Will direct cash transfer be a poll cash cow for UPA?

Political experts believe mere sloganeering and other forms of propaganda will not work for the govt in 2014

The ruling political class of India must acknowledge an elementary rule of economics: expenditure cannot wildly exceed income. The government is clearly spending beyond its means. It would be a folly to think of Aadhaar-based direct cash transfer (DCT) as a magic bullet to cure poverty in India. With general elections due in 2014, this is the last year that the Congress-led United Progressive Alliance (UPA) can take bold decisions to implement meaningful reforms. Political pundits are of the view that mere slogans and other forms of the propaganda warfare will not work for the government in 2014.

Congress chief Sonia Gandhi's confidants believe sops — from cash transfers of subsidies on fertiliser, food and oil to MNREGA — will help the party win back votes. It was the late Rajiv Gandhi who had stated that of every rupee that the Indian government spends on subsidising the poor, barely 15 paise reaches the actual beneficiaries. According to present estimates, the government’s expenditure on fuel and fertiliser subsidies stands at around Rs 73,637 crore a year. Ironically, a vast portion of it does not reach the beneficiaries. Will the DCT scheme be a game changer for the UPA-II in the 2014 polls?

What is the direct cash transfer scheme?

It is a poverty-alleviation programme in which government subsidies and other benefits are given directly to the poor in cash rather than in the form of subsidies. 

Under the direct cash subsidy scheme, Central and state grants for as many as 34 schemes (such as LPG and kerosene subsidy, student scholarships, old-age and widow pension schemes, and MGNREGS payments) would be credited directly to the beneficiaries' Aadhaar-enabled bank accounts

Finance Minister P Chidambaram said the first phase of the cash transfer would benefit 10 million households. 

Under the scheme, cash transfers will be in the range of Rs 30,000 to Rs 40,000 on a yearly basis. Overall, Rs 3,20,000 crore will be distributed.

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How it works

The cash transfer scheme (CTS) became possible with the identification of the poor after the introduction of 'Aadhaar, or unique identity scheme. Aadhaar card is an ID card with a 12-digit unique number issued to all the citizens of India (on voluntary basis). It will carry the demographics and biometric information of the holder.

Under the system, financial institutions select banking correspondents in the villages and equip them with micro ATMs and a certain amount of cash. The Aadhaar-enabled account holders approach the correspondent and press their thumbs, which work like passwords, on the ATM to authenticate their account numbers.

The ATM then displays the balance in his or her account to the beneficiary before allowing withdrawal of money. The correspondents go around villages, carrying the micro ATM to extend banking services to the residents.

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Bumpy road ahead?

The DCT scheme is exclusively for Aadhaar card holders and only they are entitled to get cash transfer. As of today, only 21 crore of the 120 crore people have Aadhaar cards.

States’ participation in Aadhaar enrolment and coverage of schemes would be necessary.

Implementing direct cash transfer with less than 80% overall penetration may lead to problems. Also the weak Aadhaar coverage in some age groups shows implementation of schemes like pension transfer may be difficult.

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Other countries

The idea of directly giving money to the poor is becoming popular among the policy makers. Probably the biggest and best known of all the cash transfer schemes in the developing world is the Bolsa Familia in Brazil. Since 2003, 12 million families have joined the scheme and receive small amounts of money (around $12 a month). Inequality has been cut by 17% in just five years, which is perhaps one of the most dramatic achievements in welfare ever recorded. The poverty rate has fallen from 42.7% to 28.8%, according to The Telegraph, London.

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Poll gimmick

In India, any cut or removal of cash benefits in future may be resisted by citizens and the scheme will become a permanent liability.

Secondly, the scheme is likely to be misused by the government since it will become an attractive populist gimmick for political parties apart from imposing additional burden on the exchequer as subsidies do at present.

