(This article in EPW is reproduced as it is. Not just does this article provide a beautiful analysis of the aadhaar project, it puts all the disadvantages of it in perspective and provides suggestions for improvement)
The Aadhaar-linked Direct Benefit
Transfer scheme for reducing leakages in Liquefied Petroleum Gas (LPG) subsidies
has been widely advertised as a phenomenal success and has been used to promote
Aadhaar and DBT in other spheres by prominent government officials. However, an
analyses of various studies and data shows that the government’s tall claims of
savings cannot be confirmed and leaves much to be questioned.
Since the 1991 reforms, one of
the major objectives of the government’s economic policy has been to
rationalize and reduce the expenditure on subsidies. According to the Economic
Survey 2015–16, the Indian government spent 4.2% of its gross domestic product
(GDP) on subsidies, which it intends to reduce to 1%. This is being done by
eliminating certain subsidies, reducing the scope and extent of some, targeting
to a narrower population and reducing leakages through better administration.
Direct Benefit Transfer (DBT), or
the transfer of subsidies directly to the beneficiary bank accounts, along with
using Aadhaar/Unique ID as the identification proof, has been promoted as the
silver bullet to reduce leakages in subsidy administration.
The Aadhaar-linked DBT scheme for
reducing leakages in liquefied petroleum gas (LPG) subsidies is the first
full-scale cash transfer programme via DBT. The flagship program has been widely
advertised as a phenomenal success and has been used to promote Aadhaar and DBT
in other spheres by various prominent members of the government (Panagariya
2016).
However, the limited evidence of
potential savings in LPG does not match these tall claims and leaves several
questions unanswered about the extent and mechanism of savings through DBT.
Even
if reduction in leakages in LPG
subsidies turns out to be substantial, the government should be especially
careful about extrapolating this impact to other subsidy programmes like the
Public Distribution System (PDS) and Mahatma Gandhi National Rural Employment
Guarantee Act (MGNREGA). The context and use of DBT differ significantly across
different programs for the “success” to carry over.
LPG usage is mostly urban, is
centrally administered by a few companies through a fully computerized list of beneficiaries and
does not need bio-metric verification; which makes it more conducive for DBT. On
the other hand, PDS and MGNREGA are more rural-based, managed through multiple
agencies with only partial computerization of user lists and need repeated
bio-metric verification, making the use of DBT far more challenging. The Economic
Survey 2015-16 acknowledges some of these issues, but the government has begun
the process of extending DBT to kerosene subsidy and PDS without due diligence.
In recent months there has been a
vigorous debate on the impact of DBT for LPG (George and Subramanian 2016). The
debate is a welcome step, but most analyses have left critical questions unanswered,
and the widely quoted estimates of savings do not stand to scrutiny. The
estimates of the potential impact vary: from an estimated 24% reduction in
subsidies by the Economic Survey to that of less than 3% according to the
International Institute for Sustainable Development (IISD).
A recent audit by the Comptroller
and Auditor General of India (CAG) of the PAHAL–Direct Benefits Transfer for LPG
(DBTL) scheme concludes that more than 90% of decline in subsidies can be accounted
for by the fall of crude prices and only ₹1,763 crore out of the total reduction of ₹23,316 crore
was due to reduced offtake of cylinders by consumers. To be certain about the
level of impact and “phenomenal success” of DBTL and to extend it to other
spheres, more research and analysis is needed, along with a transparency in
data and methods used.
Evaluating Aadhaar-linked LPG
Over the last few years,
subsidies on diesel and petrol have been gradually eliminated, but LPG still remains
heavily subsidized. The Economic Survey estimates that the effective subsidy
rate on LPG is 86% . According to the Ministry of Petroleum and Natural Gas
(MoPNG), the government provided an average subsidy of ₹173 per cylinder in
the first six months of 2015–16 (April–September 2015) totaling
approximately $1.4 billion.
Differential pricing across
sectors leads to leakages as well. In India, public sector oil marketing companies
sell LPG to households and to the commercial sector through a distributor
network.
Commercial establishments and
households consuming more than 12 cylinders in a year have to buy LPG at
unsubsidised prices. Commercial establishments have to additionally pay central
and state taxes of about 25%–30% on an average. Because different prices exist
for the same product, dealers create ghost LPG accounts and divert subsidised
LPG cylinders into the black market which are then sold to commercial
establishments.
