Aadhar-based transfers are a big reforms step
The government’s decision to begin rolling out Aadhar-based payments to 51 of India’s 659 districts by January next year, 18 states from April 2013 and the remaining 16 states by April 2014 or earlier is probably the biggest reforms step the country has seen in a long time and, more important, has seen relatively little opposition as compared to measures like, say, raising the FDI limits in insurance from 26% to 49%. In other words, never mind whether Parliament is allowed to function or not, Aadhar-based reforms are here to stay. Depending on how fast it is rolled out, Aadhar-based payments can help shave off 0.5 percentage points from India’s subsidy payments (currently around 2% of GDP) when fully rolled out—the figure can be more depending on whether other payments are also Aadhar-based; scholarships, for instance, don’t come under the budget definition of subsidies. And while Aadhar payments are supposedly revenue-neutral, they have the potential to increase the money in the hands of the beneficiaries. As an election strategy, more money in the hands of the poor has to be a powerful one.
Take the issue of losses first. In the case of LPG cylinders where Aadhar-based payments will be the first to begin, it is estimated that there are 1-2 crore fake/duplicate connections. Just eliminating these will save between R2,000 crore to R4,000 crore. Ditto for the R75,000 crore spent on food subsidies where leakages are estimated to be around 58%. In the case of MGNREGA, similarly, just around a third of the poor get employed while the scheme was conceived with them in mind. So, presumably an Aadhar-based payments system will fix this.
How the poor will get even more funds is easy to see, since the administrative costs associated with the scheme will be eliminated—these are typically 25-30% of the cost of the scheme and will be replaced by the cost of administering Aadhar, typically 2-5%. In the case of MGNREGA, for instance, the capital component of the scheme—the bricks and the cement—is around 30%. Since the idea of MGNREGA is not so much to create assets—which in any case aren’t always easy to find later—as it is to be able to push funds to the poor, this 30% can also be given to the poor in terms of enhanced Aadhar payments. Similarly, in the case of food subsidies, around 30% of the costs are associated with storing and distribution of foodgrains—once government procurement of grain reduces as the poor get cash transfers, the government will save money and can just as well increase Aadhar payments under this head.