How effective is direct cash transfer scheme for below-poverty-line families in India?

Social Safety net programmes like pensions to the aged poor, food aid, free health services are an essential part of any State. Social safety nets are not means to necessarily engender development; they are meant to prevent the poor from further falling off the radar. In India they are an indispensable part of poverty alleviation and have been since independence. Corruption has always accompanied social safety net programmes (and others too but these are not under discussion here). It is not difficult to understand why. In the first place the power imbalance between the recipient and the giver (government) or even the conduit (the bureaucrat) is vast and the recipient cannot always protest any shortcomings. Second, asymmetry of knowledge of the entitlements - often the giver knew more than the receiver and that meant sometimes that entire amounts could be siphoned off. Third, both receiver and giver, looked at the money / food as 'extras' and some parts going amiss were not to bothersome. The fact is that the safety net protection is actually a right of the receiver and a duty of the State was conveniently forgotten or just not known. Once you assume that social safety net programmes are important, it is only the mechanism that needs to be worked on. For the last six odd decades in India the omniscient, omnipotent Government used to decide what was good for the poor - 5 Kgs rice, 2 kgs sugar, 10 litres of kerosene etc. This stuff would come through Public Distribution System shops and were available on production of a ration card. We all know about the leakages in the system and how a significant portion never reached the poor. What is not readily known or appreciated is that the poor have needs that go beyond what the system has decided for them. So it is natural to expect that the poor decide, rationally, that they should sell off part of the Kerosene and buy clothes with that money. I have seen this happen in responses to humanitarian disasters too; NGOs / governments distribute say Wheat to the people in camps who promptly sell part of the wheat to buy oil, salt and lentils. If safety net programmes have to be run, the best approach is cash transfers. [1] Not only it is easier from the logistics angle (moving cash easier than moving tonnes of food stuff), it is also very good from the pov of dignity of the recipient. We MUST assume that the poor are rational, economic creatures and they know what is best for them. More importantly there is no reason to assume that you know more about what is good for them!  Cash transfers can be conditional (you get 'x' if you do 'y') or unconditional (you get 'x' every month). That does not matter and it depends on the purpose of the transfer. If the cash transfers are done well and are based on the Unique Identity system, they will eliminate middle-men and reduce if not eliminate leakages. Now coming to the question of 'bribing of voters'. The cash transfer proposed, to a large extent, replaces existing schemes with a new way of doing things. Since these were pre-existing, they cannot be called bribing unless the older ones were bribes too. Is the Government taking credit for the direct cash transfers as something that shows its heart bleeds for the poor? Sure. Would you not? Is the opposition screaming blue murder? Sure. Would you not? If the roles were reversed, the situation would not change. Just the screaming faces would be different.To conclude.If we have to have social safety net programmes, which we must in a civilised society, the best way to do it is cash transfer simply because it eliminates a lot of middlemen and reduces avenues of leakages. it transfers decision making and restores dignity to the poor who can now decide what they want to do with the money - buy food, educate kid, marry daughter, settle debts, get drunk; its their life and their decision. There will be leakages, accusation of bribing etc. That will happen even if new schemes are announced. We need to go with the flow and plug gaps as we see them.[1] http://oxfamblogs.org/fp2p/just-give-them-the-money-why-are-cash-transfers-only-6-of-humanitarian-aid/ 

Government giving dole to unproductive people is always bad. However compared to the million schemes and subsidies government provides which never reach the end user, direct cash transfer will give the poor people a choice about their services. For example instead of staying in long queues and buying the subsidized rice, the poor man can now go to a shop of his choice and buy the quality of rice he wants. Choice is always good. Secondly, some people will be able to save that money for future. Instead of using it for daily needs they might let it accumulate and use it for various other purposes. Note: I have not really read in depth about this new scheme. I assume that government is going to scrape all the subsidies and dole and replace it with direct cash transfer.