The belief behind Aadhaar-linked
DBT is that technology can help states with low administrative capacity to efficiently
curb diversion of subsidy. In the DBT scheme, consumers have to register their Aadhaar-linked
bank accounts with their LPG distributor. Consumers pay the full cost of LPG to
the distributor and the subsidy is transferred directly to their bank accounts
(supposedly, before the next refill). This does not restrict or target the
subsidy, but only changes the mechanism through which subsidy is delivered to
the end user.
Having an Aadhaar-linked bank
account is mandatory to access this subsidy. The idea is that this change
increases the chances of identifying and eliminating ghost or duplicate LPG
accounts. The few studies investigating the effectiveness of DBT for LPG have
reached contradictory conclusions and do not clarify important issues. The
Economic Survey 2015-16 claims that DBT was responsible for reducing LPG
subsidy by 24%, while a study by Prabhat Barnwal (2015) found a more modest
impact of 11%–14%. Both these studies evaluate the DBT scheme introduced (and
abruptly terminated) by the United Progressive Alliance government from
September 2013 to February 2014 by comparing the change in usage of LPG in DBT
districts with the change in usage in non-DBT districts.
Based on publically available
data, the IISD’s policy briefs claims that the savings for 2015-16 would be ₹120 crore
against the ₹14,672 crore estimate mentioned by the finance minister in Parliament (Clarke
2016). These claims have been reported extensively in both national and
international media and used as a justification to extend Aadhaar and DBT to
other spheres. However, none of these studies help in bringing clarity to the
extent and mechanism of savings, leading to unreasonable extrapolation in the
political narrative and in the media.
This article aims to bring
clarity to the debate by raising questions that are critical to understanding the
true impact of DBT on subsidy reduction but which have been insufficiently
addressed. After having reviewed all publicly available research and data about
the Aadhaar-based DBT scheme, and having communicated with several researchers
with different viewpoints on the debate, four major questions surface:
1. Is the recorded impact of Aadhaar-linked DBT due to elimination of
ghost accounts or is it because of exclusion of genuine beneficiaries?
Exclusion errors could be an
important driver of reduction in subsidised LPG usage. For a household to
benefit from LPG subsidy under the DBT scheme, they have to open a bank account,
link it with their Aadhaar number and register the same with the LPG
distributor. In the initial few months after DBT was made mandatory, some
genuine households might have not been able to complete the requirements and
thus would have been excluded from receiving LPG subsidy. Both Barnwal (2015) and
the Economic Survey find a sharp drop in subsidised LPG sales in the first month
after the enforcement of DBT. This fall recovered substantially over the next
few months, possibly as exclusion errors declined over time. Barnwal finds that
even after DBT was made compulsory, not all genuine households were initially
enrolled in the programme. For six months after the start of the programme,
about 20% of households complied with DBT requirements.
However, none of these studies
quantify the extent of exclusion errors or account for them, without which the
true impact of DBT is uncertain. Both Barnwal (2015) and the Economic Survey
argue that exclusion errors do not play a big role in the estimates. They argue
that households which do not comply with LPG requirements are likely to be rich
households or ghost accounts. But this does not quantify the extent of
exclusion errors which are bound to exist in a new scheme, especially in the first
few months (George and Subramanian 2016).
The claims of no significant
exclusion would have been more convincing if the studies provided results which
excluded the first few months of data from the analysis—assuming that exclusion
is resolved after few months in most cases. Exclusion errors will invariably
lead to overestimation of the impact of DBT, and like in other impact
evaluation studies, additional parallel household surveys would have helped
ascertain the extent of these errors. Without getting a handle on the exclusion
errors, it remains unclear whether the reduction in subsidised LPG consumption
is due to genuine households being left out or because of elimination of ghost
accounts.
2. How much does Aadhaar contribute in reducing subsidy in the DBT
programme?
Present analyses of the impact of
DBT do not examine the individual effect of each of its mandatory components—the
bank account and the Aadhaar requirement—which would help in identifying the mechanisms
of impact. Most of the impact could have potentially come only by transferring
the subsidy to a non-Aadhaar linked bank account, as it would help in
identifying ghost accounts.
