Column : Making cash transfers work

Written by Sarath Davala | Updated: Jan 14 2013, 06:05am hrs
In this month, the government of India plans to roll out its cash transfers scheme in some 51 pilot districts. The ruling party expects this scheme to be a game-changer in the next general elections. The government also expects big savings to the exchequer in terms of cutting out the operational costs and plugging the leakages in social spending. The announcement of the scheme and the implied policy drift has met with a great deal of criticism and opposition, the latest one coming from a group of prominent social activists and academics who have issued a statement strongly opposing a wholesale shift of the modus of social spending to cash transfers.

Ironically, what is common between the governments script of the cash transfer scheme and its opponents is their mistrust of the poor. Both seem to believe that the poor will drink away their cash or spend it irresponsibly. The government displays its mistrust by imposing conditionalities and through them engineer the so-called responsible behaviour, while the opponents do so by upholding in-kind transfers such as grain or bricks as opposed to cash.

What is wrong with the conditionalities that the government seeks to impose They immediately bring into the picture a bureaucratic procedure to approve and monitor compliance, which in turn paves the way for monitors or certifiers at the muscle-end of the bureaucracy. This then produces a system of patronage at the street-level through the political party channels. This is a recipe for erosion of the welfare benefit or subsidy itself. Consider the latest proposal with respect to food and kerosene subsidies. The government will transfer two months subsidy directly to the beneficiarys bank account. After this, if the beneficiary does not lift her grain or kerosene from the ration shop, the cash transfer will be discontinued. In the first place, without the banking infrastructure fully in place, the implementation of this model is bound to be disastrous. Further, to insist that the beneficiaries should buy only from the ration shop and not in the open market completely takes away the choice that the cash offers.

There are equally serious problems with the in-kind transfers, supported enthusiastically by those who oppose cash transfers. It is a matter of common knowledge that in our country, the quality of any food item or fuel or any other good supplied to the poor has a way of becoming sub-standard. It is like the way we give only stale food to beggars, and never fresh and hot food. By upholding such a system of in-kind transfers, we are actually promoting the cause of the dealers, middlemen, low-end government staff and street political party leaders who seem to benefit from it much more than the poor. In a research study of unconditional cash transfers that SEWA is conducting in Madhya Pradesh, we find that this system also has a way of transferring subsidised goods to non-poor households who in turn sell it either in the market or to the poor again. This may be the case in other states as well. It is also not uncommon to find farmers using this grain to pay workers in lieu of wages. And the leakages at the storage stage, transportation stage and the distribution point itself are legendary and part of our folklore. Like in the case of conditionalities, even in this system of transfers, there is a likelihood of a severe erosion of value to the point of making the subsidy itself a myth.

One can hardly say that there is anything essentially wrong with cash transfers. The question is whether they will work for the poor. Our study shows that they can work for the poor; of course, under certain conditions. In general, we know that the most striking advantage of cash is the liquidity it offers. In our study, a great deal of evidence is coming from the poor households in the pilot villages on the positive impact of this. In these households, firstly, cash is very scarce and the level of small borrowings very high. A regular inflow of small amounts of cash has shown a reduction in borrowings which are usually at very high interest rates. Secondly, liquidity also allows people to spend on what the household considers to be urgentpaying school fees, buying medicines, etc. Thirdly, liquidity enables them to purchase food items other than grains, such as pulses, vegetables and eggs that actually contribute to nutrition. To say that husbands would drink away the cash meant for food is nothing but a deep-seated prejudice we have against the poor.

Take the case of the village barber, Rajaram Sain, in Jalodkeu village (in Indore district, Madhya Pradesh). He is 65 and his wife 60. Out of the four daughters he has, two have been married, and two still live with him. His youngest daughter goes to school. Over the years, since he could not open a shop of his own to meet the new demands of barbering in the village, his traditional occupation has been reduced to tonsuring at the time of ritual ceremonies. For these services, he gets paid in kind, i.e., wheat. His wife, and occasionally his daughters, work as casual agricultural labourers, where wages are paid both in kind and in cash. Two years ago, he took a loan from the milk contractor and bought two buffaloes. The contractor also gave part of the feed for the animals on credit. All of the milk is given to the contractor as repayment of loan. Each day after his barbering duties, if any, Rajaram goes to the fields to collect fodder for the animals. After that, he looks after the buffaloes.

In Rajarams household, as is evident, cash flow is extremely limited. It is only when the women get paid in cash that they ever see any cash. Rajarams own labour either gets him wheat or goes entirely into the repayment of the loan. In a household like this, small borrowings or taking goods on credit is the only way much of the current expenditure is met. In such a context, any cash-flow has a dramatic effect. In our pilot villages, there are many Rajaram-kinds of households.

Cash transfers, however, will not automatically work for the poor. To make them work, as our research study points out, we need to address at least five major challenges.

One, to have a very simple criterion for selecting the poor, and spread the net as wide as possible. It is better to make errors of inclusion rather than errors of exclusion. Two, cash transfers will work for the poor only if they are unconditional. Imposing conditionalities takes away with one hand what the other gives. We need to trust the poor and believe that they know best how to spend their money. Three, bridging the last milecash may instantly be transferred to a branch closest to where the beneficiary resides. But how does it reach the beneficiary from the bank without making the former pay part of the subsidy itself to collect the money This is the biggest challenge that we face today.

Four, cash transfers will work best if they are made regularly, that is, every month without fail. Regularity lends itself to anticipation and planning, and actually increases the value of money. It also acts as an insurance in times of unemployment or incapacity.

Lastly, a mechanism needs to be put in place by the government in order to protect the purchasing power of cash transfers from the vagaries of inflation.

The author is an independent sociologist based in Hyderabad. He is currently coordinating SEWAs research study on Unconditional Cash Transfer Pilots in Madhya Pradesh. Views are