Direct Cash Transfers in fertilizer: Modalities for cash delivery

This paper analyzes two potential models for implementing Direct Cash Transfers (DCT) for fertilizer subsidies in India. It explores the advantages and disadvantages of each model, providing insights for policymakers considering reforms in fertilizer distribution. It offers a practical comparison of direct bank transfers versus virtual accounts, considering infrastructure limitations and farmer preferences.

Key Insights

Challenges in the Current Fertilizer Subsidy System

The paper identifies four key challenges in the existing fertilizer subsidy system in India:

• Lack of a dedicated fertilizer beneficiary database.
• Absence of a cap on fertilizer entitlements.
• Different levels of subsidy provided to fertilizer manufacturers.
• Disproportionate use of urea.

Three-Step Approach to Resolving Challenges

To address these challenges before implementing a DCT system, the paper proposes a three-step approach:

1. Move urea under the Nutrient-based Subsidy (NBS) program for uniform subsidy calculation.
2. Fix the beneficiary database to accurately target farmers.
3. Cap the fertilizer entitlement per farmer based on land and cropping activity.

Model 1: Direct Transfer to Farmers’ Bank Accounts

Under this model, the equivalent cash amount of the fertilizer subsidy would be transferred directly into farmers’ bank accounts, similar to existing digital pathways for fuel subsidies and pensions. This approach aims to provide farmers with the cash equivalent of the subsidy, allowing them to purchase fertilizer at non-subsidized prices.

Model 2: Transfer to Closed, Virtual Farmer Accounts

This model involves crediting the subsidy equivalent into a farmer’s closed, virtual account on the Integrated Fertilizer Management System (IFMS) application. Farmers could access these accounts through Point of Sale (PoS) devices at fertilizer retail outlets, allowing them to purchase fertilizer at the subsidized price.

Challenges of Model 1

The paper highlights several challenges associated with the direct transfer to bank accounts model:

• Farmer reluctance due to past issues with LPG subsidies.
• Concerns about increased financial burden if the subsidy is not credited in advance.
• The need for multiple trips to banking points and fertilizer retailers.
• Potential for farmers to use the subsidy for purposes other than purchasing fertilizer.
• Reports of rent-seeking by banking agents and distrust of them.

In MSC’s recent assessment, 65% of farmers in the country were reluctant to receive the fertilizer subsidy in cash directly in their bank accounts. (Giri & Rautela, 2020)

Advantages of Model 2

The paper emphasizes the following advantages of the virtual account model:

• Farmers would not experience changes in their routine at transaction points.
• Purchase of fertilizer would be limited to farmers based on their allotted entitlement.
• Potentially “nudge” farmers to optimize their purchase and application of fertilizer.

Aadhaar Authentication Failures

The paper acknowledges the potential for Aadhaar authentication failures in areas with poor connectivity under Model 2. It recommends developing an exception management practice, such as mobile-based One Time Password (OTP) authentication, to address this issue.

Key Statistics & Data

• 65% of farmers were reluctant to receive the fertilizer subsidy in cash directly in their bank accounts (Model 1).
• 93% of farmers use cash to buy fertilizer.
• 58% of farmers indicated that they did not prefer a cashless mode when buying fertilizer.
• 80% of the subset of farmers who prefer cash cited the perceived ease of using cash as a primary reason.
• Retailers could experience issues managing farmer crowds during peak agriculture seasons, when footfall reaches more than 200 farmers per day.

Methodology

The paper appears to be based on a combination of literature review, policy analysis, and primary assessment. The authors reference their previous note on “Reforms in fertilizer subsidy in India: The way forward” and mention a recent assessment conducted by MSC. However, specific details about the assessment methodology (sample size, data collection methods, etc.) are not provided.

Implications and Conclusions

MSC recommends commencing a pilot for Model 2, transferring the subsidy into a closed virtual wallet. They believe it is a more practical and feasible option given the existing infrastructure. The paper suggests that once the banking and payment infrastructure is strengthened, the Gol should commence a pilot to transfer cash directly into the bank accounts of farmers. Only after experiencing both modalities can the Gol determine which model is best for all stakeholders. The authors emphasize that the DBT-F model continues to evolve to meet the needs of farmers and optimize efficiencies for the government.