Dealers can create ghost accounts
and divert LPG cylinders to the black market relatively easily when LPG is
provided to households directly at a subsidised price. Introducing the
requirement of bank accounts separates the subsidy transfer task from the
dealer and hence they cannot directly create ghost accounts. The process of
creating ghost accounts now involves a separate set of actors.
LPG dealers can still collude
with bank employees on the matter of verifying identity, create ghost bank accounts,
and then pocket the subsidy. Aadhaar might be useful in preventing the latter,
but Aadhaar itself is not ghost proof. Two individuals living at the same
household address with different Aadhaar numbers can collude with the dealer or
the delivery person to create one genuine and one ghost LPG account. Aadhaar is
not helpful in identifying this type of a fraud. None of the studies mentioned
above attempt to decipher the separate impact of bank accounts and Aadhaar.
Identifying the separate impact
of bank accounts and Aadhaar is important because the usage of Aadhaar raises
other concerns that should be evaluated against its benefits before beginning
its widespread usage. These include loss of privacy, increased risk of
government surveillance and security risks. While aspects of privacy and
surveillance regarding Aadhaar have been discussed in depth (Ramkumar 2010;
Drèze 2016), the security risks have received lesser attention. Storing and providing
biometric authentication services for over a billion people through a
centralised agency increases the risks of malicious hacker attacks. A single
successful hack might lead to the theft of the identity information, as shown
by several recent international attacks (Khandelwal 2015).
The recent version of DBT introduced
by the National Democratic Alliance (NDA) government, called PAHAL, does not
make Aadhaar mandatory for subsidy transfer to bank accounts. Studies could include
an analysis of the impact of DBT in districts with varying levels of
penetration of Aadhaar to help ascertain the marginal effectiveness of using
Aadhaar in the DBT scheme.
3. Why do the estimates for savings differ vastly across studies?
The estimates of savings vary
substantially across studies and the methodology is not always transparent.
Barnwal (2015) and the Economic Survey use similar methodology and data to
estimate the impact of Aadhaarlinked DBT on subsidy reduction, but report
different levels of savings. Barnwal (2015) estimates a reduction of 11%–14% in
domestic subsidised cylinder usage using individual transaction-level data and
about 13%–17% using aggregated distributor-level data. The Economic Survey
reports a reduction of 24%.
These are substantial differences
as it would translate into potential savings between ₹5,820 and ₹9,000 crore using Barnwal’s
estimates as opposed to ₹12,700 crore as reported in the Economic Survey. It is difficult
to ascertain the exact reason for the differences as the data, method and regression
used for the Economic Survey estimates are not reported. One of the potential
reasons for the discrepancy might be different sources of data , but the
discrepancy is too large to be completely accounted for by this alone. The
picture would have been clearer if the authors of the Economic Survey had
released a working paper detailing the exact data, method and regressions used
in the analysis.
In contrast to other studies, the
IISD estimates almost no savings from Aadhaar and raises several pertinent
issues, but their analysis is not directly comparable with the other studies.
IISD claims that
in the fiscal year of 2015-16, the
maximum savings possible due to Aadhaar would only be ₹121 crore
while duplicate accounts found due to Aadhaar will be 1%. This is based on data
on the number of ghost accounts identified and quarterly LPG subsidy data
released by the MoPNG. They attribute a substantial reduction in the number of
ghost LPG connections to a simple list-based de-duplication exercise carried
out by the public sector oil companies. Based on government-submitted affidavits
to the Supreme Court, IISD notes that the number of ghost LPG accounts is less
than 2%. But IISD’s analysis cannot be compared with other analyses, since they
only use aggregate data and do not use beneficiary- or distributor-level data.
Aggregate data might be impacted due to various trends that are difficult to
separate. Nonetheless, IISD’s analysis does raise key issues that have not been
addressed fully.
4. If diversion is reduced, why have sales to the commercial sector not
increased?
