Cash transfers cannot and should not replace the public provision of essential goods and services, but rather supplement them.
Cash transfers are the latest fad of the international development industry, as the preferred strategy for poverty reduction. And now Indian policymakers are busy catching up. The idea was mooted in the Government's Economic Survey for 2010-11, and the Finance Minister made an explicit announcement in his budget speech for replacing some subsidies on goods with cash transfers.
So what exactly is this strategy all about? In the recent international experience, cash transfers can be conditional (subject to the households meeting certain demands) or unconditional; targeted (given only to households or individuals meeting particular criteria) or universal. But essentially they amount to just what they sound like — the transfer of money to people by governments, rather than the provision of goods and services.
The basic idea sounds so simple and easy that a toddler could think of it: Why are people poor? Because they have no money. So let's give them money — then they won't be poor anymore!
The proponents of cash transfers tend to present this as a radically new idea, but it actually has a long history. Kautilya's Arthasastra specifies a system of taxation payments from the rich in order to enable transfer payments to the poor, including not only financial assistance during calamities but welfare payments to the chronically indigent and those unable to earn their own livelihood. Islamic rulers in the Middle Ages were required to follow the tenets of zakat, using state revenues to provide income transfers for the poor, the elderly, orphans, widows and the disabled. Other historical examples abound.
The purpose of cash transfer schemes is to provide poor people with money and give them the freedom to choose what to do with it. Of course, this then generates other choices that have to be made: Who gets the transfers? How much do they get? If they are universal, that usually spreads the money around rather thinly, so they account for very little. But if they are targeted, then the familiar problems of targeting (unfair exclusion, unjustified inclusion, large administration costs, possibilities of leakage) all become significant.
If they are to be effective at all, cash transfers have to be assured, relatively easy to deliver and monitor, and large enough to affect household income. But that also means that they have to be reasonably significant chunks of public spending. And this begs the question of what expenditures they are replacing.
Several of the more well-known recent “success stories” involve targeting and conditions on recipients that range from light to onerous. Brazil's Bolsa Familia is a grant provided to families with less than a threshold monthly income, with the requirement of attendance at government clinics and 85 per cent school attendance. The Oportunidades programme in Mexico is a highly conditional cash transfer system based on a complex system of eligibility (age, gender and level of education of each family member, electricity and tap water, household assets) and requiring family members, especially mothers, to meet various time-intensive conditions like attending meetings and providing “voluntary” community labour.
There is no doubt that progressive redistributive transfers are desirable. Indeed, redistribution is a major, even critical element of any fiscal system of taxation and public expenditure. Minimum income schemes for the destitute, pension payments for the elderly, child support grants, unemployment benefits and other forms of social protection are obviously desirable in themselves and constitute requirements for any civilised society, even the poorest one. They also contribute in the short term to more effective demand and therefore have positive multiplier effects, and in the long term to healthier, better educated and more secure populations.
So the question then is not whether or not to oppose cash transfers in general, but rather what specific importance to give them in an overall strategy of development and poverty reduction. Cash transfers cannot and should not replace the public provision of essential goods and services, but rather supplement them. However, the current tendency is to see this as a further excuse for the reduction of publicly provided services, and replace them with the administratively easier option of doling out money.
In many countries, the argument has become one of encouraging governments to give the poor cash transfers that will allow them to access whatever goods and services they want that are generated by private markets, rather than struggling to ensure public provision.
Such a position completely misses the point. In Brazil, for example, Bolsa Familia can be based on minimum school attendance only because there are enough public (and free) schools of reasonable quality that children of poor households can attend, which in turn means prior and continuing public investment in quality schooling and teacher education. Similarly, providing small amounts of cash to allow people to visit local private quacks will hardly compensate for the absence of a reasonably well-funded public health system that provides access to preventive and curative services. Cash transfers are less effective in periods of rising prices of essential goods. And so on.
