Thursday, 31 January 2013

Understanding Direct Cash Transfers

In their recent burst of policy reforms, Congress introduced the concept of Direct Cash (or Benefits) Transfer. The idea is simple: Instead of subsidising goods/services for the people and taking the responsibility for it's distribution, the Government will now use the Unique Identification, or the Aadhaar program, to directly transfer monetary sums to each person's bank account. These accounts would be created for each beneficiary who will have access to it via a local vendor.

Upon unveiling this reform, Congress instantly came under heavy firing for both the policy and their motives behind it:

  1. Buying votes: Congress has been accused of using this reform to transfer large sums of money to the electorate and in effect buying the votes of the less well-off. This criticism is particularly supported by the timing of the reform and the rush with which Congress is attempting to implement it.
  2. Speed of implementation: India has had a long history of distribution of such subsidised goods and services via the government. The ration card is universally recognised in India and the people feel comfortable with that in their possession. Changing such a long tradition within a span of 2 years is going to be incredible difficult. Not only do they have to design the entire process for flawless delievery of money, but also educate the public about it. If either of these goes wrong, several million people will suffer.
  3. Lag in increasing benefits: Among other concerns is that the prices of the goods/services will increase based on the market forces which can happen rapidly. Where as the decision on the amount of money being transferred will be done by the Government process which can be slow and tedious. The people fear that there will be time spans when the money being transferred will not be enough for the market prices. To be fair this is one of the reasons for the government to move to direct cash transfers so that they are not committed to subsidise the goods no matter what the price, however this leaves the beneficiary with the potential burden.
  4. Will add to the deficit: There is also a fear that Congress might introduce this policy and continue the Government delievery mechanisms thus doubling the burden on the national exchequer.

The concerns and criticisms above are all valid and yet one cannot argue against the policy itself. If we were to assume that the Government does execute the policy properly, then the benefits are several:

  1. Targeted subsidy: Instead of providing the good/service at a particular price to everyone, the money can now be transferred to targeted socio-economic groups based on the needs. Using the UID mechanism the government will now be able to make sure that there are no replications and recognise the people most in need of the benefits. This will save resources and thus allow greater benefits for the people in need.
  2. Flexibility in consumption: So far, individuals entitled to benefits were given a quota for each good/service. For example x number of gas cylinders per year. Thus to utilise their benefits, the consumer had to buy that number of cylinders even if they did not need it. With direct cash transfers, the subsidy that the government provided for the those x cylinders will now be available to the consumer who may choose to utilise the money based on their individual needs.
  3. Reduction in leakages: With direct transfers, the elaborate delievery mechanism run by the government can now be avoided. This will reduce the power of the babus sitting in the government offices and thus reduce the scope for corruption and bribes. Opportunities for the same bureaucrats to seize the goods and sell them on a black market will also be removed allowing the benefits to actually reach the intended targets.
  4. Erosion of Government monopoly: With the money now in the hand of the people they are no longer forced to deal with the government delievery mechanism and can purchase their good/services from a 3rd party private vendor. This will allow multiple benefits: The consumer will benefit with better quality goods, the businesses will benefit with the increase in market size and the efficiency in these markets will improve due to competition between private parties.

However, there was a big 'if' in my argument. These benefits will only be realised if the execution is done well. The speed with which Congress is trying to execute the policy is my biggest concern. Changing such a long standing status quo should be done with more care. It gives me hope however, that since they are banking on this policy to win them the next election, they will ensure that the public does not suffer. But will this mean smooth execution or running parallel systems of subsidies and direct cash transfers? We will have to wait and see.

1 comment:

  1. As a subset of your point on implementation have you considered the issue of targeting? Given the inequality particularly in the rural households, the dominant may use this money to further their own needs. Secondly as Dreze points out there is a case for "denial by design", this goes in hand with the speed of implementation that you had mentioned and is an extremely valid point.
    Also do you feel that India should perhaps use a "CCT-conditional cash transfers" approach instead?

    ReplyDelete