The real benefit of direct benefit transfer

A week ago, I gave up. My LPG subsidy that is.

Having been out of the country for a few months, with our normal LPG usage being much lower than the average family’s, and having forgotten to book my spare cylinder, my LPG account had been “suspended”, for not booking a refill for over six months.

Back in the day when all domestic LPG connections were subsidised, you were required to book a cylinder every six months, else your account would get suspended. This was a measure to get rid of fake accounts and duplicate connections owned by a family (a family could have only one connection, legally).

So when I went to my dealer last week asking for my account to be unsuspended, I was told to submit my Aadhaar number to get it released. When I said I don’t have an Aadhaar number (I have one, but don’t want to use it unless mandatory), the clerk asked if I could give up my subsidy. With the LPG subsidy being a minuscule part of my overall annual expense, I quickly agreed, and after filling up a form and submitting a copy of my driving license, I had “given up”.

Later that day, my account was unsuspended, and I could presently book a refill, which arrived today. And having “given up”, there is no compulsion now to book a cylinder every six months!

The real benefit of the direct benefit transfer scheme adopted by the union government for LPG subsidy transfer is that it is now possible to have two classes of LPG connections, with several benefits.

Firstly, rules such as minimum and maximum frequency of booking don’t apply any more. Secondly, and more importantly, it is far easier nowadays to get an LPG connection – someone I know went to a nearby dealer to get a connection, and after submitting basic identification documents and paying a deposit, it took only a couple of days for the cylinders to arrive.

You might recall a campaign in the late 2000s by the then Karnataka Energy Minister Shobha Karandlaje to weed out duplicate LPG accounts in order to prevent wasteful subsidy. That brought in a regime of submitting a copy of an electricity bill to get LPG connections, in order to prevent one household from having more than one connection. Consequently, getting a new LPG connection became an absolute nightmare.

With the benefits now being targeted, and Aadhaar based, getting a new LPG connection is mostly straightforward, as long as you don’t claim a subsidy. And a lot of the times, the value of the subsidy is far lower than the additional cost of getting the cylinder itself!

In the earlier “indirect transfer regime”, this class of unsubsidided LPG connection did not exist (unless you went with one of the private sector players, most of whom have remained undependable), causing much harassment to consumers, and the need for various workarounds.

The direct benefit regime has thus not only saved the government the cost of wasteful subsidies, but also made life easier for consumers by making the market more rational!

Market depth, pricing and subsidies

A few days back I had written about how startups should determine how much to subsidise their customers during the growth phase – subsidise to the extent of the long-term price. If you subsidise too much initially, elasticity might hit you when you eventually have to raise prices, and that can set you back.

The problem is in determining what this long-term sustainable price will be. In “one-sided markets” where the company manufactures or assembles stuff and sells it on, it is relatively easy, since the costs are well known. The problem lies in two-sided markets, where the long-term sustainable price is a function of the long-term sustainable volume.

A “bug” of any market is transaction costs, and this is especially the case in a two-sided market. If you are a taxi driver on Ola or Uber platform, the time you need to wait for the next ride or distance you travel to pick up your next customer are transaction costs. And the more “liquid” the market (more customers and more drivers), the lesser these transaction costs, and the more the money you make.

In other words, the denser a market, the lower the price required to match demand and supply, with the savings coming out of savings in transaction costs.

So if you are a two-sided market, the long-term sustainable price on your platform is a function of how big your market will be, and so in order to determine how much to subsidise (which is a function of long-term sustainable price), you need to be able to forecast how big the market will be. And subsidise accordingly.

It is well possible that overly optimistic founders might be too bullish about the eventual size of their platform, and this can lead to subsidising to an extent greater than the extent dictated by the long term market size. And some data points from the Indian “marketplace industry” show that this has possibly happened in India.

Having remained credit card only for a long time now, Uber has started accepting cash payments – in order to attract customers who are not comfortable transacting money online. This belated opening shows that Uber perhaps didn’t hit the numbers they had hoped to, using their traditional credit card / wallet model.

