to non-agricultural uses and abroad; (ii) of the remaining, 24 per cent is consumed by larger—presumably richer—farmers.”

These are huge leakages which cost the government a lot of money. So what can be done about this? As the Economic Survey points out: “Cash transfers can directly improve the economic lives of India’s poor, and raise economic efficiency by reducing leakages and market distortions.”

The current model of distribution of subsidies is essentially very leaky. This has led to a situation where only 35% or Rs 17,500 crore of the total urea subsidy of Rs 50,300 crore reaches the small and marginal farmers, the intended beneficiaries.

It is estimated that 75% subsidy on agricultural urea has essentially managed to create a thriving black market in the Bangladesh and Nepal. As the Economic Survey points out: “Comparing urea allocation data with estimates of actual use from the Cost of Cultivation Survey 2012-13, we estimate that 41 per cent of urea is diverted to industry or smuggled across borders.”

Further, there is a huge black market for urea within India as well. “It is estimated that about 51 per cent of Indian farmers buy urea at above-MRP. In the three eastern states bordering Bangladesh, 100 per cent of farmers had to buy urea at above MRP in the black market. Similarly, in Uttar Pradesh, which borders Nepal, 67 per cent of farmers had to buy urea in the black market at above the stipulated MRP,” the Survey points out.
The simple answer to prevent this leakage would have been better policing. Nevertheless, as World Bank chief economist Kaushik Basu writes in An Economist in the Real World—The Art of Policymaking in India: “Trying to police such a large system by creating another layer of police and bureaucracy will come with its own problems of corruption and bureaucracy.” It also leads to the proverbial question of who will police the police?

The answer lies in coming up with a better design in order to deliver food grains, fertiliser and kerosene to the poor. Essentially, the role of the PDS shop owner needs to be cut down. The Economic Survey for 2014-2015 as well as the Economic Survey for 2015-2016 talk about direct cash transfers to beneficiaries of these subsidised commodities, instead of distributing them through the PDS.

Instead of distributing food grains, fertiliser and kerosene through the PDS shops, the intended beneficiaries need to be given money through cash transfers and be allowed to buy commodities from wherever they want to.

As the Survey for 2014-2015 pointed out: “Recent experimental evidence documents that unconditional cash transfers – if targeted well – can boost household consumption and asset ownership and reduce food security problems for the ultra poor.”

In fact, Basu explains this in some detail in his book through the concept of food coupons, which are again nothing but cash transfers. He envisages a system where the poor get food coupons or cash transfers and they then use that money to buy kerosene, fertiliser and food grains from any shop instead of just the PDS shop in their neighbourhood.

As he writes: “Note that since the stores get full price from the poor and, more importantly, the same price from the poor and the rich, they will have little incentive to turn away the poor away. Further, the incentive to adulterate will also be greatly reduced since the poor will have the right to go to any store with their coupons [or cash for that matter].”

This means that the PDS shops are also likely to sell good stuff, instead of trying to adulterate the commodities. Further, the siphoning of the food grains, fertiliser and kerosene will also come down.

The fear here is that the poor will use their coupons or cash for something else. But that risk is anyway there in the current system as well. The poor can sell the grain or the kerosene that they get and do something else with that money.

Also, as Basu puts it: “If they choose not to take the benefit in the form of food and buy something else, it is not nearly so counterproductive as the benefit going to owners of PDS stores as often happens in the current system.” The chances of that money being spent and benefitting the economy are higher.

For this system to work the government needs to be able to link the Aadhaar number to an active bank account, in which it can transfer money. As of January 2016, around 970 million Indians have Aadhaar numbers. In fact, linking Aadhaar numbers to bank accounts has worked very well in case of subsidised cooking gas cylinders where black marketing has come down. “The use of Aadhaar has made black marketing harder, and LPG leakages have reduced by about 24 per cent with limited exclusion of genuine beneficiaries.”

As the Survey points out: “A number of states, like Andhra Pradesh and Gujarat, with high Aadhaar penetration and POS devices in rural areas might be good candidates to start pilots based on this model.”
Let’s hope this happens on a larger scale than it currently is, sooner rather than later.

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

The column originally appeared on Huffington Post India on February 26, 2016