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Cash transfers: Miracle or mirage?

The recent economics conclave hosted by the finance ministry in the capital has rekindled the debate on cash transfers in India. Among the invitees to the conclave was one of the most vocal critics of India’s transition to direct cash transfers, Jean Dreze, a development economist and an advisor to the erstwhile United Progressive Alliance (UPA) government. But the invitation was revoked at the last moment for reasons that are not quite clear (bit.ly/1Okx3Y6).

Dreze, in turn, published a scathing critique of the move towards direct cash transfers, warning, “A single-minded focus on high-tech cash transfers as a foundation for social policy in India is fraught with dangers.” He argued that implementation challenges may hobble the cash transfer programme, which seeks to substitute the myriad subsidies the Indian state provides for direct cash transfers to beneficiaries. The cash transfer scheme risks excluding vulnerable groups and poorer people from the ambit of social protection schemes, Dreze wrote. He also warned that cash transfers may dilute people’s entitlements, “become a stepping stone towards state withdrawal from many essential services”, adding that “some influential economists are advocating precisely that”.

Why has cash transfer become such an important policy tool in India? Is it a miracle cure for India’s poorly functioning and leaky social security system, as some of its proponents suggest? Or is it a mirage as Dreze and other critics suggest?

The most powerful case for cash transfers came in a 2008 Economic and Political Weekly (EPW) article by economists Devesh Kapur of the University of Pennsylvania, Partha Mukhopadhyay of the Centre for Policy Research, and Arvind Subramanian, chief economic advisor to the finance ministry.

The trio argued that despite several long-running anti-poverty programmes, India’s record against poverty has been less than stellar because of the leaky nature of many of these interventions. Hence, the time had come to whittle down the number of centrally sponsored schemes, and use up the saved resources to fund a direct cash transfer programme. If the Rs180,000 crore spent on centrally sponsored schemes and food, fertilizer and fuel subsidies in that year were distributed equally to the 70 million poor households, it would mean a monthly transfer of over Rs2,140 per household, enough to pull them out of poverty, they wrote.

Arguing that the poor should be trusted to use these resources as they deem fit, the authors argued for a two-pronged decentralization of state funding: direct cash transfers to individuals, backed by complementary funding to local governments.

In a rebuttal published in the same journal, the former Planning Commission member Mihir Shah argued that channelling all or even a large fraction of development funds directly to beneficiaries would mean ignoring important public infrastructure and rural development projects. Also, expecting weak local governments to implement development projects is a tough ask, Shah argued.

In their reply to Shah, Kapur, Mukhopadhyay and Subramanian pointed out that they did not advocate that the government should stop providing for public goods, such as rural roads, which are needed to complement the effect of direct cash transfers. They also argued that local governments can be expected to reform once they are provided the resources and mandate to undertake development works.

The debate on cash transfers has only intensified since then, with many of the arguments for and against cash transfers, appearing in the pages of the EPW, which published a fantastic special issue on the topic in 2011.

Critics of direct cash transfers agree that cash transfers can be a useful tool for some welfare benefits, such as scholarships and old-age pensions, but do not see a much larger role for cash transfers in India. They make six key arguments.

First, an unconditional direct cash transfer scheme relies heavily on technology and infrastructure, which may not be available in all areas of the country.

Secondly, even if technological constraints are addressed, technological fixes cannot solve the vexed problem of targeting—the problem of identifying beneficiaries correctly. While biometric cards may weed out bogus names from the list of beneficiaries, the government will still need to identify a credible mechanism to identify beneficiaries that does not leave out a large section of the poor.

Thirdly, providing cash to the poor may lead to wasteful consumption (such as on alcohol) rather than on essentials, such as food.

Fourthly, critics argue that the influence of local power brokers, which hamper the delivery of many existing schemes, can also thwart effective implementation of cash transfer programmes. Jawaharlal Nehru University (JNU) economist Jayati Ghosh pointed out in an EPW article that actual payments for the rural employment guarantee scheme are often lower than the sanctioned amount even when they are linked to bank accounts of beneficiaries in some parts of the country. Forcing poor people to receive only a fraction of cash transfers could be possible at least in those areas, Ghosh warned.

Fifthly, critics point out that applying the lessons of Latin America to India is fraught with dangers because countries such as Brazil where cash transfers have succeeded are predominantly urban, unlike India. Rural markets for essentials, such as food items, may often be imperfect, necessitating in-kind transfers by the state, critics argue.

Also, in countries such as Brazil, cash transfers have accompanied a gradual expansion of the state (especially in sectors such as health and education) to provide a demand-side boost. In India, cash transfers are expected to be accompanied by a contraction of the state, and the effects are therefore likely to be different.