This is important, because ultimately social and economic policies are all about choices, and this is most starkly evident than in the allocations of public expenditure. Governments typically do not have the luxury of being able to ensure enough spending to provide good quality public services and provide cash transfers that are large enough to be at all meaningful.
In most developing countries, the choices to be made are not only about having good quality schools versus transfers that incentivise parents to send their children to school but even more basic choices: road or health clinic; electricity or piped water; schools or higher education institution; one airport or many railway stations; this region or that one?
It is evident that the agenda of the UPA government is to bring in cash transfers to replace public distribution of various essential items, including food. To begin with, Finance Minister Pranab Mukherjee has proposed that the existing system of subsidies for kerosene and fertilizers be done away with and replaced by direct cash transfers to chosen beneficiaries.
In his speech, he said “The government provides subsidies, notably on fuel and food grains, to enable the common man to have access to these basic necessities at affordable prices. A significant proportion of subsidised fuel does not reach the targeted beneficiaries and there is large scale diversion of subsidised kerosene oil ... To ensure greater efficiency, cost effectiveness and better delivery for both kerosene and fertilizers, the government will move towards direct transfer of cash subsidy to people living below poverty line in a phased manner.”
There are two immediate problems that are evident in this approach. First, what ensures that the amount of the transfer will be sufficient to fully compensate for any price increases in the newly deregulated markets of these goods? Second, how will the government ensure that the cash transfer actually goes to those who were intended to be the beneficiaries of the subsidised kerosene and fertilizer?
The second problem is well known in India, where all public delivery systems have some element of leakage and diversion. How much simpler and easier it will be to divert cash than goods that have to be stored and resold!
The government seems to be under the delusion that a technological fix (such as a Unique Identity number provided to all residents) will somehow eliminate all the potential problems of targeting. But determining who is actually poor and which farmers deserve the cash subsidy are socio-economic decisions that are affected by a complex set of political and social forces as well as power relations. Technology simply cannot address those, they require very different responses.
In India, where much of this basic part of the development project still remains woefully incomplete, the urge to adopt this latest international development fashion involves several risks. In the case of choice between direct public provision of some essential goods (like food and fuel) and cash transfers to consumers instead, the most immediate threat is that the rising prices in these deregulated markets will make such goods unaffordable for those who need them most.
Posing the problem in this way is also misleading, because it completely leaves out the feasible and much more just alternative of universal provision of some essential items, which would ensure better access and create public pressure for greater accountability in public delivery.
Keywords: Economic Survey 2010-11, Pranab Mukherjee
Comments:
Instead of actually transferring cash, the government should insist on providing cards that essentially work only for purchase of certain types of commodities (such as food, medicines and education). It should be made mandatory for all stores and schools to provide these commodities and accept these cards. Following are the advantages of this method: 1)Prevent the receiver of the benefit from abusing the funds(for purchase of liquor, gambling etc), 2)Eliminates the need for government to expend resources on PDS, 3)It MAY also control corruption. Limitations/Disadvantages: 1)Purchased commodities could be resold (Would require enforcement of rules such as no resale of commodities purchased with these cards) Finally, any system in India will only work if we can ensure that all the players act with integrity. All players will act with integrity only through fear. The government should ensure that guilty are punished severely. Will this ever happen in my country?
The state of technology available today allows for efficient delivery of subsidies directly into the wallets of targeted people. The blunt defense put forward by socialists against the use of technology is out of fear of government abandoning provision of public goods and services altogether and in part because of ignorance about the role of technology. Today, in some of the states, NREGA payments are being directly credited to the bank accounts of the workers reducing needless bureaucracy and leakages. Whenever possible, governments all over the world have embraced technology in making the process of governance efficient and accountable. Whether it is traditional ration cards or UID based smart cards, the fears about errors in selection of beneficiaries exist. If anything, UID can greatly aid the process of such targeting process. The progress we have made in fixing the Indian bureaucracy and in improving the quality of public delivery systems during the last two decades is less than promising and sanity should drive us out of comfort zones. The direct cash subsidies for food items and fuel can be linked to prevailing market prices in order to account for inflation.
