CHAKRAVYUHA CHALLENGE

(From socialism with restricted entry to "marketism without exit)

WHen we say we habe no exit policy, means we have no means to check inefficiencies.
Exit has a vital role in market economy fxning as it destroys old structues to create new one--
J.Schumpeter.
SInce 80s we have focused more on Easy entry(LPG,LQP) but din work much on Exit
policy.(NPA,Red tapism,Financial inclusion leakges & TBS)
Policy action is needed when costs clearly outweigh benefits & when lack of exit generates
externalities that hurt others.e.g. Firms that have to compete with sick companies or taxpayer
who have to pay for corporate subsidies.
Exit polcy reqd to remove resources from inefficient & unsustainable uses to rescue orgzn.
Unsustainable business is run @cost of poor's ppl money(tax). They pay high prices for substd
goods & services from inefficient firms which should have exited.

Exit problem arises due to 3 reasons:

1) INterests 2) Institutions 3) Ideas/Ideology.
Interest groups block reforms like DBT.
Instns like DRT.(delay in debt recovery makes enormous cost o economy & cleaning up of
balance sheets)
Ideology: Difficult to phase out entitlements for poor in name of socialism.Democracy will
favour resdistribution.

Solution: Promote competition via pvt sector rather than changing ownership via
privatization.e.g. Indian aviation & telecom are unrecognizably diff from wht they were 20 yrs
ago.
Introduce better laws like bankruptcy code, implimenting kelkar PPP reforms.
Technology:DBT can address subisy problems
Prevention of corruption (amendment),2013 bill seeks to prevent prosecution for mere admin
errors.
main constraint on JAMs spread is the last-mile challenge of getting money from banks into
peoples hands, especially in rural areas. The government should improve financial inclusion by
developing banking correspondent and mobile money networks, while in the interim
considering models like BAPUBiometrically Authenticated Physical Uptake.
At present, the most promising targets for JAM are fertiliser subsidies and within-government
fund transfers

The ingredients of JAM

Suppose the government wanted to transfer Rs1000 to every Indian tomorrow. What would
that require?
1. Government must be able to
identify beneficiaries;
2. Government must be able to
transfer money to beneficiaries;
3. Beneficiaries must be able to easily
access theirs money

Failure on (1) leads to inclusion errors and leakage benefits intended for the poor flow to rich
and ghost households, resulting in fiscal loss. Failure on (2) and (3) leads to exclusion errors
genuine beneficiaries being
unable to avail benefits.

FIRST MILE: GOVT----> BENEFICIARY : Challenge of identification.

To identify beneficiaries, the government needs databases of eligible
individuals. Beneficiary databases have existed for long before Aadhaar, but their accuracy and
legitimacy have been hampered by the administrative and political discretion involved in
granting identity proofs like BPL cards, driving licenses and voter IDs. Ghost and duplicate
names crept into beneficiary lists, leading to leakage. Aadhaars virtue lies in using technology
to replace human discretion.
OVLL CHALLENGES are Identification & Eligibility of BENEFICIARY. Aadhar is only an Identity
authenticating system,not an eligibility authenticating system.
So for eligibility, BENEFICIARY DATABASE of eligible individuals has to be there.
Some subsidy distributors habe vebeficiary lists in digital form,such as OMCs that distribute LPG
subsidies. Customer IDs can then be seeded with Aadhar and bank account information &
mobile numbers.
Third issue is with HOusehold-individual connection. Some benefits are for households & other
for individuals. e.g. NFSA provides for subsidised grain to households but a cash transfer
maternal entitlements to mother. Jan dhan monitored at household level, while aadhar is an
individual identifier.

SECOND MILE :Government Bank: the challenge of payment

After identifying beneficiaries, the government must transfer money to them.
Every beneficiary needs a bank account his constraint has been significantly eased by the
Pradhan Mantri Jan Dhan Yojana,.
Chief issues are :
A)administrative challenges of coordination bw central & state govts.
e.g. LPG ka DBT succeful hai coz it merely requires coordination bw petroelum ministry,OMCs.
Whereas in Kerosene,Petroleum ministry must coordinate with ministry of OCnsumer
ffairs,food & public distribution and all the states' PD depatts.

Hence it is no accident that LPG was the first subsidy where DBT was introduced.

B) Interests of agents: agents can obstruct spread of JAM if their interests are threatened.
Limited progress in installation of POS proves it.

THIRD MILE :Bank Beneficiary: the last-mile challenge of getting money into peoples hand.
Having transferred money to peoples bank accounts, is the governments job done? Perhaps in
urban areas, where people live near banks, even though financial literacy remains a concern.
In banks into households hands: only 27 per cent of villages have a bank within 5 km.

Challenges: Exclusion errors. Jan dhan to aa gaya, lekin physical connectivity to banking ysstem
remains limited, BCs and mobile money providers have not yet solved the last-mile problem.

To help address this problem, the RBI in 2015 licensed 23 new banks 2 universal banks .Basic
Saving Account coverage across states payment banks and 10 small finance banks.While the
figures show states performance relative to each other, it is important to benchmark Indias
preparedness against a country where last-mile financial inclusion is considered goodlike
Kenya.
India should take advantage of its deep mobile penetration and agent networks by making
greater use of mobile payments technology. Mobiles can not only transfer money quickly and
securely, but also improve the quality and convenience of service bank-Beneficiary connection
still appears the weakest link in the JAM chain.