Finally, critics point out that replacing subsidies such as those on fertilizers and food with cash transfers may have adverse effects on the food economy. If withdrawal of state support for production of food grains leads to a fall in production, it may lead to expensive imports. Hence, implementing a cash transfer programme without consideration of the impact it would have on food security is fraught with dangers.

Among the objections, the objections about implementation challenges and the use of technology are the weakest. Any reform of welfare programmes involve the use of new technology and teething challenges. Indeed, irrespective of whether one advocates cash transfers or reforms of existing in-kind transfer programmes, such as the public distribution system (PDS), one would necessarily have to rely on several technological fixes. Chhattisgarh, which is widely hailed as a successful PDS reformer, made extensive use of technology to minimize leakages in its distribution system.

As Silvia Masiero of the London School of Economics and Political Science argued in a recent EPW article, the JAM trinity can be used to reform PDS as it can be to roll out cash transfers. Masiero pointed out that both Karnataka and Kerala have used elements of the JAM trinity to reach intended beneficiaries and to monitor delivery of food grains more effectively. JAM trinity refers to the Jan Dhan Yojana bank account number, Aadhaar unique identity number for every resident and a mobile phone number.

Evidence from a UN-sponsored 2011 survey on cash transfers in a Delhi slum suggest that the introduction of cash transfers may not lead to a decline in food consumption, or an increase in wasteful consumption, as some critics fear. The beneficiaries in fact spent more on food, purchasing a more diversified food basket than before.

A widely cited 2013 study on the impact of cash transfers in Kenya also records similar results, with monthly cash transfers leading to improved levels of food security and lower levels of mental stress among beneficiaries.

On the question of targeting, there is a broad consensus among both proponents and opponents of cash transfers that India’s record in targeting the poor has been quite dismal, with many poor people excluded from below-poverty line lists, and many non-deserving households finding their way into those lists. The socioeconomic caste census was supposed to take care of these problems, but large discrepancies in the data raise questions about its credibility.

In the absence of a credible mechanism to identify poor households, most economists recommend a universal social safety net (whether it be in kind, or through cash transfers) or a near-universal programme which provides income transfers to everyone except an easily identifiable set of the affluent (such as income-tax payers, government employees and owners of motor vehicles).

The argument that food markets may not work effectively in all areas of the country, requiring state-led distribution networks to provide in-kind food transfers is acknowledged even by many proponents of cash transfers, who advocate a gradual shift to cash transfers, starting with areas with well-functioning competitive markets. The Shanta Kumar committee report on restructuring India’s food procurement and distribution system, for instance, recommended a shift to cash transfers initially in the large cities.

Some proponents of cash transfers have also underscored the need to think through the question of how cash transfers will impact food and energy security of the country. In another of his EPW articles (bit.ly/1MtSgy6), Kapur, for instance argued that the real promise of cash transfers will bear full fruit only when India is capable of a new strategic vision on food and energy security.

Kapur argued that the government must consider alternative approaches to food security (such as through long-term forward contracts in international markets) and higher levels of agri-investments, if the existing procurement and distribution system is replaced by a cash transfer regime. Merely moving towards piece-meal replacement of subsidies with cash transfers smacked of tactics without a well-thought out strategy, wrote Kapur.

Given that a move towards cash transfers entails a transformation of India’s social contract, it is imperative that the government spell out its broader vision on the pace and sequencing of reforms, and the implications for the wider economy. Rather than shutting out voices of criticism, the government must engage with its critics, and make an honest effort to respond to their concerns.

Ultimately, of course, the debate on cash transfers can only be settled by empirical evidence. The government must invest in statistical systems that can provide a credible picture of the impact of cash transfers across India’s state and districts across time.

One of the big lessons from a Latin American success story in cash transfers, the Oportunidades Program of Mexico, is that big-ticket welfare reform can be politically sustainable, and can withstand shifts in political winds if the aims and objectives are clearly spelled out, and the outcomes carefully measured.

In their analysis of the political economy of Oportunidades for an International Food Policy and Research Institute (IFPRI) publication, Mexican social scientists, Iliana Yaschine and Monica Orozco pointed out that despite bitter polarization within the Mexican polity, there was widespread consensus and unflinching budgetary support for the programme.

“Some of the reasons consensus was built about the positive nature of Oportunidades are related to the impartiality of its targeting method, the effectiveness of its operation, and the positive results from evaluations delivered by external academic institutions using rigorous research methods,” the duo noted.

Economics Express runs weekly, and features interesting reads from the world of economics and finance.

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