In India, we are facing a situation of subsidy costs spiraling out of control. Today the subsidies are for food-grains, kerosene, LPG, diesel and fertilizers (in case of farmers). I suppose there are many other type of subsidies, which lead to differential pricing, misuse as well. The current subsidy regime at one hand unsustainable (in cases like LPG) and also gets wrongly targeted. But considering the poverty levels, subsidies can not be stopped all together.
Here is a proposal to manage social benefits creatively.
1. Instead of capping prices, cap the subsidies. Arrive at subsidies based on what country can afford. If prices rise even after that the consumers will feel the proportionate increase. However if prices decrease, consumers may get benefitted.
2. Devise a Flexible Social Benefit Plan, here each family gets a specific amount every month that can be used only for selected expense categories. Each family can use this as per their needs. We can use a scheme similar to credit card rewards. So if a person does not need cheap rice, he can use the amount for school education. A person/family may choose to spend his benefits as per needs. It can be argued why can we not do a direct cash transfer. Direct cash transfer may get used for alcoholism or expenses that state did not intend leaving the family still in distress. By giving flexibility on use of subsidy this will also reduce price distortion in markets. Since the benefits are spread across multiple categories of items, it is unlikely to produce inflation. We can also enable families to save subsidies in instruments like PF, so that those whose current needs are met can save for rainy day. By liberating markets from dual pricing scheme, we can attract more competition.
May be subsidy can be capped at Rs 1200 per month for adult (12 years+) and Rs 600 (for child). The implementation can be through a money card, coupon/pass book or mobile money.