Do cash subsidies mean more corruption? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Do cash subsidies mean more corruption? 

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In this issue:
» A Japanese development spells good news for silver
» Government bails out Air India yet again!
» Lessons from Apple and Narayana Hrudayalaya
» Why Africa's economic potential may get wasted
» ...and more!

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Ever since the 2G scam, the government has been fire fighting graft accusations. But to no avail! Mr Arvind Kejriwal's recent disclosures have further rubbed salt on the government's wounds. Nevertheless, in their latest 'pro-reform' avatar, the policy makers are trying their best to shed the tainted image. Our Finance Minister in particular has been very prompt in unleashing some long pending reforms. Key amongst them being reducing the subsidy on diesel and liquefied gas.

But it seems that he will not stop at that. In order to arrest the economy's fiscal deficit at 5.3%, the government wishes to get rid of off balance sheet liabilities. What this effectively means is that instead of offering subsidies via discounts, these will be paid out in cash. This plan could address two issues. One, it will ensure that there is a healthy mechanism for passing on price rises of essential commodities. Two, subsidies if any, go only to the needy, in the form of cash. If implemented to the tee, this will not only improve the financials of some bleeding PSUs. But it will also help the government contain fiscal deficit.

Alas! When it comes to our government, the executions of such noble policies are usually far from being noble. Despite schemes like Aadhar, the needy citizens of India are still beyond the realm of banking. Therefore cash handouts are very unlikely to reach them. For all we know, the cash subsidies may end up lying in the pockets of corrupt policy makers instead. In such a scenario, the government's books may look better with lower deficit numbers. But the standard of living for the country's poor and under privileged may worsen.

Hence we believe that the cash subsidy scheme though noble, is a little premature to implement. Unless the government can assure itself of handing out the same to those who deserve, it must be ultra careful about doling out cash.

Do you think the cash subsidy scheme will bring in more corruption or help build a better economy? Let us know your comments or post them on our Facebook page / Google+ page

The quality of our polity seems to be deteriorating day by day. It is time for citizens to wake up and take a stance against this. If you feel this way too, then help create a 'snowball' effect to save India's democracy and growth story. Participate in our petition to the government.

01:30  Chart of the day
Data from Economist points out that two-thirds of Indian population, some 833 million people, are still living in 640,000 villages. And why not? Farmers get subsidised diesel to run irrigation pumps. The NREGA scheme offers jobs for alternative employment. Food grains are sold at subsidised rates. Power for agriculture is still free in many states. This has discouraged urbanisation to quite an extent. However, if United Nations' estimates are anything to go by, India rural skewed population, is set to become very urban in the next four decades. From 31% in 2010, the urban population will account for 56% of Indian populace by 2050.

Data source: Economist

We all know how the invention of cell phones sounded the death knell for landlines. Or how anyone hardly uses typewriters these days, preferring to use their computers or laptops instead. The crux of all this is that new way of doing things replaces its old counterparts and these transformations keep happening all the time. What this also does is that it ignites demand for materials and commodities that go into the making of newly invented stuff.

The precious metal silver is the beneficiary of one such similar shift taking place in the power industry these days. We all know how events in a nuclear plant in Japan created a worldwide scare. Japan's overreliance on nuclear power was also brought to the fore as a result of this. And thus use of solar energy is being promoted on a massive scale so that dependence on the same comes down significantly.

Well, this development also spells a lot of good news for silver. For the simple reason that equipment used for generation of solar power does use a lot of silver. Not that silver's demand for use in solar power generation was not strong previously. However, the recent developments in Japan would definitely give further impetus to this demand and also help in boosting silver prices.

