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Business News/ Opinion / Online Views/  The dubious promise of cash transfers

The dubious promise of cash transfers

The welfare gains for the poor from substituting subsidies by cash transfers are likely to prove illusory

The case for cash transfers rests on the claim that PDS is inefficient both in reaching intended beneficiaries and in the costs it incurs. Photo: Indranil Bhoumik/Mint (Indranil Bhoumik/Mint)Premium
The case for cash transfers rests on the claim that PDS is inefficient both in reaching intended beneficiaries and in the costs it incurs. Photo: Indranil Bhoumik/Mint
(Indranil Bhoumik/Mint)

The debate on cash transfers versus transfers in kind, such as the delivery of foodgrains through the public distribution system (PDS), is far from settled. While the government has ruled out converting existing PDS entitlements into cash at the moment—and is committed to passing the National Food Security Bill (NFSB) in Parliament—the voice of those who argue for shifting towards cash transfers is growing louder. This is particularly relevant as the existing NFSB does allow shifting of in-kind to cash transfers. The issue gains salience as the push towards direct benefits transfer (DBT) is viewed as a precursor of converting the PDS into a cash transfer scheme.

Unfortunately, the debate on cash versus in-kind transfers has not been argued with sufficient empirical clarity. The case for cash transfers rests on the claim that PDS is inefficient both in reaching intended beneficiaries and in the costs it incurs. But this is barking up the wrong tree. A large part of the problem in beneficiary selection is not only due to wrong targeting but also because of the arbitrary capping of beneficiaries by the Planning Commission. In fact, there is now strong evidence that states that have universalized their PDS and reduced food prices have also managed to eliminate leakages to a great extent.

Similarly, there is now sufficient evidence that the Food Corporation of India (FCI) is not as inefficient as it is made out to be. Except for 2004-05, in most years for which data is available, the economic cost of foodgrains supplied by FCI has been lower than the prevailing market prices. This is despite the fact that FCI pays the minimum support price to farmers and taxes to governments and local bodies that private traders and companies often do not. It incurs much higher costs on account of long-distance transportation and much larger storage obligations than the private sector does.

More importantly, many of the arguments against PDS ignore two basic facts. First, those who use PDS complain less than those who do not, and PDS does provide real purchasing power to the poor, particularly those at the bottom of the heap.

A 2010 study by the National Council of Applied Economic Research shows satisfaction levels of about 80% among actual beneficiaries in most states other than Bihar.

A recent study by Jean Dreze and Reetika Khera also reached a similar conclusion. Our own analysis of National Sample Survey (NSS) consumption data clearly shows that PDS alone accounts for a substantial part of poverty reduction between 2004-05 and 2009-10. This is especially so if one uses inequality sensitive measures such as the squared poverty gap (SPG). Food transfers (including mid-day meals) accounted for 32% of the reduction in the Suresh Tendulkar headcount ratio (HCR) between 2004-05 and 2009-10 and 51% of the reduction in the associated SPG.

Moreover, there is clear evidence that among bottom 40% of the households, those consuming foodgrains from PDS are the only group which have seen an increase in calorie consumption. This is significant as there has been a secular decline in calorie consumption of Indians in the last three decades. Although it is difficult to measure the impact on nutritional outcomes due to PDS consumption, the evidence on calorie consumption is sufficiently robust to suggest that if the purpose is reducing the levels of malnutrition, then PDS seems to have had an impact.

While this evidence is clear, there is no counterfactual to test it with what would have happened if India had a system of only cash transfers. A comparison of those with similar consumption expenditure level—after adjusting for implicit income transfer of PDS consuming households—shows that households with PDS access are likely to have significantly higher calorie consumption. Further, a rupee transferred through PDS leads to about twice the increase in calorie consumption than a rupee given otherwise without access to PDS. In other words, if the choice is made between an in-kind transfer and a cash transfer, then same amount of transfer in case of PDS increases calorie consumption by twice compared with a cash transfer.

While this may be strong evidence of in-kind transfers being superior to cash transfers, there is some merit in continuing cash transfers for vulnerable groups. This, in fact, has been the case in India where cash transfers such as social pensions (widow pension, disability pension and old-age pension) have been helpful in enabling households to access basic necessities, including those from the PDS. This, in fact, is also the lesson from the Latin American countries which are seen as successful role models for cash transfers. The level of deprivation in these countries is much lower than that in India; they use cash transfers only to supplement other benefits in an otherwise universal system of providing basic necessities.

The message from available evidence is clearly that DBT is neither a magic wand nor is it undesirable. At the same time, available evidence from the existing pilot testing schemes is one of caution against relying too heavily on technology. Attempts to convert in-kind subsidies into cash subsidies may prove detrimental in the absence of adequate infrastructure such as banking. But even if banking and other infrastructure is put in place, and the purpose is to improve nutritional outcomes, cash transfers are unlikely to be a substitute for PDS. The way out is reforming the existing PDS, not dismantling it.

Himanshu is an assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.

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Published: 14 Mar 2013, 09:07 PM IST
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