Originally Published 2011-04-01 00:00:00 Published on Apr 01, 2011
The government has to ensure that rural roads are constructed and not just "state of the art" modern highways. The interests of the rural people have to be protected, and the government has to regulate and monitor the private sector's participation.
New ideas in the Union Budget: Banking more on market mechanism
In the Union Budget for 2011-12, many new ideas based on greater reliance on the market have been introduced by Finance Minister Pranab Mukherjee. The poor will be asked to buy food at market prices from shops in the villages. According to the Finance Minister, 'To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilisers, the government will move towards direct transfer of cash subsidy to people living below the poverty line in a phased manner." Thus, cash handouts will be given to the poor who will directly buy their important needs from the market at market-determined prices.

According to the government, all prices should be market determined and the government should not attempt to fix low prices for basic goods for the poor because it creates distortions. In other words, there should be no price control and, according to the last year's Economic Survey in which the idea of giving coupons instead of subsidised food to the poor was mooted, "setting the price of a commodity becomes a matter of politics and lobbying and adds to the distortions."

The government is trying to get out of the business of public distribution because it cannot do so efficiently and effectively. It wants to reduce the increasing burden of subsidy and is going for coupons and cash handouts and leaving it to the poor to buy from the market like everyone else. Subsidies have already been reduced in this year's Budget by Rs 20,000 crore which will be much lauded by the World Bank.

It is entirely true that the public distribution system (PDS) has got many leakages which are hard to plug and around 40 to 55 per cent of the goods meant for the poor are sold in the open market through back channels and corrupt agents. It is also true that foodgrains are not always available in ration/PDS shops and when the poor go to buy them, they are often told that the supplies have not arrived or they find the shops shut. After making long journeys to shops, the poor often give up and buy from the open market at higher prices than the PDS shops.

The idea is to replace the whole system of PDS with smart cards based on unique identification of the poor that will enable them to access food with coupons by which any person below the poverty line will get the requisite amount of foodgrains. It will ensure that the food that the below poverty line person will buy is not adulterated because when the poor buy from shops at market prices, it will act as a disincentive for the shopkeepers to sell adulterated foodgrains. The shop owners can cash the coupons received from the poor at any local bank.

What about the family head when he gets cash in hand for buying kerosene or fertilisers? Is he not going to be tempted to buy liquor, tobacco and drugs or use it to pay back some urgent outstanding loan? If women are given the money, there is greater assurance of it going for fuel and fertilisers. She would feel responsible for it but often women are weak and disempowered and are forced by the men in the family to spend money for other urgent needs instead.

In a country like India where there is rampant malnourishment among children and anaemia among women, and 45 per cent of the children below five are malnourished, why is the government not taking the responsibility of reaching subsidised foodgrains to the poor? It is their entitlement after all to have basic goods delivered to them. But the government is of the view that if the direct cash and coupon subsidy to the poor has worked in Latin American countries, it should work in India too. There is, however, no guarantee that it would work in India where the social structure and the level of deprivation is very different.

Why can't the government control corruption in the diversion of kerosene and foodgrains in the open market? Also when the Food Security Bill goes through, what will be the mode of operation of the government to fulfil its obligation to give cheap food to the poor?

A scheme for monitoring the trucks carrying kerosene through GPS-based vehicular tracking system is being contemplated by Petroleum Minister Jaipal Reddy for avoiding the diversion of kerosene for adulteration purposes and if it is successful, similar schemes could be tried for the distribution of foodgrains.

Another area for which the government is betting on more private participation is infrastructure which is the main bottleneck for higher growth rate and more the main bottleneck for higher growth rate and more equitable distribution of incomes. Many parts of rural India are not connected to towns with proper roads and this isolation leads to the perpetuation of poverty.

Since over the next five years (of 12th Plan) the infrastructure requirement will run into over $1000 billion, the government is hoping that at least 50 per cent of it will come from private domestic investors and foreign investors. The government has opened the sector to foreign investment further in the recent Budget and has increased the limit of FIIs (Foreign Institutional Investors) for investment in infrastructure in corporate bonds from $20 billion to $25 billion. This will raise the total limit available to the FIIs for investment in corporate bonds to $40 billion. And since most of the infrastructure companies are organised in the form of SPVs (Special Purpose Vehicles), FIIs would be permitted to invest in unlisted bonds with a minimum lock- in period of three years. However, the FIIs will be allowed to trade among themselves during the lock-in period. Also tax-free bonds of Rs 30,000 crore have been proposed to be issued by the government undertakings during 2011-12 for infrastructure development. Perhaps this greater private participation is a good thing, and raising FII limit in infrastructure bonds will attract more foreign investors.

But then the government has to ensure that rural roads are constructed and not just "state of the art" modern highways only. The interests of the rural people have to be protected and though the private sector will remain important, the government has to regulate and monitor its participation so that proper direction can be given to these investments. So far in the area of infrastructure the public- private partnership model has not worked all that well with big cost and time overruns because of the problem of slow bureaucratic clearances. If foreign investment is to be encouraged many more glitches will have to be sorted out before foreign investors come to India in a big way to invest in Indian infrastructure.

(The writer is a Senior Fellow at Observer Research Foundation)

Courtesy: The Tribune
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David Rusnok

David Rusnok

David Rusnok Researcher Strengthening National Climate Policy Implementation (SNAPFI) project DIW Germany

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