That bailouts have not helped in kick starting economies is a lesson for all to see. The crux here is whether we have learnt anything from the same. Take the US for instance. No amount of money printing and quantitative easing lessened the woes of the US economy. And yet the Fed goes ahead and announced a third such round. Europe is no different. As certain European economies teetered on the edge of bankruptcy, the only solution that the region could come up with is bailout with more quantitative easing. Sadly, such a scenario seems to be unfolding in India as well. Although this is for a company rather than the country. And the company we are talking about is none other than the debt saddled Air India. The finance ministry has now approved an unconditional guarantee for Air India's Rs 74 bn bond issue. With a guarantee in hand, the airline will now issue non-convertible debentures and repay the high-cost short-term working capital facility availed from 19 banks. This along with equity infusion by the Centre and taking over aircraft loans were the key elements of the airline's Rs 300 bn financial restructuring plan cleared by the cabinet in April.

We recently ran a campaign against bailouts.

Amendments have always been a pain in the neck for government. For one it needs to have acceptability amongst masses. The second problem lies in their applicability. Any change can be brought into effect either prospectively or retrospectively. And the repercussions could be huge in retrospective matters. Especially to those which are related to taxation as it involves a direct cash outgo.

However, the recommendations of Shome Panel have brought in some relief here. The panel says that any taxation amendment should not be levied retrospectively. And even if it is, in a rare case, the government should not claim interest and penalty on that. The recommendations are open to public debate until 19th October, 2012. If accepted, they could bring necessary relief to companies like Vodafone which are involved in taxation battle with the government. We believe that this is a step in the right direction. One cannot penalize the assessee for withholding taxes in cases where there were no clear rules which said that he is liable to pay taxes in the first instance. We also know how long it takes for court cases to resolve in India. Thus, the delay indirectly adds up to the interest. This is unfavorable to the assessee. Thus, changes recommended in the tax laws are more than welcome.

Indian banks weathered the storm of the financial crisis. But they are far from being the best. To help them improve their image, the executive Director of the Reserve Bank of India (RBI) has a piece of advice. Mr Padmanabhan has advised banks to take lessons from Apple and Narayana Hrudayalaya. The former is an undisputed technology giant that has revolutionised the tech products segment. The latter is the brainchild of Dr Devi Shetty who has the vision to make complicated surgeries affordable.

In Mr Padmanabhan's opinion, Apple gives a lesson on maximizing end user experience. This has been the key reason behind Apple's success. Indian banks too could work on improving customer experience particularly in electronic transactions. This would help banks increase their business without adding additional employees.

The hospital is a perfect example on how reducing costs can lead to lowering the price of goods or service provided. It is known for negotiating aggressively with suppliers for better prices. At the same time it buys directly from manufacturers. This helps in bypassing the distributors and hence reducing costs. Banks too can look at reducing their costs on an everyday basis to maximize their profits further.

A combination of both the processes is the key for long term growth and profitability.

Africa. A continent of untapped potential. Over the last decade, this resource-rich continent has lured a lot of global interest. For instance, foreign direct investment in Africa jumped nearly seven-fold from US$ 9 bn in 2000 to US$ 62 bn in 2008. The World Bank has said that the continent is at a takeoff point quite akin to where China was three decades ago and India two decades ago. As per Citigroup, Africa's contribution to world GDP is set to triple by 2050.

But this is just one side of the story. Here are the worrying aspects. The two major African economies, South Africa and Nigeria, are in the midst of some serious internal challenges. South Africa has witnessed two months of worker strikes after the police massacred 45 platinum miners in August. Its currency, the rand, has dipped by 20% against the US dollar since March. Even worse, the economy is expected to grow at a meagre rate of 2.5% in the current year. Nigeria, on the other hand, is facing increasing attacks from Islamic extremists who have been pushing for a separate state in the country's north. The insurgency has claimed over 1,000 lives since 2010.

So, despite the great growth potential, Africa has several socio-political issues to combat. How these economies manage to deal with social challenges will be a decisive factor for future economic prospects.

Taking cues from their peers across Asia, the benchmark indices in Indian equity markets opened in the negative and made no attempt to move closer to the dotted line until noon. The BSE Sensex was trading lower by around 120 points at the time of writing. Other Asian markets except China closed lower today while Europe also opened on a negative note.

04:56  Today's Investing Mantra
"Cash combined with courage in a crisis is priceless." - Warren Buffett

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    Equitymaster requests your view! Post a comment on "Do cash subsidies mean more corruption?". Click here!

