Economics of cash transfers: Balancing welfare, productivity, state budgets

Increasing popularity needs to be debated

The ruling Aam Aadmi Party’s (AAP’s) announcement to launch the Mukhya Mantri Mahila Samman Yojana and other schemes in Delhi has run into problems, with the Delhi government recently issuing public notice against registration for the schemes. While a government department’s public notice against the promise of the ruling party reflects the unique administrative structure of Delhi, which is a separate debate, the motivation for announcing a scheme like the Mukhya Mantri Mahila Samman Yojana is not very difficult to understand and will need a broader debate in 2025. According to the scheme, eligible women in Delhi will get Rs 1,000 per month, which would be increased to Rs 2,100 if AAP returned to power after the Assembly elections, likely to be in February. Although multiple factors affect election outcomes, similar cash-transfer schemes are believed to have helped incumbents return to power, most recently in Maharashtra and Jharkhand.

 

According to a report in this newspaper, at least 12 other state governments have already implemented some form of such a scheme. Given their popularity, it is worth pondering if they tilt the balance in favour of the incumbent at the cost of the taxpayer, and whether it disturbs the level playing field. The economic aspect is equally serious if not more. In a developing country like India, governments at both Union and state levels are bound by hard Budget constraints. There are always competing development demands on the Budget. The Indian state, for instance, needs to invest a lot more in both physical and social infrastructure not only to increase the productive capacity of the country, but also to improve the ease of living. Given the constraints, spending on cash transfers would leave so much less to spend on developmental needs.

 

Cash transfer needs more attention because, unlike other subsidies or support programmes subsidised power, for example this can be increased substantially over time perhaps owing to competitive electoral compulsions. AAP in Delhi, for example, has promised to more than double the cash assistance after the elections. Further, cash-transfer schemes are not limited to states. The Union government also has schemes such as the Pradhan Mantri Kisan Samman Nidhi (PM-Kisan). A parliamentary panel recently suggested doubling the annual assistance under the scheme from Rs 6,000 per year. If implemented, it would require a doubling of allocation from the current Rs 60,000 crore. However, it is hard to argue that even doubling the assistance would alleviate the stress in the farm sector. Nonetheless, as evidence suggests, cash transfers are becoming fairly popular and allocation to such schemes can be expected to increase over time. It is thus important to keep track of the expenditure.

 

However, as of now, it is not clear how much of general government expenditure goes into such cash transfers and what impact, if any, it has had on subsidy outlays. The Reserve Bank of India in its latest study of state finances has noted that state governments should contain such outgo because it could affect productive expenditure. However, for a meaningful debate on state support to vulnerable sections of society, it is important to gauge how much of general government expenditure goes to subsidies and cash transfers. As things stand, one family may be getting cash transfers under different Union and state schemes. A robust data analysis will allow both the Union and state governments to rationalise expenditure on subsidies and cash transfers with improved targeting and outcomes. As Union and state governments will be presenting their Budgets in the coming months, the issue will need greater public attention.