Ok. I think this question needs to be put in perspective. First, the Government of India has decided that for now, cash transfers will not be introduced to replace PDS. So PDS is just in-kind transfer of food. The opposition is for the same reason as you have put in your comment. Many states such as Kerala, Tamil Nadu Chhattisgarh had opposed it, and even Uttar Pradesh and Bihar did the same once they realized that this may be combined with National Food Security Bill, which covers only 67% of population (75% of rural population and 50% of urban population). The reason is that while Tamil Nadu, Kerala and Chhattisgarh have near-universal coverage of population under PDS and so their schemes will be affected if cash transfers are put as it becomes cumbersome to coordinate with a Central scheme and it can have a political fallout during elections. For Uttar Pradesh and Bihar, the issue was that they did not have enough money of their own to run this scheme and would like the Centre to bear it but after near-universal coverage and then get a political reward for it in the form of victory in elections. Second, cash transfer schemes are only being run for those Central government schemes where the States have a negligible role to play or are themselves dependent on Central government for funds. So for example, if a State runs a scheme based on amount obtained from Central government, then it has no choice but to accept a cash transfer. So scholarship schemes, pension schemes and/or cash transfer schemes to children if they complete certain standards of education are being conducted through cash transfers, but even MGNREGA, a major flagship scheme of Central government is not being conducted through cash transfers because of the fear that if many laborers are not able to get their due wages because of issues in matching of fingerprints due to a variety of reasons, then it can backfire politically also. But I don't know how these issues will be resolved in future unless the Central government decides to not introduce cash transfers at all in these schemes. And all cash transfer schemes are linked to Aadhaar so we can't think of them separately from Aadhaar as issues with Aadhaar are also issues with cash transfers, in a way.

I doubt the credibility of the scheme due to no proper system in place.I don't know & even can't predict how much of the cash will ultimately reach the poor but all I can say is this is a very intelligent move politically by UPA -2 ahead of the 2014 polls. If benefits reach to the one's who need them who knows this can be a really good move socially & economically too....

The government is only going to begin this scheme with payment of pensions, scholarships, education loans etc, which are low cost deliverables as they are already monetised. PDS will still continue to function, at least for now. A lot of factors have to be taken into consideration to predict its success in India. Some of them are- 1.linking of bank accounts with aadhar card. 2.Taking into account the price differential of various products such as rice, oil etc in different parts of the country so that the different sums can be deposited in different states. 3.A good follow is also imp, as the govt needs to make sure that the money is being spent for the right purpose. 4.Different from PDS as it may also contribute to inflation (Multiplier effect)!! But it also should be noted that it will definitely remove some of the middlemen and will increase the efficiency and accountability of the entire procedure! Lets hope for the best.

"Direct Cash Transfer " ,as the name suggests will involve direct deposition of cash into bank accounts of the people covered under the scheme.This is scheme will go a long way in dissuading black marketing,hoarding and will give more way to accountability as the scheme is UID enabled which would go a long way in solving problems if identification of the poor which the government faces across many levels. Banks ,both public and private have not been so keen to move to the rural hinterlands of the country will have an incentive where they will have to spend a considerable lesser amount of time in the identificcation process. The subsidies on fuel ,food and fertilizers which account for 2.3 percent of GDP face an acute problem of leakage to ghost accounts right from the top of the pyramid to the bottom which will be curbed. There are however strong oppositions to the same as well : 1.Unrealistic timelines laid by the government. 2.Failure of cohesion between scheme implemetation and opening of bank   accounts. 3.Failure of pilot projects. 4.Inflationary aspect,where if a sudden rise in the price of a prticular product will have an inverse impact on the quantity that can be bought with the amount of cash disbursed to the account .Furthurmore,there will be a time lag in case the cash has to be increased. So ,the government has to  bear in mind of the same aspects before making any leap towards the country wide implementation of the same.