I understand that the scheme in Mexico was introduced at the initiative of a lower level bureaucrat in a small area and based on lessons learned, it was extended over a wider area. Given the enormity and complexity of the geographic and cultural diversity in India, test schemes in different regions will provide the answers to many of the concerns raised. UID, food stamps and cash transfers using digital technology can help simplify the process provided the basic infrastructure is in place to ensure access to the last mile in India's villages and hamlets. A tall order but in my opinion worth aiming for over the years, to be phased in gradually.
After Egypt, this has become a trend, governments promising handouts. The duty of the government is to provide liberty and infrastructure (which includes not only visible things like roads but also legal system, rule of law, access to governance etc). That will then empower people to learn, do work and create jobs. Successive Indian governments have failed to do that. And now, planning to hand out money as a substitute for failing in their duties ? Not wise, and indeed mischievous, or cowardly.
Not being cynical about the change, but the questions raised by the writer are very genuine. It looks like the government's fascination about everything foreign still persists without checking its viability in Indian context. Even after about 50 years of inception of PDS we are not able to check the loop holes in it even when we know where the problem lies. Since independence the government has brought about many plans and programmes to get rid of poverty and also to give the poor his right to live a dignified and healthy life but still after more than 6 decades of it, we have not been able to solve this matrix. Before implementation these plan seems to be the panacea of our all ills we were looking for, but story remains the same as it was. It is not the problem with the policy or plan per se, but the execution part is faulty, no matter what new incentive government brings to address the problem of poverty and food security, the problem stills remain the same. The problem is the same all over the country i.e. poverty, but the causes are different for its existence all together. So firstly according to me we need to decentralize the poverty eradication programme, giving more right to the state to devise its own plan by looking the reasons more prominent for its prevalence, obviously with central assistance and that to with supervisory power with the central government with obviously setting goals for time bound development and devising proper checks and balances. Also, the tradition of scrapping a plan or project, as because it was introduced by the predecessors cannot be justified by any means. Till today though there is no dearth of such programmes, so it is not only good action we need right now but also with good intention to overcome these issues.
A good article with good analysis.I think first we need to expand our banking system in rural India before implimenting direct cash transfer schemes.If every beneficiary is given a bank account then we can eliminate diversion of funds or leakage.
Conditional cash transfers schemes can enable two advantages strategically for India in future. One will be accounted for net export gain of agriculture products over the import and second will be enabled India to bargain in WTO Ministrial Round for agriculture related issues.
"How much simpler and easier it will be to divert cash than goods that have to be stored and resold!" Absolutely! If the PDS system is corrupt and inefficient, this will only make it more so.
The Author's Observations on the public distribution system versus Direct cash transfers is unconvincing. The public distribution that we have right now is perhaps the most inefficient,corrupt,ineffective and retrograde policy that India has implemented. Firstly, by creating a public distribution system with massive and corrupt beaurocracy, we created a system where anybody can obtain ration cards, for instance in state of AP we have 20 million white (below poverty line )ration cards that is ration card for every family! Government levies(buys) millions of tons of Rice (or wheat) and twists the market prices incentivising farmers to produce only these essential items which are often more than what is needed for our requirements. Farmers are discouraged to produce more productive and high yielding crops as these provide guarantee based on artificial demand. While governemnts collect millions of Tons of food grains, due to arbitrary demand from farmers and millers all the acquired food is not distributed in PDS when the same farmers and millers protest for prices, and poor are forced to buy in open market whose prices are high due to aquisition of food by government, while millons of tons of food rot in the Government godowns. Finally it creates a PDS mafia, which has become stronger with time and acts like a parallel government (we have seen in Maharashtra where an inspector is burned live by mafia). I am surprised, the so called economist doesn't know or comprehend the problem we have with PDS. While cash transfers are no ideal solution, no family with money provided by the government would ruin their own family because of its own interests to keep it protected rather than a system where vested interests twist the social programs.
