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Updated: November 29, 2012 01:35 IST

Cashing in on schemes for poor

Narendar Pani
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Any political benefit the Congress hopes to reap in 2014 will come at the cost of reducing the effectiveness of social welfare schemes

In getting its ministers to endorse the shift to cash transfers from the AICC office in New Delhi, the Congress has highlighted the political nature of the move. The party clearly expects cash transfers to play the same role for it in 2014 that the National Rural Employment Guarantee Act did in 2009. By pouring money directly into the bank accounts of voters across the country, it expects to be paid back with additional seats in the Lok Sabha. But the politics of cash transfers is not the same as that of the MGNREGA. And even if there is political gain for the Congress from this move, it will come at a great social cost.

Then and now

The fundamental difference between the political economy of the NREGA in 2009 and the cash transfers today is in the impact on inflation. The NREGA was launched at a time when the macroeconomic goal was to provide an impetus to the Indian economy at a time of a global slowdown. The impetus took the form of raising the fiscal deficit substantially, thereby providing the resources for the NREGA. Since the economy needed the additional expenditure there was only a limited immediate impact on inflation.

This is not the macroeconomic situation today. With inflationary pressures remaining a concern there is need to be wary of any massive transfer of cash to voters. The politicians in the Congress possibly believe they have got this covered since they are simply changing the way of delivering existing subsidies. As there is no additional expenditure involved, they seem convinced there will be no inflationary pressure from the move.

The economist in the Prime Minister must however know otherwise. He will be sensitive to what economists call the multiplier effect. Simply put, when cash is paid out to an individual she saves some of it and spends the rest. What she spends becomes income to someone else. The next person again saves some of this income and spends the rest, thereby creating income for a third person, and so on. The overall effect of putting cash into the economy is then several times greater than the original infusion, the exact multiple depending on the proportion of income that is spent.

In the case of a transfer of welfare in kind, there is little scope for this multiplier to take effect. When a beneficiary receives food from a ration shop her family consumes the food without creating additional income for anyone else. The multiplier comes into play when the supply of subsidised food from the ration shop is replaced by cash. And if the government were to try to control the inflationary pressures by curbing money supply it runs the risk of going to the next elections with the economy slowing down. It is therefore no surprise that the food subsidy and the fertilizer subsidy have been kept out of the initial shift to cash transfers.

The 29 schemes that are to form the initial round of cash transfer from January 1, 2013 focus primarily on reworking cash based welfare schemes such as pensions and student loans. The apparent political potential of this move, in the current system of patronage politics, explains the glee in the AICC office when the shift to cash transfers was endorsed. The entire transfer of the cash value of welfare schemes will now be seen as coming from the Congress. The old process, in which a local politician was the link between a scheme and its beneficiaries, thus earning loyalty and building constituency, will no longer be valid. This would not only hurt opposition parties but would also weaken the grass root Congress worker, while strengthening the party high command.

The social costs of this move are however quite evident when we consider the precise mechanism through which the shift to cash transfers is to take place. The beneficiaries are to be identified using the unique identification of Aadhar. There may be those who challenge the claims to perfection of the Aadhar process, but that view is unlikely to overcome the widespread Indian belief that what is technologically done must be perfect. Even if we grant Aadhar perfection, though, we must keep in mind that it is only a system of unique identification, nothing more. All that it does is to ensure that once a person says she is X, she cannot later say she is Y.

Such a unique identification does not even guarantee that the person is in fact an Indian. It is quite possible for a person from, say Bangladesh, to cross our porous borders, go up to an Aadhar office and get a card. Aadhar does not believe it is its business to guarantee the nationality of the individual. With a convenient Indian address she could then be eligible for direct cash transfers. This can make a significant difference to the working of cash transfers in some regions where borders are porous.

Overreliance on Aadhar

Moving away from the northeast there is an even greater challenge in an overreliance on Aadhar. The proof that the person has once identified herself as X tells us nothing about whether X is, in fact, poor or eligible for the subsidy. The problem with ration cards today is twofold: there are multiple cards issued to the same households, and the Below Poverty Line cards have been issued to those who are not poor. Aadhar could help solve the first problem, but not the second. Even with Aadhar based identification, the non-poor can be classified as poor.