Uber has problems on the driver side, too, with an increasing number of its drivers turning out to be rather rude (this is anecdata from several sources, I must confess), refusing rides, fighting with passengers, etc. Competitor Ola has started buying cars and loaning them to drivers, perhaps indicating that the driver side of the market hasn’t grown to their expectations. They are all indicative of overestimation of market size, and an attempt to somehow hit that size rather than operating at the lower equilibrium.

So an additional risk in running marketplaces is that if you overestimate market size, you might end up overdoing the subsidies that you provide to build up the market. And at some point in time you have to roll back those subsidies, which might lead to shrinkage of the market and a possible death spiral.

Now apply this model to your favourite marketplace, and tell me what you think of them.

Biometrics for Aadhaar reflects a lack of social trust and law enforcement

As far as I’m concerned, the primary purpose of Aadhaar is for targeting subsidies. Right now we have a regime where subsidies are targeted on a household basis, which is incorrect and inefficient. What we need is a methodology to target subsidies to individuals, and for this purpose, we need a way to uniquely identify individuals.

Hence, we need a unique identification mechanism. The problem with existing IDs, such as the passport, driving licence and permanent account number (PAN) is that there is no guarantee of de-duplication. There is nothing that prevents one individual to hold multiple of these – though it might be illegal to do so. There is no formal mechanism of de-duplication in any of these – and the rather unstructured form of Indian names and addresses means that it is going to be extremely difficult to weed out duplicates of these at scale.

This is only my conjecture, but this might be the reason why the government decided to create a completely new ID, which one could obtain only if one were to give their biometric details. The argument here is that biometrics uniquely identify a person, though there are counterarguments to this which argue that it is possible in extremely rare cases (which is not rare enough, given India’s size) for two people to have biometrics that are considered identical by the de-duplication system.

India is not the only country to have aspired to issue a unique identity card for its residents. What sets India apart is the size and the fact that sharing of biometrics with the issuing agency is a necessary condition for issuing the ID card. That we have to resort to a system based on biometrics is a reflection of both the lack of social trust and the lack of law enforcement in India. That we have lack of social trust is indicated by the fact that people aspire to hold more than one “unique identity proof” – such as a PAN or a driving license or a passport. That we have weak law enforcement is indicated by the fact that existing punishments for holding duplicate IDs is not deterrent enough for people who aspire to hold multiple cards.

It can be argued that using biometrics to ensure that each resident has only one ID is an engineer’s solution to a policy problem. It is an admission of the fact that our legal enforcement is too weak to enforce unique IDs without a technological basis. It is sad that we had to go down this route without exploring policy solutions first (or maybe we did, and they didn’t go anywhere).

Gas credits and trading

So last week the government took a decision to increase the number of subsidized gas cylinders per family from nine to twelve per year. People say it is a move aimed at the elections, but it doesn’t impress me. It doesn’t impress me because it doesn’t affect me.

We are a family of two (wife and I), and have a subsidized gas connection. We cook at home daily, but since it’s just the two of us and we’re a “DINK” (double income, no kids) family, we don’t end up using all that much of gas. We use the cylinders strictly for cooking purposes only (not for heating water or running our car), and in the last three years or so when we’ve lived together we’ve averaged about three cylinders a year.

Given that we use only three cylinders a year I’m pissed off that the government has increased the subsidy from nine to twelve cylinders a year! Earlier, subsidy for six cylinders that I was getting was going waste, and now subsidy for nine cylinders is going waste! I don’t like it.

The only statistics that are out about the number of gas cylinders people use is that 90% of the population uses 9 cylinders or less a year, and 97% of the population uses 12 cylinders or less (numbers from a TV debate on the topic I watched last week). What we don’t know is the average number of cylinders consumed by a household with subsidized connection.

Given that I’m not availing of most of my subsidy, I should be allowed to trade in my subsidy for something else – subsidy on petrol maybe? If a family that belongs to the 3% that uses more than 12 cylinders a year, we should be able to strike a deal so that some of my unused subsidy can be channeled to give that family additional subsidy! This is just like carbon credit trading happens – where carbon efficient companies can sell pollution rights to companies that emit more CO2.

If you realize, what I’m getting at is that I don’t want to be “punished” (in terms of lesser subsidy) because I use less gas than the average Indian household. I want the same subsidy, too, so what if I use less gas? Perhaps the subsidy can be given in the form of an unconditional cash transfer?