On 1 January 2013, the project is to be rolled out in 51 districts



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Here’s a quick recap of our earlier stories and views:

1) Direct Cash Transfer system a 'pure magic': Chidambaram

Describing the proposed Direct Cash Transfer scheme a 'pure magic' that brings a big responsibility on banks for its implementation, Finance Minister P Chidambaram has asked bankers to work with the government to make the scheme a success. Click here for more

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2) Centre's unsolved worry on cash transfer scheme

The government has a fly in the ointment in the implementation of the direct cash transfer of food subsidy.Draft proposals show the government could lose the subsidy amount credited to bank accounts of beneficiaries who don’t use it to lift foodgrain for two months. This money would have to written off, senior officials said. “Some mechanism needs to be developed to address this,” said an official. The government is working towards implementing the direct cash transfer of food subsidy in six Union Territories from April 1. Click here for more

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3) Scheme might begin only in 30 districts

With senior government functionaries, including Finance Minister P Chidambaram, favouring launch of direct cash transfers of subsidies in only those places fully ready for it, the actual number where the scheme would be started from January 1 is expected to be far lesser than even the 43 districts targeted at present. Click here for more

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4) If this proof of concept works, everybody will want it done this way: Montek

In an interview to Santosh Tiwari and Devjyot Ghoshal, Planning Commission Deputy Chairman Montek Singh Ahluwalia says the initial experience of taking the scheme to 51 districts, starting January 1, will allow the government to identify the problems and, hopefully, find a way to dealing with these. Click here for more

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5) Govt high on fertiliser subsidy cash transfer

Come January 2013, the department of fertilisers is launching pilot projects in 10 districts spread over nine states to track the movement of the nutrient from the retailer to the farmer. The finance ministry’s mid-year economic analysis of 2012-13 has pointed out that in these districts, part of the subsidy to manufacturers will be linked to sale of fertilisers to farmers by retailers. Click here for more

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6) Centre readies direct cash transfer procedure details

The central government has worked out an elaborate plan to disburse food subsidy to beneficiaries directly in states and Union Territories (UTs). The programme worked out by the food ministry is to be launched in the Andaman and Nicobar Islands, Chandigarh, Dadra and Nagar Haveli, Daman & Diu and Lakshadweep from April 1. Click here for more

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7) Test of flagship schemes on Jan 1

The government’s ambitious direct cash transfer ( DCT) scheme on subsidies is to be tested right in the first phase, from January 1, on some of its flagship programmes. Selected districts are to see, from January 1, a phased roll-out of the DCT. These are to be the site for testing on 29 of the government’s 42 programmes for subsidy transfer in the first phase. Click here for more

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8) Take up cash transfer work on war footing: PMO tells ministries

The Prime Minister’s Office ( PMO) has asked ministries to take up preparatory work for implementation of the cash transfer scheme from January 1 on a war footing. Firming up and digitising databases, completing enrolment for Aadhaar by all beneficiaries, ensuring bank accounts for all beneficiaries, ensuring Aadhaar numbers are entered into bank account databases and beneficiary databases will be the primary activity in the coming few weeks at the field level, for ministries implementing schemes. Click here for more

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9) Cash transfer really a 'game changer'?

While Finance Minister P Chidambaram has described cash transfer scheme as a  'game changer’',  the people of Kotkasim in Rajasthan on whom the first cash transfer experiment was conducted say that they have been cheated of both kerosene and the subsidy that the Government so far has been paying on it. Click here for more

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10) Cash course | As the government gets ready to roll out its ambitious cash transfer of subsidies scheme on January 1, an on-the-ground report on how the experiments are working out. Click here for more

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11) 'Aadhaar-based cash transfer benefits to rise gradually'

The Aadhaar programme, on the back of which the government wants to implement its ambitious cash transfer regime starting January 1, could yield an internal rate of return of 52.85 per cent, according to an analysis by the National Institute of Public Finance and Policy (NIPFP). Click here for more

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12) Cash transfers | Game changer for Cong-led UPA: FM

Finance minister P Chidambaram along with Rural Development minister Jairam Ramesh, addressing the media at the Congress Party headquarters described the direct cash transfer not just as a government initiative but as a “fulfillment of the Congress party’s 2009 election manifesto promise” and a sure shot “game changer.” Click here for more

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13) Edit | UID's unintended effect

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14) Cash transfer to farmers faces hurdle

Plan drew strong opposition from cartel of middlemen and agents as they will lose commission. The food ministry’s ambitious plan to transfer the minimum support price (MSP) directly into the farmers’ accounts or through account-payee cheques has run into roadblocks in the first year itself. Click here for more

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15) Edit | Look before you leap