What should cause greater concern is that there is little attention being paid to the transaction costs of the poor and illiterate accessing the bank accounts. In a study of the working of the Mahatma Gandhi National Rural Employment Guarantee Scheme in Karnataka, it was found that the poor did not always get their full wages. In the more backward districts of the State, there was a significant difference between the wages paid out according to the MGNREGA records and the wages the workers said they received. And it is not difficult to imagine how this could happen. The poor, especially if they are illiterate, are dependent on bank officials to tell them whether the money has been credited into their accounts. And if they seek the help of others in the village that too can come at an economic, if not social, cost.

Even in cases where the money reaches the right bank account and the right person, there could still be leakages in terms of how that money is spent. In some schemes this would not matter. A pension has served its stated purpose the moment it reaches the beneficiary. But there are other schemes such as student loans where a mechanism is still needed to ensure that the money that is transferred to the bank account is actually spent on education. When the cash transfer is from a distant source and the expenditure to be made is local, monitoring how the money is spent is no easy task. And if the money is not used for the stated purpose, it is a leakage of another kind.

The experience of MGNREGA tells us that preventing this leakage could cause greater pain to the beneficiaries. In some States by the time the work done is measured and the payments are released, the workers could end up waiting for months to be paid. In the case of cash transfers too while the actual transfer of funds into bank accounts may be instantaneous, the process of ensuring the money is spent on the stated purpose could cause either leakages or substantial delays.

It is here that the gap between the political interests of the Congress and the social interests of the country is the widest. If the cash transfers are to be politically viable the government must transfer the subsidies on time. And it would be in the Congress party’s interest for the cash to be transferred without worrying too much about whether it is being spent on the stated purpose. If its record is any guide, it would not mind transferring cash for a student loan even if the money is spent on a school or college that is unworthy of that expenditure.

Faced with a choice between a possible political benefit in 2014, and a further reduction in the effectiveness of the social welfare schemes, the Congress has made its choice public. And in a country where we celebrate our economic growth even as over 40 per cent of our children remain malnourished, it is a choice that is unlikely to cause much consternation.

(The author is Professor, National Institute of Advanced Studies, Bangalore)

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Direct cash transfer scheme will usher into new paradigm where we will
start considering poor as resilient and creative ,value-conscious
consumers which will open for them new access , opportunities.

every project comes with challenge and with time they will be tackled.
This new way where our corrupt system is bypassed and people are
getting power to spend.
Considering the experience since independence of eradicating
poverty,this new and creative approach deserves chance.It is not about what is wrong or right.it is about what works.Technology is one of
them.

from:  dhiraj sonaje
Posted on: Dec 1, 2012 at 19:58 IST

The writer's reasoning is that when the poor spend the additional cash, it would
form income for some one who will the spend it and thus generating the multiplier
effect on demand. Earlier when he was getting subsidised food, there was no such
multiplier effect. He simply paid Rs. 2 and consumed the food.

But is it justified? I mean earlier also SOMEONE must be paying the market price
for the food. That someone was government which was paying market price for the
food and then delivering it to the poor at subsidised rates. so multiplier effect was
already present in the economy... isnt it?

from:  Gaurav Agrawal
Posted on: Nov 30, 2012 at 20:59 IST

Mr.Pani talks of the multiplier effect. But doesn't subsidy in kind do
the same thing? Let us say rice in the open market is Rs 50/kg. Instead of spending Rs 50 on rice, the beneficiary buys subsidized rice for Rs 25. So he gets
a surplus of Rs 25 which he can spend on other goods. Doesn't this also lead to multiplier effect?
In the cash transfer scheme he gets Rs 25 in cash which will be paid either to the rice merchant or if he does not buy rice Rs 50 will be used for other goods.
How the 'multiplier effect works differently for the two schemes beats me. but then, I am not an economist.