Govt of Pondy decides to deposit 300 rs cash into bank accounts instead of supplying ration rice (comes under Public distribution system). This is very tricky. If the govt is keen in remove subsidy and freebies why they need to give allowances? With 10-20 kg of rice a small family can adjust for even one month but how long can they sustain with mere 300 rs. If the man of that poor family is a drunkard he will spend everything on drinks and the money goes back to the Tasmac economy!! great!!! How the women and children will survive!! This will never going to benefit poor. When the economy grows and the price of the consumer product increases the govt will not increase the allowance accordingly. Instead it will pass the burden on the shoulders of people. At least will it benefit the farmers in someway the answer is big no. The traders and wholesale dealers will enjoy ample profit from all the sides (farmers, poor and taxpayers). If the govt decides to starve the people it will hit back the political stability of a welfare state after all India is not a developed country. It will directly impact the life expectancy and infant mortality of people belong to BPL. There will be increase in crime rates and violence. In short its a lose-lose situation for poor as well as taxpayers. Beware. The claim on direct money transfer helps to regulate unwanted subsidies in case of Public distribution system (ration) is bogus. Rather it might help mishandling of funds or in future creates a situation where the govt completely deserting the weaker section of the society. The higher class community which usually boost such ideas even try to take moral high ground by saying "why subsidize for rich?" good. "we don't need subsidies" good. "so it is right step to stop subsidies FOR ALL" what!!! seriously!!!  "we will never support subsidies but we appreciate the govt depositing some (insignificant) cash (only) to poor on the basis of humanitarian aid"  oh really!!! When the current ruling party during its 2014 election campaign promised to bring back the black money and deposits 15 lakhs in each and everyone's account at that time I never heard anyone whispered the spell "we don't need it give my share to poor". Is it because the said amount was substantially good? Sometime when greed overtakes needs even the standard of moral high grounds gets so low!!! If someone genuinely feel no need of subsidy then they should not use such option like they can buy commodities from private vendor instead of govt subsidized goods. At least they should have little heart to equally question the govt on giving tax exemption for corporate bigwigs!! If it's not double standards then what else could be? I agree with the though " Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime. " Yes it is wise to teach a man to fish. But what is more wiser is to make sure he stays alive til the time he learns how to fish. Govt should have some dignity not to treat people like beggars. Govt must take responsibility for his survival (food,shelter,water) as well as living (education,healthcare,vocational training). 300 rs will neither keep him stay alive nor help him learn fishing. -Arjun Che