Once the system is implemented will anyone carryout an honest audit of the beneficiaries. This is another way to make the corrupt politicians powerful. God save the real population who requires the cash/ subsidy.
I'm afraid the writer has created a fine cocktail of untruths, bias and sophomoric arguments in writing this essay. The very opening sentence states "Cash transfers are the latest fad of the international development industry.." First, governments' distribution of money (rather than free or subsidized goods and services) to the needy has occurred for far too long to be termed 'the latest fad'. And, none of the governments that have been doing cash transfers is thinking of abandoning it. The central thesis of the essay seems to be that targeted distribution of welfare funds is difficult. But, a targeted distribution of subsidized goods and services is easy? Here's why I believe distributing cash is far superior to distributing goods & services: 1) When it comes to distribution of goods and services, governments are significantly less efficient compared to private sector. Most of us are convinced of that based on the state of PDS. Let the private sector take care of the supply of goods and services. 2) Monitoring the distribution of cash is far easier than monitoring the PDS or distribution of subsidized fertilizer, fuel etc. The government has the necessary tools in its arsenal. For example, the postal service and nationalized banks can be the delivery mechanism. 3) Claims that 'familiar problems of targeting (unfair exclusion, unjustified inclusion, large administration costs, possibilities of leakage) all become significant' under cash transfer schemes are nonsense. These problems are far worse under the current PDS system. In fact, administration costs will reduce considerably under cash transfer schemes. Ensuring that a thousand rupees are sent to a known recipient is a lot cheaper and can be done a lot more reliably than distributing goods and services of the same value. 4) One of the benefits of UID will be addressing the problems currently plaguing the PDS -- poor targeting and fraud. I have a feeling that the people arguing against UID are the same ones arguing that cash transfers will be difficult to target!! You can't eat your cake and have it too! 5) To my knowledge, distributing cash / food stamps /vouchers etc is an alternative to sustaining the decrepit PDS or giving subsidizing fertilizers that don't benefit the poor farmers as much as the rich farmer or the super rich dealer. The purpose of welfare schemes is to give the needy the help they need. Whether governments should build roads, run air ports, power plants, schools and hospitals is orthogonal to the argument about the best way to help the needy. Roads, schools, power plants, air ports are needed by the society at large. The government should make sure they are built and run for public convenience. It doesn't matter who builds and runs them.
MAKE GOVT ACCOUNTABLE:: 'Timely Justice and Justice to all' idea can change the entire system and make every department accountable. All the policies are run under the aegis of a particular department. Law must be there to punish or penalize the department in case certain policy fails or underperforms. Every policy or scheme is bound to fail if target achieved is not reviewed and reasons are not found behind the failure, subsequently officials involved must be held accountable on non-performance. It is because every policy involves public money. Those who let it go waste in a particular government scheme without desired result must be punished, or give solid reason if the failure was unpredictable or unavoidable, to avoid repetition of failure of next scheme.
In India some time even money order is not reaching the poor!! Poor have to bribe at least 50% to Govt employees and ruling front and then too they have to run around for months. Best is open Post office saving account for poor and credit and give an ATM card to withdraw! (poor need to bribe to get on the list as poor!)
In the present PDS and TPDS, goods of inferior quality are distributed. There is large scale diversion and fraud in PDS. Eligible beneficiaries are not getting benefits of susidised food, fuel and fertilisers. Industrialists are purchasing fuel from PDS by fraud. The continuation of present system without reforms will only make poor to suffer. Cash transfer to poor people will provide them freedom to purchase the goods of their choice from market. Cash should be transferred in the bank account of woman of the family, otherwise men will use this money for alcohol drinking. Unique no. is helpful in this excercise.
