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Tuesday, 12 May 2015 05:33
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Cuts in subsidies critical to fund new programmes


Given the poor levels of social security in India, the government has done well to try and plug this gap through imaginative insurance and financial inclusion schemes like the Jan Dhan Yojana. There are schemes for life and accident insurance as well as pension coverage. In Kolkata, over the weekend to woo TMC chief Mamata Banerjee, prime minister Narendra Modi said the first 7 days of the trial run of the 3 schemes announced in the budget—the Pradhan Mantri Suraksha Bima Yojana, the Pradhan Mantri Jeevan Jyoti Bima Yojana and the Atal

Pension Yojana—had seen over 5 crore people enrolled and around a tenth of those were from West Bengal. Around 12.5 crore people have already been enrolled under the Jan Dhan Yojana—the numbers, of course, shouldn’t be added since there will be a significant overlap. While exact details of the funding are not clear—if the banks/insurance companies selling these products have a high claims ratio, they will run huge losses—the idea is to substitute badly-run government schemes with more professionally-run, and in time, privately-run, insurance/pension programmes. Indeed, the government needs to extend such progressive working to other areas as well. There is, for instance, no reason why the bulk of the farming community shouldn’t be covered by crop/weather insurance—if this was done, farmers wouldn’t need to run to the government for help each time there is a flood or a drought. Indeed, instead of running an expensive and hugely inefficient buffer stock operation, the government would do well to maintain a stripped-down version of the buffer and make good the difference by buying wheat/rice options in global and local markets.

Since all the programmes being talked of involve large sums of money, the government needs to work out realistic costs and look at ways to fund this. Even the very limited pension provided by the EPFO, for instance, has resulted in a gap running into tens of thousands of crore rupees, it is difficult to conceive of the Atal Pension Yojana not requiring large financial support from the government if it is to deliver pensions of R1,000-5,000 per month. Indeed, in the case of crop insurance, ICRIER professor Ashok Gulati had estimated a premium cost of R15,000 crore if even two-thirds of farm area was to be insured. Gulati’s solution was to levy a cess on farm equipment and agricultural exports, apart from a sharing formula between the Centre and the states. In the case of using futures with a stripped-down buffer stock of 5 million tonnes in physical form, around R1 lakh crore can be got by reducing FCI’s hugely excessive stocks to this level. Similarly, while it costs banks a lot of money to set up Jan Dhan accounts, and a lot more of likely bad debt if a R5,000 overdraft is given to each of the 12.5 crore accounts opened so far, the scheme makes commercial sense if the R3 lakh crore spent by the government on social security schemes is directly transferred to the Jan Dhan accounts of the country’s 30-crore poor. In other cases, the money to fund insurance/pension schemes could be got by cutting on some other government-spend. It is up to the government to match the increased spending required through greater insurance/Jan Dhan overdrafts with cuts in wasteful social spending.


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