Direct cash subsidy: Challenges for implementation

After extended debates, discussions and dialogues the Government finally announced its decision to move towards direct transfer of cash subsidy for kerosene and fertilisers for people living below the poverty line. This has been widely accepted as it raised hopes that this mechanism will reduce wastage and inefficiency, weed out black marketing and hoarding, and most importantly ensure that the subsidy reaches the targeted beneficiaries. The Government is also hopeful that the system of cash transfer will ensure more efficiency than the current system of indirect subsidy, which is plagued with leakages, in addition to bringing about a reduction in its subsidy bill through better targeting. While this has raised many expectations on one hand it has also raised questions regarding the feasibility of foolproof implementation in India where the problem lies in the inefficiency of the delivery mechanism and correct identification of the target population. However, this system of cash transfer of subsidies is not new and has been successfully implemented across a number of countries, the examples of which provides us with important lessons to be learned.

 

Several countries including Chile, Mexico, Indonesia, South Africa, Turkey, Morocco and New York have adopted the system of conditional cash transfer programs (CCTs). This program provides direct cash to the poor families on condition that they make verifiable investments in human capital, such as regular school attendance or use of basic nutrition and health care. Impact evaluations of such implemented programs has revealed many success stories; such programs have not only been effective in reaching the poor and improving their living conditions but also have led to important developments in the design, administration and governance of social policies. The largest and the most successful conditional cash transfer program is the Bolsa Família Program (BFP) in Brazil where a significant portion of the Brazilian society has been benefited.

Brazil Case study

The significance of the Bolsa Família Program in Brazil is that it covered more than 11.1 million beneficiary families i.e. almost 100% of Brazil's poor (as on 2007). The entire programme is administered by threes institution- While the programme is managed at the central level by The Ministry of Social Development (MDS), various aspects of the program is implemented by around 5,564 municipalities. Further, the Caixa Econômica Federal, a federal bank, has been contracted as the program's operating agent.

The entire system is managed through efficient targeting, disbursement and regular monitoring of the disbursed funds. The targeting of beneficiaries is done through a combination of methods i.e. geographic (federal and municipal) and household assessment based on per capita income. Family eligibility is determined by MDS based on household registry data collected locally and transmitted into a central database known as the Cadastro Único. The eligibility determination is centralized by MDS, which then establishes the monthly beneficiary payroll. According to the beneficiary list established by MDS, the Caixa distributes the electronic benefit cards (EBC) to the targeted beneficiaries. Caixa also assigns the registered individuals the unique Social

Identification Number (NIS) and makes payments directly, crediting beneficiaries' electronic benefit cards (EBCs) on a monthly basis through its extensive banking network. There are overall 32,000 points (2,000 Caixa agencies, 9,000 lottery points 2,000 banking correspondents) from where the beneficiaries can withdraw the money.

While such success stories do raise hopes regarding the operation of this type of system, there arises several questions regarding the success of implementation in India. The first and foremost challenge concerning the system of cash transfer in India is the proper identification of the intended beneficiaries i.e. BPL population. In Brazil, beneficiaries were identified through a thorough mechanism wherein information regarding household composition, income and living conditions (proxies) was collected through personal interviews of each family. Self-reported income is further validated against other proxy variables. This highlights the humongous task of identifying the correct beneficiaries, maintaining a single national database and regular monitoring, that the Government would face in the process of implementing the direct cash subsidy mechanism.

The second hurdle that lies before the Government is to devise the methodology to transfer the cash subsidy to the poor. While an extensive banking system in Brazil enabled the distribution of CCT programs, India still needs to develop a more inclusive banking system to incorporate the BPL people living in the rural regions and remote areas. According to RBI, only 40% of the population across the country has access to bank accounts. Thus, the Indian Government is relying heavily on Aadhaar, for implementation of the program. The implementation of Aadhaar, will facilitate hassle free opening of a bank account. The Government might then be able to directly transfer the cash to the Aadhaar-linked bank accounts of the beneficiaries. Moreover, even if such a process is devised the success of the cash transfer mechanism will depend on the time taken to cover the entire eligible population of India and the successful pan India implementation of the Aadhaar project. Another issue which raises concern is the effectiveness of the cash transfer when prices become volatile. As the market determined, prices of kerosene will be immediately impacted if global prices fluctuate, the poor would have to deal with the uncertain prices. The Government will also have to frequently administer and allocate the subsidy amounts which will pose significant administrative challenges.

The author is Senior Economist, Dun & Bradstreet India