The burden of India's cash transfer scheme

Sun Dec 2, 2012 8:37pm IST

Local residents wait outside a closed ration shop with their empty containers to collect kerosene in Kolkata September 16, 2010. REUTERS/Rupak De Chowdhuri/Files

Local residents wait outside a closed ration shop with their empty containers to collect kerosene in Kolkata September 16, 2010.

Credit: Reuters/Rupak De Chowdhuri/Files

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(The views expressed in this column are the author's own and do not represent those of Reuters)

By D. H. Pai Panandiker

The government's cash transfer scheme (CTS) has been accepted by economists as the most efficient method of delivering subsidies to the poor. This became possible with the identification of the poor after the introduction of "Aadhar" or unique identity scheme. The scheme is going to be implemented from the beginning of 2013.

The Congress party is excited because the scheme can prove to be an excellent vote magnate. Cash in hand is a good enough incentive even if it is in replacement of invisible subsidies. UPA-II came to power mainly on the basis of a loan waiver to farmers which cost the government 600 billion rupees. Possibly, CTS would not need any additional outlays and may actually reduce the burden on the exchequer. The opposition Bharatiya Janata Party has been quick to understand the scheme's political appeal and is protesting its introduction for one reason or the other.

A pilot project for CTS was started a year back in Kotkasim block in Rajasthan that has 25,000 households. Preliminary results indicate that the scheme was a flop. It was intended primarily to replace the state subsidy of 14 rupees per litre on kerosene. With the withdrawal of the subsidy, prices increased while the cash transfer got delayed or did not take place at all. The government did not have in place an efficient system to replace subsidy by cash delivery. That is likely to happen when the scheme is extended to 51 districts from January 1.

CTS requires a different infrastructure for success. It is no longer the ration shops which will deliver the subsidy through low priced essential commodities but a cash equivalent of the subsidies would be distributed by the banks. But in some villages, the requisite banking facilities do not exist, many beneficiaries being illiterate may not be able to take recourse to banks and, in spite of "Aadhar", may not have been properly identified.

Obviously, it is not possible to have a perfect system to begin with or cover all the subsidies that can be cash delivered. It is only after the scheme has been in operation for a while that its refinement would be possible. Initially restricted to 29 schemes, CTS will replace 42 different public welfare benefits by 2014 and cover the whole country.

The advantages are obvious. With direct cash transfers there will be elimination of intermediaries and therefore the cost of distribution will be substantially reduced. That cost is higher than the actual subsidy that the beneficiaries receive. Hence, CTS is likely to benefit people directly and at the same time cost less to the government.

That sounds good but also has potential dangers. First, a cut in or a removal of cash benefits in future may be resisted by citizens and the scheme will become a permanent liability. Second, the scheme is likely to be misused by the government since it will become an attractive populist gimmick for political parties apart from imposing additional burden on the exchequer as subsidies do at present.

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