from:  KS Pillai
Posted on: Nov 29, 2012 at 14:05 IST

Even tdoay, in the present arrangement, the subsidised items are sold at
the point of sale and cornered in bulk through purchases and the
beneficiaries are paid cash. Such bulk PDS items go to the open market
and whole sale traders. So the planned CASH PAYMENT system would prevent
such large scale look and only make the receivers to use the cash
prudently for the family welfare.

from:  KUPPUSWAMY
Posted on: Nov 29, 2012 at 13:42 IST

The very basis of providing subsidy is to reduce the pain of the poor people. If government provides cash and there is no check on inflation then how could this be relieving pain of the poor.The cash provided in times of high inflation would be of little use. Moreover the intended beneficiaries and poor, less educated or illiterate therefore there are high chances that the use of the cash would not be efficient. Efforts could be made by unscrupulous people to siphon out the cash and the poor would be left with nothing. With the present system they are at least getting food to eat, the very essence of survival,although this system also has pilferage. Opening bank account, updating passbooks using ATMs are still very difficult task for poor and illiterate.

from:  Divya Prakash
Posted on: Nov 29, 2012 at 13:36 IST

I think this could actually be a move that could cut around many
corners. Yes, the author is right about the money being spent for all
the wrong purposes, but how much of a right purpose is subsidy money
and more importantly, goods being spent anyway? When people have cash
in hand, they have the independence to spend, and are not bound to
consume only this and that, as decreed by the government. And at this
moment, with industrial growth only heading south, constantly, i feel
a little more cash making rounds in the economy is not that bad a
thing. And then again, to make this system effective, there are the
other things that come along with it, and the most important of that
is Banking. Banks in remote, rural locations can only do good to the
country. But then, it all depends on how the Congress, and the
governments after this one carries it forward. In other words, this
scheme can actually be a great game changer.

from:  Jyotishman
Posted on: Nov 29, 2012 at 13:15 IST

Prof. Pani's article reflects muddled thinking. The whole idea here is to let the poor decide how to use the cash. They can buy food or something else if that is more important to them. The delivery of cash hopefully will be straight forward and much cheaper. Whether government spends the money on food or the poor spend on it has the same multiplier effect whatever that might be. The only serious question is would the government increase the cash payment in line with the increases in prices of food. If not, the the cash's real value will drop and the poor suffer. Otherwise, paying cash and letting the poor decide what to do with it is the right way to go and it ought to have the support of all right thinking people. If
Congress gets any credit for it, so be it. But the money is clearly coming from the tax payers of India have no doubt about it.

from:  Hoshiar Singh
Posted on: Nov 29, 2012 at 13:10 IST

Direct cash transfer to the beneficiaries is an initiative to plug leakages and ensure that the
citizens are adequately empowered to avail the services entitled upon them. It is another
thing that they may use the money elsewhere, which would be a new form of leakage. Lets
leave that to the wisdom of the society on how they use the cash and in my view
government is not responsible for that. At best it can educate the society on rightful
expenditure.
Another concern raised in the article " Cashing in on schemes for poor 29 nov." is about
the lack of financial literacy among villagers and how they can be cheated. In my view, mostly people are smart and once they start interacting with the system, they will learn in the process. 
Also the question of identification of beneficiaries remains unanswered. It is beyond the scope of Aadhar based direct cash transfer scheme. I suggest that the PRIs and muncipalities be given the task of preparing the beneficiaries list regarding different scheme

from:  Sritik Sinha
Posted on: Nov 29, 2012 at 13:09 IST

Question remain how this scheme going to successfull? since corruption is rocking on all front of country. Instaed of Cash transfer Govt. should have issue SMART cards then transfer points, points of SAMRT card will consider as cash.This way help to reduce corruption on Govt schemes.

