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Can cash transfers work for subsidy schemes?

Business Standard  |  New Delhi 

Cash transfers effected through smart cards can go a long way in enabling the beneficiary and revamping the public distribution system, but one can’t vouch for them as a better option to tackle leakages and corruption.

Chief Economist, Indicus Analytics

Smart cards should not be seen as an either/or solution but as one step forward in an overhaul of a system that desperately needs repair

The Budget proposal to bring in cash transfers for subsidies has ignited a strident debate. Yet, as the finance minister said in his Budget speech, “We have deliberated for long the modalities of implementing such subsidies. The debate now has to make way for decision.” The intent for action has been spelt out clearly and as Planning Commission member Saumitra Chaudhuri told Business Standard recently, the beginning would be made in food subsidy and the transfer effected through a smart card, to be recharged every month, according to the entitlement of the beneficiary. The card can be used to buy any food product of choice from any designated store or fair price shop. The government intends to then take up LPG and kerosene subsidies and thereafter fertiliser, for which the issues of identifying the beneficiary are complicated.

So what is the debate here about? Let us look at the crux of the problem — simply put, there are poor people who need help for basic necessities, both goods and services, there is no dispute about the need for public welfare schemes, no dispute about the need for subsidies. There is also no dispute that a large part of the huge government subsidy bill is not reaching the intended beneficiary, leakages are well documented even in government reports. The issues lie in correctly identifying the target beneficiaries and choosing between whether these goods and services are given in the form of the entitlement as is being done today or in the form of payment towards buying that entitlement.

Smart cards are not a new concept. Arvind Virmani and P V Rajeev had mooted this idea in a 2002 Working Paper for the Planning Commission. The idea of an integrated smart card can actually be a reality now thanks to the UID, the spread of banking through business correspondents and mobile payments. The benefits of a smart card in enabling the beneficiary are obvious, as the various pilot projects across the country have shown already. However, it is important to remember that even if the facility is extended to health and education, it does not absolve the government of its responsibility towards providing quality services in these sectors. Given the inequalities in access to basic services, public delivery of the basics of health and education cannot be done away with.

The point of concern would be countering inflation, when calculating the amount of cash transfer required for a given amount of grain. Global experience shows that in times of stress – whether from high rising prices or emergencies – food transfers are the most favoured option for reaching the poor. Revamping the PDS is an imperative.

Smart cards, under the proposed cash transfer scheme, therefore, should not be seen as an either/or solution but as one step forward in an overhaul of a system that desperately needs repair. Apart from food subsidies, there are other welfare programmes that can be brought under the smart card. In fact, according to a McKinsey study “Inclusive Growth and Financial Security” last year, a complete e-payment solution that would link government departments and households across the country would directly benefit the country by Rs 1 lakh crore and the largest benefit would accrue to the welfare schemes to the tune of 83 per cent of total savings. The potential savings in one year could take care of the entire cost of the Food Security Act. Seen another way, the savings are equivalent to the entire expenditure on Sarva Shiksha Abhiyan since it started. The study estimates that the cost of installing a comprehensive platform would be recovered through savings in the first year itself.

The gains that come from establishing a clear trail of funds will be invaluable for the country; not just in ensuring that the benefits reach the target, but also by creating an environment in which it will be more difficult to skim public money, thereby creating goodwill for public programmes.

Activist & Member, Joint committee drafting the Lok Pal Bill

The cash transfer option is just an excuse to cover up a government’s failure to monitor and keep the ration system working properly

Cash transfers would have worked better for subsidy schemes if they really were a better option. But this is not necessarily the case. The National Rural Employment Guarantee Programme is a good example of cash transfer and it is a story of leakages that everyone knows. Though workers have accounts opened in their names, the wages don’t reach them. They don’t get work in the first place.

Another cash transfer programme that has been in existence for some time is the pension scheme for old people and widows. Some time ago, we as part of our NGO Parivartan made a Right to Information application and obtained the list of people receiving the old age pension in a certain constituency in Delhi. We then made house-to-house visits and asked these “beneficiaries” about the Rs 400 pension they were receiving every month. None of them was getting it. They were not even aware they were part of any programme. They, however, told us that their passbooks were with the Member of the Legislation Assembly (MLA) who gave them Rs 200 every month. We learnt that the MLA’s office had been signing on behalf of all these people and drawing the pension money each month. The people were happy thinking that the MLA was a kind-hearted man who was generously giving them Rs 200 a month.

So, if cash transfer itself has been proven to be prone to corruption and leakage, how can it be a better option? The Delhi government is currently doing a pilot project for cash transfer to replace its public distribution system. The chief minister has said that eventually all ration shops would be closed and money be given to card holders. Now, how wise is that?

Under the pilot Rs 1,000 is being given to the card holders to buy 32 kg of wheat, five kg of sugar, ten kg of rice and six litres of kerosene. This amount of money, unless it is made inflation-sensitive, would not fetch these quantities in a matter of months. Even if it is sufficient money, what is the guarantee that it would be used by needy households to buy food and material? Alcoholism is rampant in homes and even if the money is put in a woman’s account, how much does it take for the man of the house to appropriate it from her? The woman is vulnerable and the money makes her more vulnerable. The ration card system, where it works, is a big support for families, especially poor ones. The cash transfer option is just an excuse to cover up a government’s failure to monitor and keep the ration system working properly.

For instance, the Delhi government may find the cash transfer working smoothly with no leakages because it is a pilot of just 100 families. If you distributed foodgrain rations to 100 families, even that would be foolproof. So the real challenge is to see how the direct cash subsidy works on a larger scale.

Then, there is the question of choice. How can you snatch an entitlement of foodgrain from millions of people and force them to take cash without any guarantee that the cash would be delivered?

If you cannot guarantee the distribution of foodgrain you cannot guarantee cash either.

Another serious concern is the interference of United Nations Development Programme (UNDP) and other players in a decision that should be taken with local consent. And distribution of foodgrains to the poor is the basis of an ongoing case in Supreme Court as is the basis of the food security Bill, the draft of which has been drawn up by the National Advisory Council led by Sonia Gandhi. So why talk of scrapping rations while making a Bill for food security?

As told to Sreelatha Menon

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First Published: Wed, May 25 2011. 00:26 IST