An article in newspaper: QUOTE: The direct cash transfers scheme (DCTS), the one truly revolutionary  subsidies reform scheme in UPA-2, is heading for the reefs even before  it has been rolled out. It looks likely to be sacrificed on the altar of  electoral greed. The scheme, which will use the Aadhaar Unique ID card to hand over  cash to beneficiaries, is being rushed through by the Prime Minister  when the implementation machinery for handling millions of subsidy  transfers every month is rudimentary and untested at best. This is happening because of a unique confluence of reformist hopes and aam aadmi political calculations, with Manmohan Singh and Sonia Gandhi symbolising the two ends of the spectrum. Cheered on by right-wing  economists, who see the scheme as a way to reduce leakages in subsidies,  leading to their ultimate reduction, and Congress party opportunists,  who see electoral gains by putting money directly in the hands of the  electorate, the cash transfer scheme is in danger of being hijacked for  short-term ends. It could even end up damaging the long-term goals of  this reform measure. In the process, the economy may end up being horribly damaged as cash  transfers accelerate the shift of resources from exchequer to voter at a  time when growth is slowing down and the government is cutting more  productive investment expenditure to make ends meet. The premature  launch of cash transfers may even mark the end of all other reforms that  were supposedly in the pipeline. The PM backs the scheme because it is supposed to cut down on subsidies by eliminating those not entitled to them, using the Aadhaar identification process. Sonia Gandhi has no such intention – at least before 2014. Her political objective  is not to eliminate any constituency by identifying leakages. She has  bought into the PM’s dream only to the extent that existing subsidies  can be paid out like legal bribes to the voter. As Firstpost noted some time ago, “in all areas where the UID is almost done, cash  transfers will mean every family will get money in the range of Rs  3,000-14,000 per annum, depending on whether they are identified as  below-poverty-line (BPL) cases or people who are better off.” This is why the scheme is being rushed through with a dangerously  inappropriate deadline of 1 January for 51 districts. It will be  cascaded to 18 states by 1 April 2013, and the whole country by the end  of 2013 or early 2014. This is an impossible deadline. Even though the PM has announced that  direct cash transfers will happen in 51 districts from 1 January –  which is less than 35 days away – The Times of India reports that only 20 of these 51 districts are Aadhaar-compliant. The Unique ID  Authority of India (UIDAI) has promised to finish all 51 districts by 1  January, but holding an Aadhaar card is not the same as making the  scheme successful. Here’s why. One, the card merely identifies the recipient as the right  beneficiary. Making payments based on direct cash transfers means having  banking infrastructure in almost every village in every district. Every  beneficiary has to have a bank account. Bankers are not saying they are  ready as yet. Two, it’s not just about sending the cash to the right  account. In a social system where might is right, handing over so much  cash to the poor runs its own risks. While the idea is to credit the  accounts of the women in households, this assumes that the menfolk have  no say over how the money is spent. If people have to trundle several  miles to a bank/ATM branch to collect their cash, the possibility of  their being mugged on the way has to be seen as a possibility. More so  in rural areas where caste thugs abound, and the law and order machinery  is weak. Three, it is also naïve to believe that crooks will not  figure out how to make money from cash- based transfers. In the NREGA  make-work scheme, a large chunk of the beneficiaries have figured out a  way to collect wages without work, so the assumption that cash transfers  will reach the right people has to be tested against ground realities  during actual implementation. The UPA rush will ensure that this does  not happen. Four, the new cash-in-your-account plan will partially  supplant the current system of food procurement and distribution through  ration shops. If all food subsidies are shifted to cash, what will  happen to the elaborate system of giving farmers minimum support prices,  procuring grain from them through the Food Corporation, and supplying  fair-price shops? Will it just be dismantled? Five, a shift to cash could mean major shifts in consumption  patterns even for the poor. When I get wheat in physical form, I use it  to cook my meals or sell it in the open market to buy what I want. But  when I get cash instead of wheat, my family might suddenly switch to  more tastier, protein-rich foods like milk, eggs, or even meat. Not to  speak of vegetables, fruits and processed foods. These were the major  causes of high food inflation in the last few years, but is the  government prepared for this shift? Six, cash makes sense if the only idea is to efficiently  transfer purchasing power from government coffers to intended  beneficiaries, as Shrayana Bhhattacharya and Lant Pritchett write in The Indian Express. But what if your idea is to provide adequate nutrition to pregnant  women, and give them money instead? Will mothers buy the right foods to  ensure they receive the right nutrition or will they just spend it on  food that is cheaper? Would nutritional supplements work better here, or  a mix of food and cash? Seven, unlike in the past, when Sonia Gandhi‘s  National Advisory Council (NAC) was rooting for all kinds of voter  giveaways, this time around people like Jean Dreze and Harsh Mander are  not rooting for cash transfers. They seem to have figured out that Sonia  is not thinking as much about the poor as about their votes. Eight, cash is good, for it makes customers out of poor  supplicants, but the fact remains that in a diverse country like India,  one size may not fit all. Some states have fairly efficient public  distribution systems while others may be