India spends about Rs. 1.6 trillion every year or roughly 2% of the country's GDP on subsidies, all indirectly. And most of these subsidies do not reach the poor. Dubbed as one of the "big ticket" reforms, the government has decided that subsidies on kerosene, fertilizers and Liquefied Petroleum Gas (LPG) and delivery through the Public Distribution System (PDS) would be replaced by direct cash transfers in a phased manner for people living below poverty line.
The government has already started cash transfer in some states and has found success in that. For example - In Alwar, Rajasthan, kerosene supplied through public distribution system was replaced by cash transfer to the target consumers. In a short time span, the monthly off-take of kerosene in the district dropped from 80 kilolitres to only 14 kilolitres, or by 80%. This is significant because kerosene supplied through PDS is largely diverted for adulteration of auto fuel.
The direct cash transfer system; however has its fair share of critics. First - money that comes in for free, without doing anything, even going through the motions of work, would more likely end up in unproductive uses.
Take the example of Kerala. During 2006-11, when the communists have been in power, government spending on welfare has shot up and so has alcohol consumption. Figures from the State Beverages Corporation (the government liquor monopoly) show that sales have more than doubled during this time. And you only have to look at the profile of the people queuing up in front of these stores to figure out that much of this increased consumption comes from the poorest.
Second - the government is planning to link cash transfers to the new Unique Identification Authority of India, which when fully implemented will document every Indian. But recently, Bangalore police had busted a fake unique ID (UID) racket and also seized thousands of fake UIDs with official Aadhaar logos.
The crux is that direct cash transfers are not perfect, but we're not living in a perfect world. The current system of subsidies and the Public Distribution System are so riddled with leakage, corruption, criminality, and waste, that the system hardly benefits the poor and is, in fact, a huge drag on the economy.