Cash transfers: Look before you leap

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Published: November 24, 2015 12:28:59 AM

The Indian economy is not yet prepared to replace physical delivery of state services with cash, given the large population being covered and low levels of income of those who are accessing the same

The relentless focus on financial inclusion on the deposits side leads to a logical implication that these accounts can be used to transfer money from the government to the targeted recipient, making the action seamless and free from manual intervention. This is the basis of a direct benefit transfer where a wage or pension is transferred to the account without the individual going to the office asking for it. The corollary is the same can be used for other government programmes, ranging from food subsidy to conditional transfers like the mid-day meal programme for children. The examples of Brazil and Mexico have often been given to buttress this argument. How can we evaluate this option?

Cash transfer works well when we are dealing with ‘direct cash’ rather than cash in lieu of a physical product. The UID-linked bank account can be used to transfer MGNREGA wage or pensions of senior citizens to ensure no manual intervention. The subsidy provided on LPG also works fairly well, as the household pays the full cost of the cylinder and is subsequently compensated the balance through a cash transfer. But we may have to think harder in expanding the scope.

Translating the same concept for the delivery of other services raises some ticklish issues that need to be addressed. The usual argument provided against such transfers relates more to timing, when certain sections get excluded because of the difference in time between their having an account and the transfer actually taking place. But this is more of a logistics issue, which in on the administrative side and not ideological.

There are two major issues on cash transfers replacing current government programmes. The first relates to the role of the state. Once we move to cash transfers, the state frees itself from provision of services that are vital for lower income groups. While the quality of services provided by government-run hospitals or schools is abysmal, they are still the only points of contact for the poor, especially in far flung areas where access to private health or education facilities is remote. And where it is available, either the quality is worse or the cost prohibitive.

The larger issue is whether or not the government can withdraw from such services? Governments all over the world play a role in creating institutions for delivery of services. Once we move over to cash transfers, the individual is left to choose the mode of use and the state steps out of the picture. In a way, the government ceases to provide services which are required for maintaining social standards. Can we really think of around 375 million children below the age of 14 years getting education in private schools once a transfer is made to their parents? Or, for that matter, health access for around a billion people who still use public institutions. Therefore, the duty of the state is to provide social services, of which food also becomes a part of the package.

A lot has been written on replacing the PDS with cash, which sounds good, given the success of the LPG transfer. The complex issue here is one of pricing foodgrains where the price varies across regions. Based on latest government data on retail prices, the price for rice varies between R21 per kg and R38 per kg and that of wheat Rs 18-36 per kg across the country. How then do we price the cash transfer? Further, once the government steps back, consumers will have to buy grains from the market where the prices would also tend to increase. Here governments can tend to under-price and save on their own subsidies with pressure coming from the budgetary side. With increasing pressure to keep the deficit within the pre-stated norms for borrowing, subsidies could be a useful head to lower the allocations. Today, with the PDS system being the front-end and the procurement of the FCI being the back-end, the system is well set to ensure a singular price for everyone based on their categories. The system is inefficient, but the cash transfer replacement will be even less efficient as the basic purpose of the scheme would get lost.

Hence, while cash transfers are more efficient as a mode of delivery, it becomes more nebulous when we are dealing with larger numbers of beneficiaries and physical products. When taken to cover health and education, the state could subtly withdraw from its responsibilities, which may not be appropriate in a country like India where the number of underprivileged households is so big.

The second issue is the end-use of the transfer. While it is okay for the government to leave it as the prerogative of the beneficiary, it becomes self-defeating in case the money is used for other purposes. Different surveys carried out by economists/institutions show that the rural poor actually prefer foodgrains to cash.

Foodgrains provided by PDS have to be consumed and cannot be resold, given the quality and value. But a cash replacement will enable households to spend the money on other priorities. The same holds for the conditional transfer being spoken of to replace midday meal, which has largely been successful but which also suffers from leakages as it involves contracts being given to the providers of such meals. A cash transfer will stop the child from being sent to school, which will affect the future of the household.

Hence, it appears our economy is not yet prepared to replace physical delivery of state services with cash, given the large population being covered as well as the low levels of income of those who are accessing the same. The success attained in transferring cash with cash transfers should be judiciously extended to other services if we are to retain the core values of helping the underprivileged. We need to strengthen our institutions and not dilute them as once we do replace them, it would be hard to reconstruct them. Besides, from an economic standpoint, when services are being provided by state institutions, backward linkages are created in employment, physical structures, networks and value chains as natural by-products. Replacing the same with cash could weaken these links.

The author is chief economist, CARE Ratings. Views are personal

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