Payments were initially made as top-ups to subsidies and not as a substitute, so that beneficiaries got used to the new system without suffering its teething problems

While meaning well, the United Progressive Alliance (UPA) is putting at risk the great idea of cash transfers by designing them primarily as substitutions for subsidised consumer goods. That may be a laudable longer-term aim; the Public Distribution System (PDS) is in a mess. But strategically, cash transfers must boost economic growth and be a progressive measure to reduce income inequality and poverty, both at the outset and in the longer-term. They can be both. The reduction of cheating, repeatedly mentioned by government spokesmen, must be a secondary gain, not the main one.

If, as with the ill-advised Kotkasim model, the intention is simply to substitute cash payments for a subsidy, many people will become worse off in the first few months. While the price of kerosene will be raised, teething problems with the banks or with the cash flow will mean they will not obtain the cash repayment to compensate. It is all very well for planners to say this will be sorted out eventually. The poor live on the edge, and cannot tolerate short-term costs. While they struggle, the legitimacy of the cash transfer policy will be eroded.

Pilot scheme

This is why SEWA and Unicef have been implementing a cash transfer pilot scheme in which the cash provided has been a small top-up to existing subsidies. As a result, nobody in the villages is worse off than before. There have been teething problems associated with opening bank accounts and with learning how to use the cash. But these have taken place in an atmosphere of net gain for the recipients. As people have learned to adapt, support has grown not only for the idea of cash transfers but for substitution for rationed items. As a result, planners could now implement a substitution scheme in those villages that would be welcomed, would improve welfare and save government money.

The biggest mistake the government is making in rolling out the Kotkasim model is trying to save money in the short-term rather than treating the rollout of cash transfers as a measure with upfront net spending that will reduce public spending in subsequent years, once the scheme has been legitimised. Cutting budget deficits is necessary, but it must be a medium-term objective, not a short-term one that jeopardises the longer-term.

The biggest risk is that so many people will lose in the set-up period that the idea of cash transfers will be delegitimised before it has a chance to become appreciated as liberating and welfare-improving. This should not happen in the Anashree scheme in Delhi, which is sensible in that it will give an unconditional cash transfer to vulnerable people excluded by the cap placed on Below Poverty Line cards. Although it will be limited because of its targeting, it will not cut anybody’s living standards. But the broader scheme in those 51 districts will suffer from targeting failures and a premature substitution procedure.

An example

Let me give an example to illustrate the fiscal point. Suppose one were to provide everybody with Rs.200 per month on top of the value of the PDS and other subsidies, with the proviso that within three months of starting to receive that cash they had to receive it in a bank account or obtain the Aadhaar. This would give people time to deal with the practicalities, while nobody would actually lose in the short-term.

At the end of the first year, the cash transfer amount could be increased to, say, Rs.300 while some subsidy worth Rs.100 were removed, again leaving nobody worse off. In that second year, the fiscal saving would be well above the Rs.100 because we know the cost of transferring Rs.100 to any recipient is actually about Rs.350. The Ministry of Finance has told us that, and the Deputy Chair of the Planning Commission has said that only 16 per cent of spending on subsidised item reaches the poor. So any removal of a subsidy would save the government much more than the value of it to the consumer. And it must always be remembered that a government can afford short-term costs that low-income citizens cannot tolerate without acute discomfort.

This way of substituting cash for subsidies would be strategically wise and redistributive, since it would leave scope for increasing the value of transfers to low-income groups while saving money fiscally, since the saving on any reduction of a subsidy could be shared between the government coffers and the citizen recipient. After all, both the citizen recipient and the government would gain revenue.

This leads back to the most important point of all. Cash transfers must be understood primarily as a way of reducing inequality and poverty, while being fiscally sustainable. Other considerations must be secondary to that objective. This is why we should all plead with the politicians to go against their nature and depoliticise the transformation of social policy as much as they can. Well, we should try.

(Guy Standing is Professor of Economics at the School of Oriental and African Studies, University of London, and co-president of Basic Income Earth Network. He is working with SEWA and Unicef on a set of pilot cash transfer schemes. The views expressed are not necessarily those of SEWA.)

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