This article may have sounded well over the moon a few years back. But now, thanks to recent government initiatives on total financial inclusion (TFI) and unique identity number (UID), it may be possible to design an approach that dramatically enhances the ability of governments to effectively target and deliver welfare.

Administering welfare benefits in a massive and complex country such as India poses enormous challenges. In an effort to eliminate leakages and target the delivery, policymakers design programmes that apply uniform standards for selecting beneficiaries, which have multiple layers of monitoring mechanisms, and which enforce strict guidelines outlining the actual process of delivery.

Illustration: Jayachandran / Mint

The result is a tangle of bureaucratic woes that ironically enough increases inefficiency and spawns both rent-seeking and pilferage. The challenge lies in balancing the tangle of norms, components and guidelines with all its complexities on the one hand; on the other, ensuring that the programmes run smoothly and are properly monitored.

The inefficiencies in government welfare schemes are twofold—inaccurate targeting of beneficiaries and leakage in the actual delivery. The former manifests as ineligible, duplicated and even fictitious beneficiaries, and the latter as beneficiaries getting less or claiming more than their actual share of benefits.

Fortunately, UID and TFI, coupled with conditional cash transfer (CCT) schemes, make it possible to achieve a paradigm shift. The high-profile UID project under Nandan Nilekani proposes to allot a unique number to each citizen over five years. A UID-linked multi-purpose smart card, readable with a biometric scan, will help accurately target beneficiaries and save the massive transaction costs associated with such delivery processes.

The equally ambitious TFI programme seeks to provide access to formal credit mechanisms, by opening a bank account, to every family below the poverty line. The various welfare benefits can be directly transferred into the respective accounts of beneficiaries without pilferage.

The missing piece in this jigsaw is CCT that converts all welfare benefits into cash and directly transfers it to the recipients, conditional to their achieving certain health, educational, nutritional and/or other outcomes. The direct cash transfer will ensure that wastages and pilferages are minimized. CCT programmes are already the most discussed idea in development policymaking, rising to prominence with their considerable successes in Brazil and Mexico over the last decade. Nancy Birdsall of the Washington, DC-based Center for Global Development has described CCTs as the “closest you can come to a magic bullet in development"; it is widely acclaimed as the most effective poverty-fighting strategy.

This “magic bullet" triptych of UID-TFI-CCT would enable the government to deliver a wider range of welfare assistance such as price and interest subsidies, matching contributions, tax credits, lump sum transfers, externality credits and vouchers in addition to the regular types of subsidies.

This will eliminate the need for differential pricing and price controls—which cause price distortions and spawn black markets—that normally characterize subsidy regimes for goods and services. The beneficiaries can purchase the product or service by paying the regular market price and then get the subsidy reimbursed into their account after validating their UID numbers. To adjust for inflation, the subsidy rates can even be benchmarked to consumer price indices or some other index.

Accordingly, cross-subsidies on a number of goods and services can be eliminated, the administered price mechanisms dismantled, and market prices can prevail. For example, free power to farmers, which distorts numerous incentives, can be more efficiently delivered this way. The government can clearly define the number of units of free or subsidized power and charge any additional consumption at the prevailing agriculture tariff. Farmers would pay this tariff on their consumption. They could then produce their consumption bills at, say, the local electricity collection centre, and claim the proportionate tariff subsidy as a refund into their UID-linked account after validating their identity.

This approach also offers the flexibility to vary the rate and extent of subsidies for different categories of farmers and restrict it to specific time periods (say, crop seasons). Governments can adopt a similar approach to efficiently deliver subsidies for municipal water supply, fuels, agricultural inputs such as fertilizers, and so on.

It would enable governments to levy and increase taxes on certain goods and services without adversely affecting market incentives or making the tax structure too regressive (since taxes on consumption disproportionately affect the poor). The subsidies on these consumption expenditures can be delivered as tax credits into the UID-linked account.

Over time, there will be a network effect arising from more use of the UID database for the delivery of different welfare and other (even private) services. Since one service uses it in a specific area, another related service may do so too—the new agency screening beneficiaries for their eligibility based on the existing services. Technologies such as mobile phones and the Internet could be harnessed to target customized assistance based on existing information from the database.

The UID-TFI-CCT triptych has the potential to be the game changer in delivering welfare. It will give a much greater bang for the development buck by lowering administration costs, ensuring better targeting, plugging leakages, and minimizing the market distortions arising from direct government interventions.

Gulzar Natarajan is a civil servant. These are the author’s personal views. Your comments are welcome at