from:  suraj Lokhande
Posted on: Nov 29, 2012 at 12:32 IST

Looks like Mr. Pani is looking at half picture. DIrect Cash Trasfer will not just eliminate inefficient and corrupt PDS sstem, it will empower the poor to manager his own expenditure and will include him in the banking model. This will inturn can be a incentive to banks and other entities to device plans for poors. Financial Inclusion will not be just limited to cash transfer but it can be a game chaner similar to telecom recolution.

from:  Ajay Kumar Yadav
Posted on: Nov 29, 2012 at 11:42 IST

I remember once Winston Churchill said like " criticism may not be
agreeable, bot it is necessary. It fulfils the same function as pain
in the human body. It call attention to an unhealthy state of things".
Irregularities that creep into the PDS was evident immediately when it
stated. However, even same but new TPDS demand for rectification as
it was not free from errors. Its fallible further called the need for
another newly evolved cash transfer facility directly to the poor.let
us hope for constructive criticism, to help Cash transfer system to
reach in its finest form.

from:  Basheer KK
Posted on: Nov 29, 2012 at 11:39 IST

Future business of providing cash instead of subsidy is limited to
increase in efficient target distribution & monitoring of the subsidy to
BPL. It can check corruption to some extend but then the corrupt system
that moves from the top can find its new ways to misuse it as pointed in
the article.No where this porous system has the ability to increase the
standard of living of the poor,by increasing jobs and their purchasing
power without which this high tech plan will be as good as putting a
cart before the horse.

from:  Rakesh Manchanda
Posted on: Nov 29, 2012 at 11:30 IST

Baiting the people with currency is not going to be a remedy for the ongoing crisis in social, economic and politics system. The country needs a fundamental rearrangement of the existing political system and practices by putting the entire nation’s wealth in the hands of the common people rather than under the custody of a few private tycoons. At present we have a democracy corresponding to chronic capitalism in which majority of citizens are just labour selling individuals with a state as a broker of business tycoons and families. Farmers who were engaged in the MGNREGA are exhausted by digging the dried surface in the canals and some of them have even lost their lands due to the state’s land snatching attempts in favour of corporate groups. People will reject any political party with dynasty and corruption.

from:  A.Kannan
Posted on: Nov 29, 2012 at 11:13 IST

The PDS loopholes could have been fixed with a strong political will. Chhattisgarh
presents a good example where the leakages have been fixed with the help of
technology to as low as 10% according to latest govt data. This can only improve with more and more computerization in future. But all this surely will not result in political benefit for the political parties.

from:  Siddharth Pandit
Posted on: Nov 29, 2012 at 11:11 IST

What about the substitution effect????
Who will ensure that the money transferred for purchase of food will
not get diverted to wine or gamble or naxal activities or any other
unsocial activities !!!
Has the government done enough to sensitize the poor people on
productive use of money??? Do they have any mechanism to provide
proper guidance on the productive use of money??? Had they done this
all the banks would have willingly gone for priority sector lending
without any hesitation.
Alas!!! The governments in our country have continued to be short -
sighted since long. They have continued beating around bushes without
addressing the real problem of illiteracy, basic health care and
creating favorable environment for facilitating the economic
development.

from:  Rajesh Kumar
Posted on: Nov 29, 2012 at 10:32 IST

This is a right step if implemented with correctly. Current PDS system is broken and rife with rampant corruption. The poor hardly benefit from the subsidized food as it is often pilfered by middlemen and PDS shop owners. As long as the whole amount is directly transferred from the govt account to the recipient account the chances of pilferage by middlemen is lot less. This will increase purchasing power in rural areas also.

from:  Suvojit Dutta
Posted on: Nov 29, 2012 at 10:21 IST

Author seems to miss the point that Govt provides subsidies on essential commodities.
These commodities will have to be purchased by masses at higher, non-subsidized rates.
This would inturn mean their net savings would remain unaffected.
One cannot ignore the basic premise of direct cash transfer scheme- to eliminate multiple
handling points of Govt subsidies, to reduce probability of misappropriation of funds.
Opponents of this scheme are hell bent to criticize it, while failing to provide an effective
alternative to address such misappropriation.
Though the political incentives of direct cash transfer cant be brushed off, isnt this incentive
the very motivation of Govts to perform in a democratic setup..?

