Biometric Identification to Improve Subsidy Schemes

Programmes such as food subsidy have huge overhead costs. In other cases, such as the fertilizer subsidy, the expenditures generate a distorted resource allocation that hampers productivity. Besides, not all the money put into subsidy schemes reaches the poor.

Therefore, it is increasingly feasible to identify households below the poverty line and give them cash. The new technologies of biometric identification, and payments through mobile phones, have created a range of new possibilities for the design of programmes. These would lead to a reduction in poverty at a lower cost when compared with the present subsidy programmes.

Subsidy programmes are particularly problematic when they hamper changes in prices and the consequent shifts in resource allocation which must take place. When the price of diesel rises, in the medium term, the economy shifts away from diesel. But this adaption is blocked if the price of diesel is not actually raised. When the purchase price for cereals is raised, cereal production becomes more attractive, even though consumers might want more non-cereals.