AMOUNT & VARIANTS OF JAM

JAM was involved in distributing benefits across a range of government

programsfrom education and labour schemes (scholarships and MGNREGS) to subsidies and
pensions (NSAP). Significant savings and efficiency gains can be achieved by transferring funds
directly from the state central government to the worker rather than layer by layer (Centre
State District Block Panchayat), with leakages along the way.

The first type of JAM DBT in LPG

Commercial & household LPG --diff rates.This violation of the One Product One Price principle
provides strong incentives for distributors to create ghost household accounts and sell
subsidised LPG to businesses in the black markey.Now, with DBT in place, the government
identifies beneficiaries by linking households LPG customer numbers with Aadhaar numbers to
eliminate ghost and duplicate households from beneficiary rolls.

From Jan 2016, whose income more than 10 lakh annually will have no LPG subsidy. The
subsidy was introduced to help poor raise their standard of living by offering cooking gas at
lower rates. But it has proved ineffective as 97 % of LPG is consumed by richest 30 % of
households.

Basic prob was LPG subsidy was universal & not targeted one.

Another reform that could further reduce LPG leakages with limited genuine exclusion is
lowering the household cap from 12 to 10. Also there is another well known' March problem' in
LPG. Because March is the end of fiscal year, distributors have strong incentives to invoice
unconsumed subsidised cylinders to households and resell them in black market.

WHY GOVT SHOULD USE JAM for it's Bread & butter fxns like salaries,fund transfer from centre
to state etc.?

Lets compare old MGNREG vs NEw one to explain it.

Float: idle funds accrue interest costs for the central government since this is borrowed money.
The new system keeps funds in a central pool and only disburses expenditure in real-time,
reducing float by 26 per cent.
Leakages: funds had to pass through multiple layers, The new system reduced leakages by 14
per cent and fund disbursal by 38 per cent even though a household survey showed no change
in the amount of work done in MGNREGA.

Misallocation: funds, once disbursed, usually do not return, so forecast errors lead to
misallocation of fiscal resources, with idle funds in some accounts and shortages in others.

Resource-intensity: scheme managers spend valuable time haggling with officials at higher
administrative units, The reform has eased the burdens in doing business with the government,
both internally and for vendors.

Similar gains are possible from adopting these reforms for all government payments, including
other central and state schemes that still use the old model.
Bringing these reforms will require development of IT systems and strong coordination.
SO WHERE & HOW TO JAM NEXT:
Where subsidies have higher leakes & central govt has high control over first & second mile
factors. THis combination is fit for fertilizers & within govt fund transfers as well. Same reason
Kerosene me dikkat kyu hai coz central govt has no high control in it.
JAM Has two options: DBT & BAPU. With DBT, subsidies are transferred to beneficiaries in cash.
With BAPU, beneficiaries certify their identity using Aadhaar and then physically take up
subsidised goods.

This combination fit for fertilizers and within govt fund transfers.
JAM Agenda is currently jammed by last mile challenge of getting money into beneficairies
hands,espcially in rural areas.So we should improve BC networks,promote spread of mobile
money,give license to banks on condition of rural branches.
In meantime models like BAPU offer prospect of lower leakages without risk of exclusion errors
& can be used in domains where end user has to take physical goods like food & kerosene.

AGRICULTURE: MORE FROM LESS

While non-farming activities are on rise, there is still core truth in theodore schultz lecture: IF
we knew economics of agri,we would know much of economics of being poor"
Concerns: Rapid industrialization--->land scarcity, Climate change-->water shortage,changing
dietary patterns-->increased protein consumption.
How to address it?
1) Prioritize less water intensive crops like pulses & oilseeds supported by favorable MSP
regime that incorporates full social benefits of producing such crops.
3)Increase productivity via micro irrigation
3)R &D.
4)Address deep segmentation in agri market.
Indian agri has become cereal centric and as a result, regionally biased and input
intensive,consuming generous amounts of load,water,and fertilizers.
Hence we should encourage other crops like Pulses(via a Rainbow revolution to follow green &
white rev) ---> to meet change in diet patterns of greater protein.
Challenges: land,water availability, wheat & rice are grown on most fertile & irrigated areas &
use large part of resources that govt channels to agri,whether water,fertilizer,power,credit or
procurement under MSP,water"embedded" in crops is the water content of each crop & once
crop is exported,can't be recovered. India has become "net exporter" of water as it exports
water-intensive crops.. Whereas china imports water-intensive soybeans,cotton,meat & cereal
grains.
Solution,: microirrigation(to economize water), SP gear towards pulses backed by agri research
& extension, NAM, increase domestic yield(dont import)-->productivity can be high through
convergence within india .e.g. If all states were to attain bihar's level of productivity, pulses
production would increase by an estimated 41 percent on aggregate.
PULSES: Max crops are produced on irrigated land, but national output of pulses come from un-
irrigated land. Do it on irrigated land to meet demand. simple.
Water efficient system should move from macro(canal,tube well) to micro(drip,sprinklers).
Technologies like this should be given "infra" status to increase public spending for micro
irrigation. Currently it is accorded to canal irrigation.
Also very few farmers who grow pulses are aware of an MSP for pulses.
Returns to growing pulses(nitrogen fixation it does making osil porous & well aerated) >returns
to wheat,sugarcane & rice. These positive benefits be incorp into MSP