from:  Apporve
Posted on: Nov 29, 2012 at 10:08 IST

Let me tell you a correlated story of direct cash transfer...The
scholarship scheme in UP has been following the direct cash transfer
to the student's bank accounts...Here are few advance corruption
practices that have evolved with time .
1.The exact scholarship amount is hardly transfered and the reason
stated is inadequate govt fund..To get any substantial information you
have to go through a series of middle men who demand their share of
money.
2.The student account number gets tampered somewhere in between
causing no transfer . The middle men come into the picture and they
demand their share to get the transfer done or you keep visiting
various offices everyday with no fault of your own.
3.Delays in transfer...you apply for a scholarship in your first year
and you get it in your third year.
Though direct cash transfer has benefitted people yet there are
loopholes which are innovated with time and that needs to be plugged
in somehow.

from:  Naman Jaiswal
Posted on: Nov 29, 2012 at 09:45 IST

The 29 schemes which the Government plans to roll out in select 51 districts from January next year and 18 states from April are purely welfare schemes and cannot be classified in the category of subsidies. Even otherwise the beneficiaries of various welfare schemes like scholarships and pension schemes are getting the proceeds either through nationalized banks or Post Office. Whereas, in the Economic Survey report for the year 2009-2010 tabled on the floor of the parliament by the Union Finance Minister dealt with the need for urgent streamlining of various subsidies like fertilizer, cooking gas, kerosene and the items supplied through the public distribution system in a bid to curb leakages in Government spending on subsidies. As per Economic Survey 2009-10, the expenditure incurred by the Central Government on account of fertilizer subsidy during the year 2008-09 was Rs.76,606 crores. The overhauling of the existing PDS and Fertilizer subsidy schemes will not only improve the deliverance but also help the Union Government to contain a substantial revenue outflow as subsidy and the expenditure thus saved can be better utilized by the Government to implement MGNREA and other flagship programmes like Bharat Nirman, Rural Health Mission and Sarva Shikshya Abhiyan, etc. The present roll out of direct cash transfer of welfare schemes like various pensions and scholarships are nothing but mere an eye wash and political gimmick aimed at reaping benefit in the 2014 elections.

from:  ettirankandath krishnadas
Posted on: Nov 29, 2012 at 09:34 IST

I could not agree with some of your points.
1. The Multiplier effect. You said that if the money that is given as subsidy is directly given to the people ], it will lead to multiplier effect. My doubt the same effect can happen even if the person is buying the already subsidised commodity. For example if person having income of 100Rs pay10Rs for 20Rs rice on subsidised rate and thus he saves 10Rs. If the money is directly given to the person then also he saves 10Rs then how this direct cash transfer only leads to multiplier effect. If the money is directly send to his bank account this will lead to some percentage of savings rather than expenditure and also this help in financial inclusion of the poor.And also government need to pay only to those who are buying the ration not all the materials coming at the ration shop , so this will defenitly reduce fiscal defficit and also prevent piliferage.

from:  saju vaheed
Posted on: Nov 29, 2012 at 09:29 IST

What's the way forward then? Is it right to keep on hinging on current PDS scheme which promotes blackmarketing and other malpractices. How efficient our PDS system is?

from:  Ajay Kumar Yadav
Posted on: Nov 29, 2012 at 09:14 IST

While interacting with the media on the occasion of announcing the the
scheme for cash transfer to the beneficiaries of some social welfare
schemes Shri Jairam Ramesh was honest enough, and rightly so,that they
were a political party and not any NGO, not to expect political gains
from the new scheme.It is also true that the Indian National Congress
would be fully justified to claim the credit if at all there is any
.Perhaps he forgot that it is hard to believe there is any NGO without
political motivations .Rather it would be more correct to say that
most of them are run as business organisations for some self interests
,The gullible are their victims.Their contribution in the society also
is questionable,They do more harm than good.In other words they blur
the thinking of their followers.It is totally premature to condemn the
efforts of the UPA government as it is placed at present to eliminate
corruption as little as it can.There are always some flaws in every
mechanism of course .