The short-cut of doling out money to the poor is no solution for the vast problem of poverty.The government cannot shed its responsibility of including these poor in the mainstream of development by diligently pursuing welfare schemes meant for the poor. The gap between the IPL and BPL India(as sitaram yechuri termed) has to be reduced effectively.Now how to do it ? One idea may be that panchayats should be made central point. One room in the village primary school building may be added which would act as the office of the panchayat after the school is over . From here the program such as the mid day mill scheme , MNERGA, can be run. More over the parents of the poor children studying in the school should also be provided with food under some additional food security scheme. First it will make the parents and children lunch together and form a platform for interaction and discussion about issues ranging from education of their children to the different political social issues. It means a facebook like village-choupal would come into existence. Secondly it means even if the village people are not familiar with letters even than they could discuss concerning issues and offer valuable suggestions at the time of the planning of the budget. Thirdly being aware of different issues they could stand against any misappropriation of funds meant for different welfare schemes. They could better organize themselves to execute any village project . Next it could also bring the school teachers, children and the villagers into contact with increasing understanding of each other thereby reducing the generation gap and villagers could get some thing of the modern education and children would get some taste of of practical experiences of farmers and natural beauty too. thus there should be formed a panchayat-primary school forum to which effective financial resources should be transferred instead of to the individuals .Because it involves problem of fair identification of poor eligible for the funds .than corrupt spilling out of money in mid way through officials. Organized panchayats along with literate school teachers could better face the bureaucratic maze of procedures in which the money gets lost than illiterate individuals.
so government instead of taking short cut route to the hearts of the voters should do some infra-structurally solid and substantially long lasting.
I think if we use that cash in rural area of India by making roads in high securities areas with the involvement of the local bodies, by improving their standard of living, give awareness to them what are the benefits of education how they can develop itself because in India the main problem is that the lack of knowledge about the development of itself. This is done only with the involvement of the local based entities.
Adult human beings who are not handicapped by old age have only two personal assets to trade for an income and these are (1)physical strength and some skill to use it in productive and saleable manual work and (2)education and acquired skills to produce goods and sevices needed by the society or trade in those produced by others. Of course accumulated wealth created by unspent income can also provide income if wisely invested. Any growth in the economy of a country will be meaningful to its people only if every family gets sufficient income through its earning members to enjoy a reasonable and steadily growing standard and quality of life and something more to save for a rainy day. Besides ensuring the security of the people and their physical assets, the responsibility of a government boils down to meeting the above minimum requirements of the people. Economic and social policies and actions have to be evaluated on this basis.Charity is not what the people want from the government. They want the government to provide them the means to earn sufficient income to maintain a reasonable standard of life for them and their families and sufficient public goods and services to improve the quality of life. A double digit GDP growth rate does not by itself guarantee this!
The implementation of this scheme is fraught with dangers as it will be a stepping stone to vote bank politics.Whenever a new State government comes have we not seen a new set of people manning PDS shops. Our government servants are far from honest. Even to get one's rightful share of arrears one has to bribe a government servant.The very idea of giving cash or coupons will open the flood gates of corruption at all levels.What we need is education. Secondly, Government servants should be given minimum opportunities to take bribes. All this is impossible in our country and so the new scheme will result in more scams. The UPA II is planning to do this to avoid manipulating accounts to make money and instead directly take the cash.This will make corruption easier for Ministers, MPs and MLAs.
Cash transfers will also take the dubious route of Rural Employment Guarantee Scheme. India and Indians are intoxicated with corruption and will find a way of siphoning off the legitimate disbursal of the poor. We have read the reply of the government that they have no account of the money spent on scheme. Many a reader have aired their view against the REGS when it was launched in AP. It has happened the same way and confirmed the suspicions expressed at that time. Cash transfer scheme should be studied well and modified from what has now been suggested. Otherwise it will open yet another channel of huge misappropriations. The poor and down-trodden will be pushed down further into misery.Neither the politician nor the bureaucrat will own the responsibility. The net result some more youth will join Maoists ( law and order problem as per our honorable Home Minister) and several more will will turn millionaires and post growth in the GDP. Wait and watch.
