Long road ahead for cash transfers

Updated: Dec 4 2012, 06:59am hrs
The recent media buzz around cash transfers is reminiscent of the NDAs India Shining campaign ahead of the 2004 elections. It is a sign of the disconnect of the UPA government from the aam aadmi

Reetika Khera

There is confusion over at least three aspects of the recent news that the government is about to make a big move towards direct cash transfers. One, what exactly does cash transfer mean Two, Brazil and Mexico are often invoked as examples of successful cash-transfer schemeswhat has the experience there been Three, media reports suggest that the government counts on cash transfers to win the 2014 electionscan this win votes Careful examination of the PMs announcement suggests that what is being planned is a big repackaging exercise, which may boomerang in terms of electoral gains.

What does the government mean by cash transfers There appears to be a lack of clarity on which subsidies are to be converted to cash transfers, but it seems that food and fertilisers are not included for now, whereas scholarships and pensions are included. Note, however, that scholarships and pensions already are cash transfers. In most cases, cash is already routed through the bank accounts of the beneficiaries. Except for linking bank accounts to UID and a different name, there is very little new here.

In the case of kerosene and LPG, what is proposed is that instead of buying these commodities at subsidised prices, consumers will buy them at the market price. The subsidy will be reimbursed into their bank accounts if kerosene is bought. In the Kotkasim (Alwar) kerosene pilot, consumers now pay R50/litre for kerosene instead of R15. The balance, R35/litre, is supposed to be deposited into their bank accounts. The pilot was initiated one year ago, and in the initial months, a crash in kerosene sales was reported. This crash was projected as a successan indication of how leakages have been plugged by the new system. A visit to some villages in Kotkasim suggests that a large part of the crash in sales is actually due to the fact that many ration card holders do not have bank accounts. This means that their subsidy cannot be reimbursed, so they have simply stopped buying kerosene. Those who do have bank accounts have not received the subsidy or have received it very erratically. Many of them, too, have stopped purchasing kerosene. What has been projected as a success amounts to driving people out of the kerosene distribution system. The Kotkasim experiment shows that while there is no guarantee of improving delivery mechanisms, it could end up leading to a collapse of the existing system by driving people out.

Let us turn to Brazil to understand what cash transfers actually are. Comparisons with Brazils successful conditional cash transfer programme, Bolsa Familia, are made out of context. In Brazil, cash transfers are one among many social protection measures. Cash transfers were put in place to encourage people to use existing public services. As far as food security is concerned, the Brazilian government is now putting in place systems that the Indian government is trying to dismantle (like the supply of subsidised food). In fact, health, education and food are legal entitlements in Brazil. The most important lesson from Brazil would be to get on with the enactment of the National Food Security Act, which was tabled last December in Parliament.

Further, Brazil is a very different countrywith lower poverty rates, a higher rate of urbanisation, near-universal literacy rates and better administrative capacity. Using the $1.25 (PPP) poverty benchmark, less than 7% of Brazilians are poor. In India, one-third are below the poverty line. Higher rates of urbanisation (85% of Brazils population is urban, compared with 30% in India) have implications for access to banks. Given this, it is not surprising that the Bolsa Familia has been such a success in Brazil.

Media reports suggest that the government believes that this push towards direct cash transfers will be a game changer (as MGNREGA was for UPA-I) and even help it garner votes in the 2014 elections. Some people are reported to have interpreted the announcement to mean that those who have Aadhar cards will be given cash! A false impression has resulted in other ways too.

One, existing schemes where people already receive either cash (for example, pensions) or subsidies (for example, kerosene) are being linked to Aadhar. By adding another administrative hoop to jump through, it could end up disrupting these schemes, at least in the initial stages. Even if the transition is smooth, people will get nothing more, nothing less. If linking with Aadhar causes disruption, those who are getting pensions today stand to lose.

Two, some argue that linking with Aadhar will reduce corruption. There are only very specific cases of corruption that Aadhar can help with. As UIDAI has itself admitted, Aadhar cannot help us identify the poor. What it can help with is to weed out ghost (i.e. dead people) names. However, there are other efficient ways of doing this. For example, computerising records and greater transparency (pasting printouts of the list of beneficiaries on panchayat walls).

Three, even if there is value added in what is being proposed, the pilots conducted so far suggest that there are bound to be teething problems (poor access to banks, over-crowding, connectivity issues). Funnily enough, the government proposes to link MGNREGA and pensions to Aadhar. It is now well known that biometrics of the elderly and of those who do physical labour often face difficulties at the time of authentication. It is unlikely that the elderly, for whom these pensions play the role of a lifeline, will take to these troubles very kindly. Further, these teething problems are likely to come up at a crucial timejust before elections.

For these reasons, those hopeful of votes should heed Shankar Singhs (Mazdoor Kisan Shakti Sangathan) warning: You transfer cash, we will transfer our votes.

The author teaches economics at IIT Delhi