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The 'Cash Transfer Scheme' debate

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Of course, cash transfers have advantages too: they have lower transaction costs, more convenient for migrant labour, and might be easier to monitor. Sometime in the future, when the banking system has a wider reach and a more ambitious social security system is developed, with large income transfers that cannot be made in grain (because people can only consume so much of it), a cautious transition to cash transfers may be advisable. But this future is quite distant still, and for the time being, food is the best.

For the full text of the blog by Mr Jean Dreze in 'Down to Earth' magazine, click here

Finally, Mr Dreze has condescended to accept that cash transfer has advantages too, even as all right thinking people, across the country, had foreseen the benefits long ago. It is he and his NAC which had been blocking its implementation all these years, earning poor Manmohan Singh a bad name in the process. Realising that things are heading no-where, Madame Gandhi appears to have released Manmohan Singh from the clutches of Dreze and his lot, and finally, we seem to be headed in the right direction. Perhaps, Mr Dreze's team has continued beyond its sell-by date.

Muralidhar Rao


murali772's picture

a balanced analysis

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Many glitches will arise in rolling out such a scheme. Some pilot projects have already tested different transfers in different areas, and corrected the glitches. But more experimentation is needed. The danger is that the scheme will quickly be extended to the whole country in half-baked shape simply to help the election prospects of the Congress. This can mean a flawed CTS that later needs overhaul.

The biggest danger is that CTS will not substitute existing subsidies but add to them. Vested interests will resist winding up any existing delivery mechanism. So instead of substituting subsidized kerosene or LPG with cash, politicians might provide both cash and subsidized fuel. Ditto for subsidized food, electricity, and dozens of other items. Such populist excesses would serious strain already stretched government finances. Provided this is avoided, cash transfers should be a big success.

To access the text of the blog by S R Aiyer in the SToI, click here

A balanced analysis, as generally to be expected from Mr Aiyer

Muralidhar Rao
murali772's picture

the size of the subsidy bill

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In his 2012-13 Budget speech, Finance Minister Pranab Mukherjee said the government would restrict subsidies to “two percent of GDP”. Can it? GDP in 2012-13 is estimated at Rs.101 lakh crore. Two percent of that is just over Rs.2 lakh crore. If the government sticks to the Budget, India’s total subsidy bill should be no more than Rs.2.02 lakh crore.

Let’s do the math. There are four broad categories of subsidies: food, fuel, fertilizer and welfare schemes.

- - - Taken together, food, fuel, fertilizer and welfare subsidies amount to Rs.3,23,000 crore – over 3% of GDP, 50% higher than the government’s budgeted figure. This excludes the proposed food security bill and the controversial formula to measure the number of people living below the poverty line.

- - - In principle, direct cash transfers are a good way to bypass corrupt middlemen. Many countries, notably Brazil, have proved this. But without a strong backend in place, it will not work.

As several development economists, including Jean Dreze, a former member of the National Advisory Council (NAC), have pointed out, a combination of physically-delivered subsidies, with mechanisms to cut out middlemen-fraud, and incremental direct cash transfers is the way to go till Aadhaar develops a robust technological backend.

For the full text of the blog by Minhaz Merchant in the ToI, click here

Hopefully, as Aadhaar rolls out and stabilises, we will be able to get a better grip on the various subsidy schemes, and eventually phase out many of them too.

Muralidhar Rao
Sanjeev's picture

How Aadhaar will help & more schemes are announced by Govt, then

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If I do't have an Aadhaar, what will happen, maximum I  will not  get the subsidized LPG, in which case I may have to pay additional say 5K per Year, with my income level & spending on other things,  do I need this???

Other wise as Citizen myself  who pays tax regularly & does not avail the reservation facility,  how Aadhaar is going to deprive me of any facility after having PAN, Voters Card, DL, Passport. 

As usual govts keep on announcing the schemes to  get votes,  so like Rs 2/- per Kg of Rice,  Free TV / Laptop / Tablet PC /  Solar Lights / Electricity for Pumpsets / Interest waver.

60% Concession for Students & Sr Citizens who travell in Calcutta METRO &  not applicable to other places.

Definition of Sr Citizens : 60 Yrs for GOI,  65 Yrs for GOK,  some places its 62  Yrs. Some places like Kerala 58 is retirement.

Over and above the wrong concept by our Finance Minister   as Taxable Income ( which does not include Agri, Rents, Interest in PPF accounts )  which finally determines the eligibility for Govt schemes.

Even if the amount gets transfered to Bank A/c,  what will be the checks if the  citizens expiers. 

Can not imagine what's going to happen on subsidy bill escalations???


kbsyed61's picture

Subsidies are needed!

