by Shweta Chopra
Cash transfers are getting a lot of attention in India these days as a possible substitute to government subsidies provided to people under various welfare schemes (health, education, agriculture, food rations, etc.). Cash transfer policies mean that the government transfers cash, instead of commodities and services, to below-poverty-line (BPL) households. Their logic is that people are then free to ‘buy’ these services in the open market.
The success of cash transfer programs in some parts of the world has led many to think about cash transfers more seriously. Despite its success around the world, there is not much empirical evidence on the success of cash transfer programs in the context of the Indian economy.
One simple reason for the lack of such evidence is that there aren’t many cash transfer programs in the first place. There are a few cash transfer programs at the Central and the State levels, but the lack of concrete data and rigorous evaluation of these programs has meant that we can’t really say much about the effect of these cash transfer schemes. Let’s look at what the programs entail and then assess whether they will work for India or not.
Key world organisations like the World Bank and the United Nations Development Programme (UNDP) are pushing cash transfer policies in India, arguing that people do not receive their entitlements and benefits related to basic services, so it is time to adopt alternatives, the best one being to transfer cash instead of providing services and subsidies.
Countries pioneering this approach, such as Brazil and Mexico, used CCTs to bring marginalised households into the fold of health and education services. CCTs are basically an incentive and often work. Money (more specifically, cash) becomes an incentive for ‘good behaviour’ as defined by governments. If you pay people to do something that benefits them anyway, they tend to do it.
A major issue involved in the functioning of the PDS is whether it should have a universal coverage (as it did prior to 1997) or be specifically targeted at the disadvantaged sections of the society. The main reason for this issue is the way the ‘disadvantaged’ section is currently defined. Food subsidy is available only to people who have a monthly income below the income level constituting the poverty line.
Many inclusion and exclusion errors creep up due to this issue. Exclusion errors arise because there is a large chunk of families that are just above the poverty line, and hence do not have access to subsidies. As a result, malnourishment is a widely prevalent phenomenon in such families. On the other hand, some states hand out ration cards on an indiscriminate basis, leading to high inclusion errors.
There is also a lot of leakage and diversion in the PDS.
A lot of people who would have been beneficiaries of the cash transfers feel that if cash flows in place of food, it would not go towards food but be spent on liquor and gambling. The idea of engaging in the open market worries them. Similar thoughts were expressed by the women in Madhya Pradesh where the Nandi Foundation conducted surveys in 12 districts of the state.
The Planning Commission sees benefits in adopting cash transfers, asserting that the government should not have a direct administrative role in the social sector. It advocates that the government should either shut down its ration shops, hospitals and welfare programmes; or adopt a policy of direct cash transfers in lieu of these services in order to enable the private sector to develop. In 2010, in a paper titled ‘Introducing Conditional Cash Transfers in India: A Proposal for Five CCTs,’ the Planning Commission said what the World Bank wanted to hear:
Until now, the poor have been receiving services directly from the government, which, to some extent, limits the scope for corruption. Once people begin receiving cash amounts, instances of fraud could increase. Thus, it is unclear whether the cash transfer scheme will actually solve the issue of corruption in the PDS or merely create another opportunity for the corrupt.
The issue of substituting existing welfare schemes with a cash transfer policy seems to be an attempt at running away from the existing problems rather than resolving them. Thus, on the one hand while experience in several countries seems to suggest this policy can be successful in the Indian context. On the other hand, there is doubt whether the issues that plague our country are really just to do with the existing scheme structure or are so deep rooted that they will create hurdles for any policy adopted by the government.
If the cash actually reaches out to the people, it will immensely benefit the poor immediately and the loss due to corruption will reduce. Creating a method to ensure that the cash actually reaches the pocket of the poor is therefore required and needed.
Cash transfers are getting a lot of attention in India these days as a possible substitute to government subsidies provided to people under various welfare schemes (health, education, agriculture, food rations, etc.). Cash transfer policies mean that the government transfers cash, instead of commodities and services, to below-poverty-line (BPL) households. Their logic is that people are then free to ‘buy’ these services in the open market.
The success of cash transfer programs in some parts of the world has led many to think about cash transfers more seriously. Despite its success around the world, there is not much empirical evidence on the success of cash transfer programs in the context of the Indian economy.
One simple reason for the lack of such evidence is that there aren’t many cash transfer programs in the first place. There are a few cash transfer programs at the Central and the State levels, but the lack of concrete data and rigorous evaluation of these programs has meant that we can’t really say much about the effect of these cash transfer schemes. Let’s look at what the programs entail and then assess whether they will work for India or not.
Key world organisations like the World Bank and the United Nations Development Programme (UNDP) are pushing cash transfer policies in India, arguing that people do not receive their entitlements and benefits related to basic services, so it is time to adopt alternatives, the best one being to transfer cash instead of providing services and subsidies.