handicapped. Should the UPA be  asking all states to opt for cash transfers when some states may be more  comfortable with the existing system? Forget all states, one size may not fit even fit all districts within  the same state. When one end of Uttar Pradesh – the western end – is  richer than the other end – the eastern one – the two may need different  treatment. One state may have a large tribal population, while another  may be fully urbanised. Cash may work better with the latter. The PM knows the problems, but has decided to make a dash for cash  because he knows that Sonia Gandhi’s political support will come only  during election time. This is not to say that cash transfers are a bad idea. This writer  certainly is all for cash transfers provided it is done carefully,  researched, and redesigned before a broader rollout. Also, the effort  must be to specifically eliminate the rich and the middle classes  substantially right in the beginning. The mistake is in trying to rush with a scheme that has been inadequately tested before such a huge rollout. As we noted, Manmohan Singh knows the pitfalls. This is why he spelt out the challenges ahead.  “The twin pillars for the success of the system of DCTs (direct cash  transfers) that we have envisioned are the Aadhaar platform and  financial inclusion. If either of these pillars is weak, it would  endanger the success of the initiative. I would expect the finance  ministry and the Unique Identification Authority to work in close  coordination to achieve a collective goal,” the PM said while clearing  the new rollout plan. But this is only about implementing it to get the money to the voter.  The principal flaw in his view is that he does not emphasise  ‘exclusion’ of the undeserving as much as ‘inclusion’. If the scheme  fails to eliminate non-merit beneficiaries, the government could end up  giving a lot more subsidies to the undeserving. The problem is simple: the system of subsidies has been tough to  eliminate even when half the money does not reach the beneficiaries. How  is it supposed to cut expenditures if the money reaches all the  intended beneficiaries, and without eliminating those who can afford to  pay full prices? Which government has the political strength necessary  to stand up to potential voters and tell them they are not entitled to  subsidies? As an editorial in Business Standard points out, “if it is politically problematic to control subsidies  today, it may become even harder when cash transfers become a reality.”  It adds: “The question that must be asked is: when transfers become  easier for governments to pull off, through Aadhaar-linked bank  accounts, what will happen to India’s public finances?” It is worth recalling that the UPA has not been able to reform  spending in more than eight-and-a-half years at the helm. It is stupid  to expect that it will correct the system when elections are just a  hop-skip-and-jump away. The reforms are over. Efforts to fix the fiscal deficit are coming to  an end. The cash transfer scheme, given the proposed speed of the  rollout, will end up becoming a political vote-buying exercise rather  than a real attempt at reform. DCTS is essentially being used as a Rahul Gandhi election funds. Mahatma Gandhi said that the end cannot justify the means. Cash  transfer is a good means that could end up being used for corrupt  electoral ends. It may well worsen the problem of subsidies and set the  Indian economy back by another five years. END Basically what Congress Party, after 50 years of rule, is saying is -  That it cannot govern and instead becomes the private bank that  transfers tax revenues to general population AFTER TAKING IT's CUT. -  That it cannot be an efficient administration to manage a nation-wide  public distribution network, hedging the prices of key food/energy needs  of the population - That it cannot offer any strong economic  policies that will keep inflation in check, irrespective of the fact  that this party boasts of having FAKE Economists in its cabinet ministry  group. And yet some "educated" indians want to support this party for, what? -  because Congress party follows secularism by not hanging Muslim  Terrorists or (for) succumbing to Christian NGOs/Churches and Communist  insurgency. INC knows it can't implement the scheme to the whole country, key  counstuncies, Minorities, Sc/ST community memmbers will be targetted for  transfer schemes. INC will have its math ready  to sway key seats.  Where its a lost cause they will simply not implement the scheme. Bahuka Economics Bahuka  figures in the Bhagawata Purana, and was the advisor of Jarasandha, who  was Kamsa's father-in-law. Kamsa, who regarded Sri Krishna as his enemy,  asked Bahuka's advice on how to make his subjects state-dependent.  Bahuka told him: “Open your treasury to the  people. Make the people eat, drink and enjoy themselves. Bring up  children to look upon parents as old and useless. That will make them  laugh at those who talk of duty, love and compassion. Like well-fed  cattle at the mercy of the cowherd, the people will be completely  dependent on you.” Rejecting the sage advice of the likes  of Milton Friedman and Martin Feldstein, decades ago, the US opted to  follow the economics of the likes of Greenspan. The result: Half of  American families are state-dependent. But fortunately, Bahuka's  economics, close to Greenspan's, was ignored by Indians thousands of  years ago, though, of late, some Indian politicians seem influenced by Bahuka's economics.

I think India is moving in the direction of most developing countries such as Mexico, Brazil and Bangladesh, who were first the countries to adopt a cash transfer scheme, I think now at least 90% of the money meant for the beneficiary would reach him/her unlike the 10% right now. I think, it would be a stepping stone where we could have a scheme like Progresa in Mexico, where govt provides cash payments in return for school attendance, health clinic visits and nutritional support. But also knowing India, conditional cash transfers will felicitate corruption, since there is a human that is required to check and approve