CASH TRANSFERS: MIRACLE OR MIRAGE?

Photo: Mint

The success of cash transfers will depend on how well the

government addresses design bugs
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mirage?&body=http://mintonsunday.livemint.com/news/cashtransfers-miracle-or-mirage/2.4.2378598053.html) Pramit
Bhattacharya

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
Indias 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 But the invitation was revoked at the last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
(http://timesofindia.indiatimes.com/india/Centre-invites-critic-JeanDreze-to-economics-meet-then-snubshim/articleshow/49696146.cms)).
Dreze, in turn, published a scathing critique
(http://thewire.in/2015/11/06/jam-and-the-pursuit-of-nirvana-14873/)
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 peoples entitlements, become a stepping stone
towards state withdrawal from many essential services, adding that

some inuential economists are advocating precisely that.

Why has cash transfer become such an important policy tool in
India? Is it a miracle cure for Indias 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
(https://casi.sas.upenn.edu/sites/casi.sas.upenn.edu/files/bio/uploads/The%20Case%20for%20Direct%20Ca
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, Indias 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
(http://www.indiaenvironmentportal.org.in/files/Direct.pdf) 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
(https://casi.sas.upenn.edu/sites/casi.sas.upenn.edu/files/bio/uploads/More%20on%20Direct%20Cash%20T
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
(http://www.epw.in/sections/special-issues/perspectives-cashtransfers) 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 oldage 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 targetingthe
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 inuence 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
(http://www.epw.in/commentary/will-jam-trinity-dismantlepds.html), 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
(http://www.undp.org/content/dam/india/docs/poverty/Final-studyresults-SEWA-PDS.pdf) 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
(http://www.princeton.edu/~joha/publications/Haushofer_Shapiro_UCT_2013.pdf)
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 Indias 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
(http://www.epw.in/system/files/pdf/2015_50/30/Socio_Economic_Caste_Census.pdf)
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 afuent (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 inkind 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

(http://fci.gov.in/app/webroot/upload/News/Report%20of%20the%20High%20Level%20Committee%20on%2
on restructuring Indias 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
(https://casi.sas.upenn.edu/sites/casi.sas.upenn.edu/files/bio/uploads/The%2BShift%2Bto%2BCash%2BTran
%2BDK.pdf)), 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 agriinvestments, if the existing procurement and distribution system is
replaced by a cash transfer regime. Merely moving towards piecemeal 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
Indias 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.
(http://mintonsunday.livemint.com)
Ultimately, of course, the debate on cash transfers can only be settled
by ECONOMICS
empirical evidence.
EXPRESSThe government must invest in statistical
Sun, 22 Nov 2015
systems that can provide a credible picture of the impact of cash
transfers across Indias 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 uninching 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.

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