The unambiguous benefits of cash transfer
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The Karnataka government said last week that it would digitize its ration shops within three months. The Aadhaar data of all ration card holders in the state will be fed into a server that will be linked to the public distribution system (PDS). The idea is to use biometric information to reduce subsidy leakages.
Similar experiments in other states underline the efficiency gains from Aadhaar, especially when it is teamed up with the Jan-Dhan Yojana and mobile payments. The truly radical possibilities will be revealed when the Indian government begins to give primacy to direct cash transfers in its welfare system.
Critics argue that the cash transfer cannot bring about any drastic reduction in leakages and corruption. Moreover, the leakages and corruption can be curbed to a great extent, they say, by enhancing the state capacity and reforming the subsidy delivery systems.
A study done by three economists—Karthik Muralidharan, Sandip Sukhtankar and Paul Niehaus—conclusively establishes the benefits of a biometrically authenticated payments infrastructure. They studied the impact of a randomized rollout of smart cards in Andhra Pradesh. The biometric smart cards brought about a substantial decrease in the number of “ghost” beneficiaries and achieved a faster, more predictable and less corrupt payments process. The reduction in leakages amounted to eight times the cost of implementing the smart-card-based system.
More than the actual quantum of leakages—which are large anyway—the benefits of social welfare programmes are lost because of poor targeting. The result is a combination of inclusion and exclusion errors. A study by the Accountability Initiative, Centre for Policy Research, finds that in the fiscal year 2010-11, the four states of Uttar Pradesh, Bihar, West Bengal and Madhya Pradesh, accounting for 59% of the total rural BPL (below poverty line) population, could avail of only 34% of total person-days employment generated under the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS). In the same year, Andhra Pradesh and Tamil Nadu, together home to only 8% of the rural BPL population, generated 23% of person-days of employment. The extent of leakages and inefficient targeting warrant the intervention of technology.
Reforming the state delivery systems and checking corruption using conventional means in large states such as Uttar Pradesh and Bihar with entrenched vested interests is easier said than done. On the other hand, technology-enabled solutions can help not just plug leakages in laggard states, but lower the enduring leakages in better-performing states as well.
Another argument against cash transfers is that there are fewer bank branches than other means of availing benefits, say PDS shops. It is nobody’s argument that PDS shops will be replaced by cash transfers without adequate support systems. The government has made it clear that it intends to shift to cash-based transfers with the help of the JAM trinity—Jan-Dhan Yojana, Aadhaar and Mobile. The revolutionary spread of mobile phones in India offers an unprecedented opportunity for redesigning state delivery mechanisms. Governments across the developing world are now using mobile phones to deliver state services.
A last argument against cash transfer is against cash itself. Replacing food, for instance, with cash is deemed as abstinence by government from providing the essential goods and services. To the contrary, cash empowers the beneficiaries to make their own choices. The last thing a government should do is to behave as a nanny to its poor citizens and dictate their choices. A related argument is that the beneficiaries will squander the cash on liquor and drugs. Multiple studies dispel this apprehension. An analysis of 19 studies across the world by David Evans and Anna Popova of the World Bank did not find cash transfers leading to any statistically significant increase in spending on alcohol or tobacco.
Meanwhile, in India, the Supreme Court as well as a number of activists have raised concerns over the possible breach of privacy with en masse collection and storage of biometric information. Indeed, the government should address the privacy concerns by introducing an appropriate legislation. Most of the other criticisms of cash transfer, however, fall flat on closer scrutiny. The Supreme Court has, for now, allowed the use of Aadhaar cards for MGNREGS, Jan-Dhan Yojana, pension and provident fund schemes, along with subsidy transfer for foodgrains, kerosene and cooking oil. The government should persist with efforts to broaden its ambit, as it is a goal worth pursuing.
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