While on the topic, it is absurd that LPG and all other rations are at the household level, and not individual level. We use only 3 cylinders a year because we are a family of two. Why should we get the same amount of subsidy as (let’s say) a family of twelve? Given that soon we will have universal coverage under UID, the LPG subsidy regime can be modified as follows.

Each individual (from a newborn baby to an adult) will be eligible for two subsidized LPG cylinders a year. For every LPG connection you have, multiple Aadhaar numbers will be attached – this is the list of “dependents” on that particular connection, and the total subsidy is the number of Aadhaars attached times two. Notice that the reason we have the present subsidy regime is that the Aadhaar is a necessary condition for moving to a per capita subsidy regime! Just goes to show how public services can be completely reformed once Aadhaar gets implemented.

Compensating Teachers

This is yet another of those things which I’ve been thinking about and have been intending to write about for a long time but have never gotten down to it. Pinky wrote this excellent post on the topic today and that has got me thinking. To quote her,

A bad teacher makes a bad student. A teacher who looks at teaching as just another job is doing no good to anyone. She neither grows in her life nor contributes to the positive growth of a kid.There have been a few teachers in my life who i have tremendous respect for, not because they taught me effectively enough to pass in their subjects but because they taught me to listen, think and speak!

I don’t have any solutions yet but I thought I should just put some bullet points here, just to try and give a structure to the problem. Let me know your thoughts

  • If we consider a person’s salary as Society’s recognition of his/her worth, school teachers are not recognized enough
  • Abysmal salaries drive away a large number of potential school teachers away from the profession
  • Love for teaching is important, but if teaching pays as abysmally as it currently does, the opportunity cost of doing what you love is way too high for some people, and so they end up in other professions
  • We have a market failure in teaching – how do we run a school profitably while paying teachers competently while on the other hand keeping fees reasonable, and not resorting to any subsidies?
  • India suffers from what I call the “official’s wife bug”. In the 60s and 70s, the teaching profession got flooded by women who weren’t really looking to make much money, but more to just pass some time and use their bachelor’s degrees rather than being housewives. This has fostered a culture of low schoolteachers’ salaries in India. People who weren’t looking to make money out of teaching crowded out those who found the opportunity cost of the low salaries in teaching too high.
  • McKinsey interview level arithmetic: assume a school having classes 1 to 12, 4 sections per class, 40 students per section. 8 periods a day 5 days a week gives a total of 12 * 4 * 8 * 5 = 1920 periods per week. Assuming each teacher can take 5 classes a day (or 25 a week) we will need 77 (round it off to 80) teachers. Number of students is 12 * 4 * 40  = 1920, so essentially 25 students have to pay for one teacher’s salary, and this is apart from expenses towards school building, maintenance, overheads, etc. McKinsey level handwaving. 10 students have to pay for one teacher’s salary. Doesn’t sound feasible
  • Primary and secondary education is simply way too important to be left in the hands of unmotivated disinterested people, but that seems like the situation we are in (I dont’ mean to say all teachers are unmotivated or disinterested; just that the situation doesn’t incentivize talented motivated people to enter the profession).
  • Universities attract talent by allowing faculty to make money by other means such as consulting and organizing for-profit courses. Will something like that work for schools? And no, I’m not talking about private tuitinos as the other source of income. Is there something else?
  • Government intervention is not a solution. In a place like India it will only end up messing up things further and draining more money from the system.
  • In the pre-IT era, teaching salaries were more competitive (with respect to competing jobs) than they are now, so they could attract better talent
  • I wonder if it is only in India that such a large proportion of school teachers are women. This is just a general pertinent observation, and has nothing to do with the rest of the post
  • The officer’s wife model was good when it started off – some motivated people came into the system because fo that. Just that the system is not sustainable and we’re facing the problems of that now and because a lot of school managements fail to take into account that the model isn’t sustainable

Any thoughts on this? Any possible solutions? Of course it’s not possible to implement any macro-level solution. All I’m looking at is a school-level solution. How do you plan to run one school (of size I mentioned in my bullets) sustainably while ensuring teachers are paid adequately enough to not scare away interested people?