Conditional and Unconditional Cash Transfers
Cash transfers may be unconditional or conditional. Conditional cash transfers (CCT) give poor people cash conditional on good behaviour such as sending their children to school. This helps kill two birds with one stone: poor people supplement their income and they take steps to lift themselves out of poverty at the same time. On the other hand, unconditional transfers provide aid to BPL families, without any conditions.Countries pioneering this approach, such as Brazil and Mexico, used CCTs to bring marginalised households into the fold of health and education services. CCTs are basically an incentive and often work. Money (more specifically, cash) becomes an incentive for ‘good behaviour’ as defined by governments. If you pay people to do something that benefits them anyway, they tend to do it.
Public Distribution Systems
The cash transfer program is thought of as a substitute to the public distribution system through which the government provides food and other essentials to the poor and also maintains price stability. The fact that the PDS has been plagued with various issues is one reason for the popularity of the cash transfer scheme.A major issue involved in the functioning of the PDS is whether it should have a universal coverage (as it did prior to 1997) or be specifically targeted at the disadvantaged sections of the society. The main reason for this issue is the way the ‘disadvantaged’ section is currently defined. Food subsidy is available only to people who have a monthly income below the income level constituting the poverty line.
Many inclusion and exclusion errors creep up due to this issue. Exclusion errors arise because there is a large chunk of families that are just above the poverty line, and hence do not have access to subsidies. As a result, malnourishment is a widely prevalent phenomenon in such families. On the other hand, some states hand out ration cards on an indiscriminate basis, leading to high inclusion errors.
There is also a lot of leakage and diversion in the PDS.
“For every Rs. 4 spent on the PDS only Rs. 1 reaches the poor and 57 percent of PDS foodgrain does not reach the intended people.” – UIDAI 2009.Major reasons for this leakage are:
- Inclusion Errors: A large number of ineligible people come under the coverage leading to transfer of subsidies to unintended beneficiaries.
- Ghost Cards: Bogus ration cards in the name of fictitious owners are a serious problem causing significant leakage.
- Shadow Ownership: This is caused by migrant families in search of work not able to avail their quota or poor families due to paucity of funds keep the ration cards with fair-price shop owners or others to avail credit or get small portions of cash.
- Corruption: Food grains get diverted from retail points intended for ration card holders to the open market and unavailability of stock in the stores is reported.
What the Poor Want
In a survey of Delhi’s slum settlements conducted by the National Federation of Indian Women (NFIW) and the Right to Food Campaign in June 2011, BPL women were asked whether they preferred cash transfers. A mere 201 out of the 4,005 women interviewed stated that they preferred cash transfers, and 91 percent of BPL families wanted the distribution of subsidised food to continue. Of course, they looked forward to structural improvements in the PDS.A lot of people who would have been beneficiaries of the cash transfers feel that if cash flows in place of food, it would not go towards food but be spent on liquor and gambling. The idea of engaging in the open market worries them. Similar thoughts were expressed by the women in Madhya Pradesh where the Nandi Foundation conducted surveys in 12 districts of the state.
The Corruption Argument
It is now an accepted fact that the government system is so corrupt and disorganised that it cannot deliver basic services to its citizens. Any direct government hand in administering food, healthcare, education and social security would mean the breakdown and ruin of these services. That’s why it is being said that it is better for people to accept a system of receiving cash relief, in accordance with certain eligibility norms.The Planning Commission sees benefits in adopting cash transfers, asserting that the government should not have a direct administrative role in the social sector. It advocates that the government should either shut down its ration shops, hospitals and welfare programmes; or adopt a policy of direct cash transfers in lieu of these services in order to enable the private sector to develop. In 2010, in a paper titled ‘Introducing Conditional Cash Transfers in India: A Proposal for Five CCTs,’ the Planning Commission said what the World Bank wanted to hear:
“India has had a long history of untargeted or poorly targeted subsidies, which are in need of replacement, especially because the fiscal burden of these subsidies has become increasingly unbearable after the multiple fiscal stimuli post-2008 economic crisis.”It costs Rs. 3.65 for every rupee of development funding to percolate down to the beneficiaries. If the relief meant for poor families in the 150 or so government-run programmes is provided in cash, it would mean that every poor and vulnerable family would receive Rs. 2,140 per month, raising them above the poverty line. Will this suffice to provide them access to food, healthcare and education at the prevailing open market rates?
Until now, the poor have been receiving services directly from the government, which, to some extent, limits the scope for corruption. Once people begin receiving cash amounts, instances of fraud could increase. Thus, it is unclear whether the cash transfer scheme will actually solve the issue of corruption in the PDS or merely create another opportunity for the corrupt.
The issue of substituting existing welfare schemes with a cash transfer policy seems to be an attempt at running away from the existing problems rather than resolving them. Thus, on the one hand while experience in several countries seems to suggest this policy can be successful in the Indian context. On the other hand, there is doubt whether the issues that plague our country are really just to do with the existing scheme structure or are so deep rooted that they will create hurdles for any policy adopted by the government.
If the cash actually reaches out to the people, it will immensely benefit the poor immediately and the loss due to corruption will reduce. Creating a method to ensure that the cash actually reaches the pocket of the poor is therefore required and needed.
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