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You have mixed up the issues. Basically you are asking 2 basic questions:

  1. Why should Aadhar be the only way to get govt subsidized good and services?
  2. More fundamentally, why should there be subsidy in its first place?

Let me try to answer the Q#2 first. Governments subsidizing goods and services is nothing new and is done in many countries. Even some countries are called 'Welfare State". Even the mecca of Capitalism, USA, which these days we would love to quote and compare, runs a series of welfare measures to lend a helping hand to those who needs it. Giving subsidies to agriculture and dairy farmers to Food stamps, from subsidized housing to unemployment benefits is the hallmark of US govt. One reason republicans lost the presidential election was economical weaker sections feared that If Romney wins, they will have to lose the state welfare schemes.

One thing every intellectual, social scientist, economist and politicians agree is, governments must help those who are at the bottom of the economic pyramid. But they do differ in how and when to help. In Indian context most of this help is in the form of goods and services. Due to inherent bureaucratic structure and opaque culture every subsidy is laced with inefficiency, corruption and pilferage. Added to that there is an element of real/fake beneficiary, which completes the tragedy of Indian subsidies.

Due to the current system of subsidy, even the person who doesn't need subsidy also avails it. As you said, LPG cylinder subsidy, is availed by everybody? Poor, Rich, Millionaire/Billionaires, every body avails it. I am yet to hear any rich family refusing the subsidized LPG cylinder with consciously. Similarly subsidy on petroleum products are mostly benefited by the rich and elite.

Therefore, it is time govts start re-looking at subsidies and the whole delivery mechanism. The goal should be that subsidy will be given to only who deserves it and only the deserving gets it.

In that context, identification of real beneficiary is an important step and it is a must if you want to ensure that only the deserving gets it. Government in its wisdom has decided to use the "Aadhar" number citing the advantage it has in terms of ensuring the uniqueness of it to a great extent.

Now the delivery mechanism of subsidy is mired into Indian bureaucratic maze and corruption system. It is evident that the system is inefficient and urgently needs replacement with more efficient mechanisms. World over subsidies in the form of cash is also prevalent and data seems to suggest it address the inefficiency issues to a large extent.

If the proposed scheme helps remove the inefficiencies and the deserving gets the help, why not? Launch hiccups, starting pangs all will be there but govt should hold its ground and move forward to make it better. My only worry is mid-way, plans are folded up and another scheme is tried. Enough time should be given for the scheme and roll out to make a case for continuing or not.

As the comment is getting long I will address the Aadhar requirement in the next comment.

kbsyed61's picture

Aadhar Vs Voter ID, Passport, PAN Card?

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A lot has already been said about Aadhar exercise. As usual there are voices of opposition citing lack of parliament nod, security concerns, usual voices of paranoia and invasion of govt into pvt lives etc. All are not without substance, certainly there are issues that demands satisfying answers

Other wise as Citizen myself  who pays tax regularly & does not avail the reservation facility,  how Aadhaar is going to deprive me of any facility after having PAN, Voters Card, DL, Passport.

I do not know why reservation is in question here, but each ID facility mentioned here is not meant for everyone. More importantly each one of them has exclusion by its purpose.

Voter ID cards - For population above 18 yrs age

PAN Card - For Tax Filings

Passport - For travel outside India

None of them has the features of universal mode of identification available for 'Every citizen/resident' who desires for. Therefore positioning of Aadhar as universal ID can not be ignored here, moreover none of the exiting ID systems offers the uniqueness that Aadhar offers - 10 Finger prints, 2 Iris etc.

To Sanjeev's question of utility of Aadhar for persons like who doesn't avail govt subsidy's or govt's largesse, answer is, at this moment is 'Nothing'. Reason being Aadhar is still to become the universal ID for all the purposes listed there. But slowly it will become one.

Here is an interesting info from UIDAI:

Hope we look at these things in a perspective not with our personal, social biases and prejudices.


kbsyed61's picture

A first hand report!

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Here is a first hand report on Aadhar coverage and direct cash transfer scheme. Per my Father-in-Law who lives in village in Andhra Pradesh, there is almost 90% coverage of Aadhar enrollment. More interesting information was about coverage of bank accounts which is 100% for the Cash transfer beneficiaries. Per initial information all the beneficiaries got the cash transferred to their bank accounts.

Whatever may be the reason, the place is now going to have an ATM soon. Though it already has a SBI branch in addition to a co-operative bank. There is news about 8-10 new bank branches (of different banks including private ones) are being opened in the nearby villages and towns. At least these rural areas would have the benefit of banking services available at a closer location than before.

It is still a long way for anybody to declare  a verdict on 'Direct Cash Transfer' scheme, but it has already started creating newer dynamics and could as well be game changer in bringing banking services to hinterlands. Which was kind of unimaginable and mission impossible just a year ago. comment guidelines

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