from:  Hargopal Singh
Posted on: Nov 29, 2012 at 08:29 IST

One need not agree with the view of author that direct cash transfer
will reduce the effectiveness of social welfare schemes..the reasons
being
1)swedburg study carried out by world bank(source-economic survey)
found that for transferring every 1 rupee in present system,
government is spending 9 rupees instead of wasting 9 rupees to give 1
rupee to poor we can give that all 10 rupees to poor,this greatly
increase the efficiency of social welfare schemes.
2)In present system only 40 % of the intended subsidy reach the poor
rest being leaked,embezzled,and diverted for adulteration.For example
large percentage of kerosene is diverted for adulterating petrol and
diesel,which increases the pollution and makes our vehicles less
efficient.
3) direct transfer of subsidies will provide economic independence to
house hold as they can use same money for other activities which are
very essential like agricultural spending as most of the poor do not
get crop loans from banks

from:  dr p sudhakar naik
Posted on: Nov 29, 2012 at 08:22 IST

I do not understand the author's explanation of 'multiplier effect'. In
the case of cash transfer, people get cash from Govt, and then purchase
goods themselves from a store. In case of rations, Govt itself purchases
goods from a store and gives them to the people. In both cases, the
store does get money from the Govt.

from:  Sunil
Posted on: Nov 29, 2012 at 06:52 IST

In fact, I am one of the few strongly talking of cash transfer directly to the people instead to a company or to a retail out let. Kerosene at present entering in to open market through retail outlets become a major resource of adulterated fuel that is causing severe air pollution. Gas is going in to open market through retail outlets to illegal small scale industry. All these are entering in to open market basically because under PDS more than 40 to 50% are rich or illegal BPL group. These groups will be eliminated under the food security bill to be cleared by parliament -- BPL is defined. At present fertilizer subsidy is directly given to manufacturing industry and thus more than 30% of the production is entering black market and not to the farmers. All these are contributing to severe pollution. Needy farmers are not getting the fertilizers. Through cash transfer this black marketing could be stopped. Mis-use of subsidy could be stopped.

Dr. S. Jeevananda Reddy

from:  Dr. S. Jeevananda Reddy
Posted on: Nov 29, 2012 at 06:03 IST

I do not understand that giving cash transfers in case of subsidies like kerosine, gas, fertilizers is going to be a game changer for poor. I take an example of kerosine - the subsidized kerosine costs rupees 15 per liter which a poor can afford to spend at first instant. On the other hand if he buys it on market rate of rupees 50 then how he can afford it at first instant. For that he has to arrange extra rupees 35 to make it rupees 50 to buy it that might be a tough task for him to arrange from his already earned low wage. Even if he arranges rupees 35 and get back rupees 35 again as a cash transfer then how come he is getting extra cash? The same argument is true for food grains extra and if I sum up all the subsidized items consumed then he may not have enough money to buy it at all at market rates and since there will be no subsidized items available and no extra money in hand for buying these items at first instant he may ultimately will go into deep chaos.

from:  Raman Tewari
Posted on: Nov 29, 2012 at 05:49 IST

Its a wrong message to nation endorse this cash transfer scheme to
direct beneficiary from Congress office.Who is responsible for this
damage & wrong tradition.India is already facing a corruption
series,Congress try to divert it.by the way if inflation occur then
who is going to pay,Congress or Country?

from:  durgesh upadhyay
Posted on: Nov 29, 2012 at 04:33 IST

You said it, Prof.Pani.
"...By pouring money directly into the bank accounts of voters across the country, it
expects to be paid back with additional seats in the Lok Sabha. .....even if there is
political gain for the Congress from this move, it will come at a great social cost."

Imagine the multiplier effect of this social cost!

from:  Soundararajan Srinivasa
Posted on: Nov 29, 2012 at 01:37 IST
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