Fertiliser and food subsidies are the two largest subsidies in the Union budget. Barring a few pilots, they are not being distributed to farmers and consumers through direct benefit transfer (DBT) as it is done in the case of Pradhan Mantri Kisan Samman Nidhi Yojana (PMKISAN) and a few other flagship schemes.
Undoubtedly, DBT under the PM Kisan scheme has turned out to be the biggest success, poised to transfer an estimated budgeted amount of Rs 68,000 crore in fiscal year 2023. DBT, as an income support measure is considered to be better than the price support measure due to transparency, inclusivity, and efficiency in the distribution of benefits to the poorer population.
DBT in Fertiliser and Food Subsidies
To help farmers increase input and hence crop productivity, the central government has been providing support by subsidising fertiliser, irrigation, seeds, electric power etc. To widen the outreach of support on fertiliser, the government carried out a few pilots in select states to implement the DBT.
At the point of sale (POS) machines (kiosks) installed at the retail shops, farmers are required to register and do the Aadhaar-enabled authentication. Based on the quantity purchased at the subsidised price, the government credits the amount of subsidy to the manufacturers.
DBT as an instrument of support has turned out quite beneficial for manufacturers due to the fast payment of the subsidy amount. But farmers face multiple hassles due to huge rush at retail shops and no purchase without Aadhaar authentication. As a result, during peak periods of sales, the process of authentication is waived.
In 2015, the government also launched pilots of DBT for food subsidy in the Union Territories of Chandigarh, Puducherry and Dadra and Nagar Haveli. The amount of food subsidy is transferred, in lieu of food grains to the bank accounts of family heads of the ration card holders. The DBT has not been extended to any other UT or state.
In the rest of India, food grains are issued at POS machines at Fair Price Shops (FPS) by Aadhaar authentication. It is claimed that this has reduced the leakages from the public distribution system (PDS) but there is no recent independent study to confirm it, except in Odisha. So, food distribution under the PDS continues to operate in physical form.
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Challenges in DBT
The government has not been able to expand DBT for food subsidies because of several reasons.
Wheat and rice are procured by the Food Corporation of India at a minimum support price (MSP). The substantial stock of wheat and rice in the central pool enables the government to use them effectively for distribution to consumers under PDS, and if necessary, for sale in the open market, to ensure price stability and meet emergencies.
India’s PDS is the largest food-based welfare program in the world. Under the National Food Security Act, 2013, the government provides 35 kg of food grains (wheat/rice) per month to the 2.37 crore Antyodaya Anna Yojana (AAY) families, identified as poorest of poor in the country. In addition, 70.77 crore priority ration card holders are entitled to 5 kg per person per month of wheat at the rate of Rs 2 per kg and rice at Rs 3 per kg. Some states further subsidise it from their own budgets.
During natural calamities like droughts, floods or pandemics, DBT may not be of much help, especially in remote areas, hills, and food-deficit regions of the country. In these areas, it is a good policy to distribute food grains rather than cash. There is enough evidence that during the Covid-19 pandemic, the distress caused by the sudden and strict nationwide lockdown in March 2020 was substantially mitigated due to the timely distribution of food grains by the government.
In addition, under Pradhan Mantri Garib Kalyan Anna Yojana (PM-GKAY), an additional 5 kg wheat/rice per month was given free of cost to all the ration card holders. As a result, cases of large-scale hunger were not reported in more than two years of the pandemic.
The government needs to connect the bank accounts of ration card holders with their respective Aadhaar numbers and it may not have the bank account details of 79.76 crore people availing of free food grains.
The beneficiaries may not prefer DBT unless the amount is linked with inflation. Moreover, the pilots of DBT in the three UTs mentioned above were not quite successful.
In October 2022, the government launched the Pradhan Mantri Bhartiya Jan Urvarak Pariyojana – ‘One Nation One Fertiliser Scheme’ under which fertilisers will be sold under the Bharat brand instead of various fertiliser companies brands. The Bharat Urea bag mentions that the actual rate is Rs 2,503 for a 45 kg bag and the maximum retail price (MRP) that a farmer has to pay is Rs 266.50, implying that the farmers are receiving a subsidy of Rs 2236.50 per bag.
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Conventional DBT
The tenancy of agricultural land is much higher than what the Agriculture Census perhaps reveals. There is no reliable and accurate recording of the tenancy. Moreover, tenants may be changing quite frequently, which may make DBT difficult.
There is a skewed pattern of the application of fertilisers in various states. For example, during 2020-21, average fertiliser application was 67.5 kg per ha in Rajasthan, 247 kg per ha in Punjab, 221 kg per ha in Haryana, 203 kg per ha in Bihar and 208 kg per ha in Andhra Pradesh. But in Jharkhand and Odisha, it was only 50 kg per ha and 68 kg per ha respectively and much lower in Tripura at 30.50 kg per ha. Depending on the usage, DBT payment to farmers for fertiliser will significantly vary across India. It is therefore not easy to implement a uniform rate of fertiliser subsidy.
In contrast, DBT under the PM Kisan scheme is much easier to operate as the designated annual amount of Rs 6,000 is given to the landholders pan India, irrespective of their land being irrigated or unirrigated or sale of produce at MSP or at farm harvest price.
The government may fear that a steep increase in the price of fertilisers in the open market can dissuade farmers from applying the optimum level of fertilisers even if they receive a subsidy through DBT. Lower application of fertiliser may be desirable for farmers who use excessive quantities of fertilisers (especially nitrogen) but it may lower food grain production if many farmers apply the sub-optimum quantity.
Given large inter-state differentials in the cost of production, and the price elasticity of fertiliser consumption, it is difficult to arrive at the exact amount that would maintain the crop output as well as farmers’ interest in applying optimal doses of fertilisers. Moreover, it will not be easy to estimate the inflation-adjusted amount of cash transfers to farmers.
Largest subsidy programmes
For FY 2023, an amount of Rs 2,07,000 crore has been allocated towards food subsidy in the Union Budget. Due to the extension of PM-GKAY, it is now estimated to reach Rs 3,38,000 crore. The budgeted amount for fertiliser subsidy is Rs 1,05,000 crore but it is projected to touch Rs. 2,50,000 crore in view of rise in the cost of imported fertilisers and raw material.
While DBT in fertiliser subsidy has several challenges, it may be somewhat easier to implement for PDS foodgrains. Large pilots can be started in the urban areas in select states having high rates of literacy, bank penetration, internet connectivity, food availability in the open market and more awareness among women.
This can well be a preparation for reimagining the future of PDS after 10 years.
Siraj Hussain, is co-promoter of Arcus Policy Research. He is a former Union Agriculture Secretary. Seema Bathla is a professor of Economics at the Centre for the Study of Regional Development, in the School of Social Sciences, Jawaharlal Nehru University, New Delhi.. Views are personal.
(Edited by Ratan Priya)