Change in subsidised LPG usage in
the domestic sector because of reduced leakages should be matched, at least
partially, by an increase in commercial sales. This is not observed, raising
further questions about the impact of DBT. The Aadhaar-linked DBT programme
claims to reduce leakages in subsidised LPG cylinders, which were earlier
diverted to the black market and sold to commercial establishments. The
reduction in supply of diverted LPG would lead to increase in prices in the
black market and some decrease in demand in the commercial sector. But at least
part of the decline in leaked cylinders has to be compensated by an increase in
commercial sales by the distributors. But over the period of the programme,
Barnwal (2015) finds no substantial change in commercial sales, and the Economic
Survey finds an increase of only 6% of commercial sales, as opposed to a decrease
of 24% in domestic sales.
This discrepancy has been
explained by suggesting that stockpiling might have taken place before the
start of the DBT scheme. However, the months preceding the policy do not show
any evidence of
increase in sales of subsidised
cylinders. Another possibility suggested by the Economic Survey is that sales
of non-subsidised cylinders to the domestic sector have increased. But this
claim would have been more convincing if the Economic Survey had provided
evidence to support it. In addition, on abrupt termination of the policy,
Barnwal (2014) finds an increase of domestic sales by 6%–7.5% and decline in
commercial sales of 6%–9%. These numbers suggest that rather than the 24%
subsidy reduction put forth by the Economic Survey, the actual impact might be
closer to one-fourth of that (6% or so).
Aggregate data from the MoPNG
also raises questions on the extent of impact of DBT. The share of domestic
consumption in total LPG consumption in the first six months of 2014–15 and
2015–16 (before and after DBT–PAHAL) remains relatively stable, having changed
from 89% to 88%. If DBT was successful in reducing ghost accounts by a quarter,
the share of domestic consumption should go down substantially and share of
commercial consumption should have increased. It is only if the domestic sector
grew at a far higher rate than the commercial sector would it be possible to
negate all the decrease in consumption, which might happen partially but not
completely. Other Mechanisms to Reduce LPG Subsidy There are several other ways
of targeting and reducing the regressive LPG subsidy , which might be
administratively easier and less controversial. A proposal which was partly
implemented and then withdrawn by the previous government of capping the number
of subsidised cylinders is one option. Fifty percent of households use only
seven or fewer subsidised cylinders every year (Lahoti, Suchitra and Goutam
2012). Currently, households can receive subsidy on up to 12 cylinders per
year. This cap on the number of cylinders could be gradually reduced to 6–7
cylinders, which will go a long way in reducing the subsidy and its regressive
nature (similar to the phased elimination of the diesel subsidy).
In addition to reducing leakages
because of the reduction of the number of cylinders which can be diverted after
genuine usage, this option would lead to efficiency, as overall usage would
reduce when consumers have to pay the full price after the lowered cap is
breached. Unfortunately, even though this option is the easiest to
administratively implement, it has not got much political traction.
Another way to reduce the cost of
LPG subsidy is to exclude high-income earners from the LPG subsidy scheme. The
government has introduced the “give-it-up” campaign, where people voluntarily
decide to give up LPG subsidy. Only 7% (1 crore households among 15.34 crore
LPG connections) have voluntarily given up the subsidy, even though most LPG
subsidy beneficaries belong to the top 20% of society. Instead of keeping it
voluntary, the government should make it compulsory for people above a certain
income threshold. A recent step in this direction is the initiative to identify
households with income greater than ₹10 lakh and exclude them from the LPG subsidy. This limit could
be lowered over time.
One additional step is to reduce
or eliminate the tax differential between commercial LPG and nonsubsidised domestic
cylinders, which currently averages 25%–30% . This will reduce any diversion of
non-subsidised domestic cylinders to the commercial sector.
Conclusion
Studies evaluating the DBT scheme
are useful and important. Given the limitations of data and methods, these few
studies cannot conclusively provide answers to all relevant questions. Nonetheless,
the current sets of estimates are shaky and leave several questions unanswered,
preventing any certainty about the extent and mechanism of the impact of the
DBT programme. The
level of exclusion errors,
marginal impact of Aadhaar in DBT, and various inconsistencies in the results
need to be addressed before celebrating the “success” of DBT for LPG. The
government should be cautious while extrapolating the uncertain results of DBT
in LPG and introducing Aadhaar equirement or even DBT to other schemes.