    11 Responses to "Do cash subsidies mean more corruption?"


    Jan 2, 2013

    The government is experimenting with a scheme that was already tried in many countries but failed (US food stamps, Holland health tickets, Germany social security etc). The motive is misplaced, as the poor cannot afford premium quality, nor are they flush with money to pay and wait for reimbursement. This will not even avoid diversion of funds.
    This is a scheme of a man with limited ideas, and a manic approach to ramrodding his ideas down others' throats.


    sunilkumar tejwani

    Oct 11, 2012

    in the last 60 years has any subsidy scheme functioned effectively? the money goes round tripping in the pockets of corrupt politicians and bureaucrats. remember the last four letters of bureaucrats are r a t s. Rats eating away all the prosperity of an economy. All said and done, following are alien concepts:
    chastity from a prostitute
    honesty from a politician
    probity from a corrupt
    mercy from a cruel
    economy from a spendthrift

    Like (1)

    Tej Krishan Raina

    Oct 11, 2012

    Unfortunately corruption is so deep rooted in the citizens & the system of our country that it has become a way of life.Payment of subsidy in cash is the most appropriate solution provided we have a sound monitoring system backed up by an efficient, honest & prompt grievance redressal system.

    Like (1)

    parimal shah

    Oct 11, 2012

    Not if cash subsidy is transferred via mobile banking or to bank account via ECS with an identity trail - so that it can be tracked, if needed.

    Like (1)


    Oct 10, 2012

    You declare that the concept of direct cash transfers to the poor is "premature". What alternative do you suggest to target subsidies to the poor ? The maxim "it is better to light one little candle than curse the darkness" comes to mind.

    A start can and must be made with cash transfers to at least those poor who live in areas with regular banks or where the proposed "banking correspondent" is available. The latter is through use of the ubiquitous mobile phone to perform basic banking functions like depositing money into the poor man's (or woman's) account and facilitate withdrawals or payments for purchases made by him. This method along with identification of the person using the Aadhar ID card should enable extension of the cash transfer system to at least 75% of the poor. The remainder can be served through the existing methods while tolerating the massive corruption that it entails. Will this not be a worthy goal to attain ?

    Like (1)


    Oct 10, 2012

    With current Cash Subsidies under Mnrega Scheme, itself, I understand , the agriculturists are unable to get Labour. I wonder what will happen, when more such Schemes are opened up.

    Like (1)

    Saravanan Viswanathan

    Oct 10, 2012

    Cash Subsidies should be avoided. Instead specific credits like Urea Credit, LPG credit, Diesel Credit etc linked to Aadhar card should be given to prevent diversion of cash for other unproductive and wasteful things like entertainment, alcohol, gambling etc. We are in the IT age and this should not be difficult to implement.

    Like (1)

    Bhalchandra v. pade

    Oct 10, 2012

    This concept of cash subsidies should not be implemented because even if cash subsidy reaches to BPL family,I doubt whether the cash will be used for buying essentials like grain.I fear, the cash subsidy will be wasted for unwanted things like gambling,consuming liquor etc. Govt should strengthen the PDS instead.

    Like (1)

    Suresh Kumar

    Oct 10, 2012

    Nobody taught village folks to use mobile phones. If cash transfers could be done through mobile mechanism and based on Adhaar number, it would be quick and error free. However there are more ration cards than people in many places. This types of mistakes needs to be corrected. A successful pilot should precede the rollout in states. Another danger is malnutrition of women and children and alcoholism and gambling by male folks. The government may not have thought through it. Hope high level of literacy precedes the rollout to prevent malnutrition.

    Like (1)


    Oct 10, 2012

    A new system has been suggested. I welcome it.
    The modus operandii there of has to be equally NOVEL.
    Let this transfer of subsidy in cash be through bank account of the beneficiary opened in reference to the ADHAAR CARD.
    This is what i can think of at the moment.
    Otherwise . . . . . . . .

    Like (1)
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