Subsidy for food and fuel has been privailing in India for quite of period of time. However, its implementation to the fullest extent is a question. Except for states like Tamilnadu and Kerala, other states may have the system in paper, but implementation is quite tardy. Experience shows and these two states have faired better in most of the social indicators, due to intervention of the Government only. Hence, it is paramount that Government should vigoursly implement the Public Distribution system using the Technology that they are trying to use for cash transfer. Government should not resign from its social responsibility. Just attaining fiscal prudence and growth will not make India great. How the welfare of its citizens is taken care of by the Government with good implementation and monitoring of schemes is going to be the indicators of its success.
The cash transfer scheme proposed by Union Budget is not the same proposed by the TDP government during 2009 polls. This scheme only to overcome mis-use of subsidized items like fertilizer, kerosene and gas. We all know that major share of the Kerosene is going in to adulterating the fuel which is causing severe pollution problems in urban India. No government is able to stop this menace as this group is very powerful. So by direct transfer of the subsidised component to eligible users at least to a maximum extent, the urban pollution component could be controlled. In the same way the fertilizer. As of now the fertilizer subsidy is given to industry and in this process the fertilizer is entering blackmarket with industry-political-bureaucratic nexus. Also, the major beneficiaries are irrigated sector and not rainfed sector. Union Budget also highlighted the need to shift to organic farming. So far there is no mechanism of providing subsidy to organic fertilizers/pesticides. To overcome these problems to a maximum extent and equitable distribution of subsidies the cash transfer serves to a maximum extent. In the case of Kerosene ration cards holders serve the cash transfer mechanism and pattadar pass books serve the fertilizer transfers. These can be integrated to cooperative agriculture and banks. Instead of talking of negative path there is a need to provide advise or ideas to government for better implimentation of this scheme.
Rich get the fruit of growth and poor gets the burden of inflation.Yes fruit of growth can serve its real purpose when it reaches the needy, and it is fruitless if only it increases the inflation. So, the solution is relative growth with respect to international market that means if we can increase the purchasing power of money for say what is the value of 1 rupee today in international market, it should increase tomorrow then automatically poor gets the benefit. Govt. should think this.
The use of cash subsidies are obviously fraught with terrible risks. Apart from the siphoning off of untraceable funds, and the obvious increased exposure to inflationary market pressures on those who need these subsidies the most, there is a very real danger that these funds meant to be expended on necessary goods and services may, instead, be utilised to purchase alcohol and other substances which allow those in dire straits to temporarily forget their woes.
Direct Cash Transfer should be given a chance. It may not look a dreamed replacement of PDS in first look given the problems mentioned affront. The existing PDS has failed miserably to upgrade the BPL families, on the negative side it has increased corruption, black marketing and malpractices with a steady pace and the worst part government is clueless to rectify the system. Many of the prior comments have suggested an alternative to direct cash such as Food Coupons or food cards which will help in resolving the misuse of money to a great extent. I strongly support that and in addition to this I suggest an increase in minimum wage level for MNREGA workers, this will help in increasing the purchasing power and effective use of money since hard earned money in most cases is wisely used compared to freely obtained money.
it may be right option to give direct cash transfer through cash voucher for essential commodities,food stamp so that poor people use only for food.it should be transfer through bank account no. which is associated to the women rather then men as we know women is good take care of his house spending than men. PDS is not good way to provide food and fertilizer because they make fraud in it.
This conversation is not a new one. It has analogy with whether to follow Capitalism or Socialism, Whether to have Government control or free market practices. Much of this has come to limelight after the financial crisis. Many of the intellectuals had inferred that due to lack of Government control and necessary regulations and presence of excessive free market policies, the remorseful event occurred. Here too we are in dilemma whether to have Freedom of Speech or a Regulated Freedom of speech (Control by Government). Both have their own merits and demerits, but Complete Freedom of Speech is more dangerous compared to regulated Freedom of Speech. Complete Freedom of Speech: can raise communal Violence, can reveal the secrets of some one's personal life, and can willingly raise a mob against lawful and good government. On the Other hand Controlled Freedom of speech will eradicate the mentioned problems but in one case it should be regulated by an independent authority, not by the government which is in power.