Revision summary
Price subsidy cheapens a commodity for whoever buys it and invites diversion. DBT credits the eligible person so the good can sell nearer market price. JAM (Jan Dhan, Aadhaar, mobile) is the delivery pipe; PAHAL is the working LPG example. Gains are targeting, less leakage, household choice and a clearer Budget cost. Risks are exclusion, weak banking, and a hard shift for fertiliser and food where markets fail.
Model answer
Introduction
A price subsidy cheapens the bag of urea, the cylinder or the kerosene litre for everyone who buys it. Direct Benefit Transfer (DBT) pays the eligible person in a bank account and lets the good sell nearer to market price. India’s JAM (Jan Dhan, Aadhaar, mobile) stack, highlighted in the Economic Survey 2014-15, is the pipe for that shift. The scene of subsidies changes only if the pipe actually reaches the poor.
Body
How price subsidy works today
- The State keeps urea, some foodgrain, kerosene and LPG cheap at the counter, which invites diversion to industry, smugglers or better-off households.
- Dual pricing needs a huge agency (fertiliser firms, oil companies, fair-price shops) and hides the true fiscal cost.
- The poor often still pay a tout, or receive a diluted bag, because the subsidy sits on the commodity, not on the person.
How DBT can change the scenario
- PAHAL (Direct Benefit Transfer for LPG) already showed that the subsidy can follow the Aadhaar-linked consumer, which cut duplicate connections.
- Targeting improves: the transfer can be limited to priority households, and the well-off can be excluded (as in giving up LPG subsidy).
- Leakage falls when the shop sells at market price and the farmer or housewife gets cash or a bank credit, so there is less incentive to divert the cheap bag.
- Households gain choice: they may buy a cleaner fuel or a different nutrient mix rather than only the subsidised item.
- The fiscal bill becomes transparent and can be capped; Economic Survey logic was that JAM reduces ghost beneficiaries.
- For food, DBT or cash in place of cheap grain is more contested, because price risk and weak rural markets can leave the family hungry if cash is delayed.
Limits
- Exclusion error: a failed Aadhaar match or a distant bank can cut off a genuine poor household.
- Fertiliser DBT is harder than LPG because urea use is seasonal, soil needs differ, and last-mile dealers are political.
- Without last-mile banking and mobile literacy, DBT becomes another queue.
- Price subsidy on merit goods (some food, some kerosene where LPG has not arrived) cannot be switched off overnight.
Flow diagram
flowchart TD P[Price subsidy on good] --> L[Leakage diversion] J[JAM stack] --> D[DBT to account] D --> T[Better targeting] D --> C[Choice and transparent fiscal cost] D --> E[Exclusion last mile risk]
Conclusion
Replacing price subsidy with DBT can cut ghosts, diversion and an opaque fiscal leak, as PAHAL showed for LPG. It changes the subsidy from a cheap bag to a targeted transfer. It will not by itself feed or fertilise India unless banking, Aadhaar and markets work for the last household, and unless food security is not reduced to a failed ping.
Quick related
Students also ask
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What are the impediments in marketing and supply chain management in developing the food processing industry in India? Can e-commerce help in overcoming this bottleneck?
Next question in the 2015 paper (Q6). View answer →
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Does DBT mean the poor lose subsidy?
No. The design is to pay them directly. They lose only if Aadhaar or the bank fails, which is why last-mile inclusion matters.
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Has India already replaced all price subsidies?
No. LPG is the furthest. Fertiliser and food remain largely price-based, with pilots and debate.
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