In an interesting development, the Central Government has decided to move forward on Aadhaar based DBT for PDS. The positive experience on DBT for LPG could have been a driver for this. While this will be rolled out in identified UTs starting September, each State Government will be commencing a pilot project for Aadhaar based PDS DBT in one district to evaluate and fine tune the mechanism for full rolloutA biometric linked DBT has significant efficiency gains on the conventional subsidy mechanism. However, four aspects need to be addressed before the pilots are set in motion—both the coverage of Aadhaar and bank accounts needs to be comprehensive in order to avoid Type 2 (false negative) errors of exclusion.

- In comparison with LPG, where the subsidy price vs. Market price differential is about 2X, for cereals, the differential is as high as 10X - 20X. This could potentially create a liquidity problem for beneficiaries, especially given the sensitivity of this group to working capital issues. This could be addressed through week ahead fund transfers, or appropriate credit duration.

- A related question is whether the account receiving the subsidy will be that of the family head (typically male) or the actual purchaser (typically female). Given that there is significant evidence of intra family frictions in fund flow, the subsidy could be better directed to the purchaser account. However, given that most households are likely to have only one account, this might be a point for consideration in later stages rather than for the pilot.

- Finally, the incentives of the distributor (PDS outlet) need to be factored in. Given that these agents might be currently involved in the very leakage which the Government wants to curtail through DBT, this group could try to create roadblocks to uptake of the DBT (e.g. claims of biometric devices not working). Alignment of this stakeholder group through appropriate incentives could mitigate this conflict of interest and smoothen uptake.

Given that these pilots will have a significant role in shaping public opinion for both pan India uptake, as well as future extension of such DBT mechanisms to other subsidy areas, it is vital that implementers calibrate their plans, taking due cognizance of these aspects.