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Cashing in
M.K. Venu
07 December 2012

The UPA’s cash transfer scheme delivering over Rs.3.2 lakh crore in subsidies and welfare programmes to the poor, directly to their bank accounts -has raised fears in many quarters about the capacity of a rickety state apparatus to cope with messy implementation issues. Our collective self-confidence about being able to implement any new policy is so low today, we seem to be paralysed by the mere suggestion of a new way of doing things. To recover confidence about policy implementation, a serious attempt must be made to radically transform the manner of delivering social welfare programmes.

Of course, there will be resistance from the existing vested interests that have built a business model around some of our substantially funded welfare schemes. In fact, businesses have built monopoly supply arrangements at the state, district and panchayat levels, based purely on well-funded, Centrally-sponsored schemes for midday meals, health and low-cost housing. The late Ponty Chadha’s food processing company alone supplied over Rs 9,000 crore worth of midday meals to schools, entirely funded by the Uttar Pradesh government. It was a near monopoly, so there was no way of ascertaining the real cost of supplies. This unique monopoly business arrangement, based on Centrally-aided programmes, is rampant in other states too. In UP, the scam around the misappropriation of Central health funds led to the murder of senior officials, while massive supplies of fertilisers disappear across the Nepal border -both symptoms of the new business model built around Central funding of welfare schemes.

The total funding through Centrally-sponsored schemes supporting health, education, employment as well as other social and physical infrastructure has increased from less than Rs 9,000 crore in the early 1990s,when reforms began, to Rs 2,37,000 crore in 2011. That means a 25-fold increase in Central funding. During this period, India’s GDP grew from $350 billion to $1,800 billion. So it is clear that rapid growth in the post reforms period has helped generate funds for social welfare. What is not clear so far -and is a matter for perennial debate -is how efficiently such funds are being delivered to the real beneficiaries.

This debate is also linked to the larger question of whether the economic reforms and the GDP growth generated in the past 15 years have helped reduce poverty at the pace desired. There is now a consensus that poverty has not gone down at the expected rate and inequality has widened as per accepted empirical measures. So it is all the more urgent that the Indian state attempts a more foolproof method to deliver social welfare funds to the real beneficiaries among the poor. The welfare state also needs to reinvent itself to meet the demands of the time.

Of course, this cannot happen overnight. The government needs to build adequate infrastructure to electronically transfer funds into the bank accounts of the poor. To begin with, full banking access will have to be created for about 150 million poor households.

The banking system is key to the cash transfer programme. Since banks cannot penetrate scattered rural households with the existing branches, a system of banking correspondents -individuals who will visit villages on behalf of banks, with a hand-held electronic device -is being put in place. The Reserve Bank of India (RBI) is in the process of fine-tuning this system. The State Bank of India (SBI) has already appointed over 30,000 banking correspondents, who will open accounts and deliver cash on behalf of the government to households verified through the Aadhaar biometric system. As in Brazil, cash withdrawals will be facilitated through rural ATMs. Currently, India has about 85,000 ATMs but 70 per cent of these are in urban centres. Another 60,000 ATMs are being planned by bank and non-bank entities over the next two to three years, largely in rural areas. The government also plans to introduce some half a million mobile micro ATMs, which will be carried by banking correspondents, to cover all villages.

India’s direct cash transfer experiment draws a lot from the Brazilian one, which has succeeded in reducing poverty and inequality over the past 15 years. Its success is now officially recorded in independent research by the United Nations Development Programme (UNDP) and the World Bank. The experiment in Brazil, called Bolsa Familia, was responsible for a 21 per cent drop in inequality between 1995 and 2004. This is a sizeable impact, considering Bolsa Familia contributed to less than 0.82 per cent of the total family income, according to a paper published by UNDP.

This shows that cash delivered directly to the bank accounts of the very poor could result in a non-linear improvement in the reduction of inequality. In the Bolsa programme, cash is delivered to a poor household’s bank account on the condition that the children will go to school until they are 17 and will have a full set of vaccinations in their first five years. Both economists and practitioners of public policy aver that by spending just 1 per cent of the GDP on this programme, Brazil has managed to improve education levels and health indices, and reduced inequality.

The ex-Brazilian minister Romula Paes de Sousa, who was involved with this programme, has publicly stated that a positive global evaluation of Bolsa Familia has won it widespread legitimacy. India also needs to demonstrate its own version of Bolsa Familia, one which will acquire legitimacy over time and prove the naysayers wrong. The Brazilian minister had admitted it was initially difficult to persuade the middle class to support such a big investment at the bottom of the socio-economic pyramid. This will be a challenge for the Indian political class too, as 70 per cent of the current subsidies, explicit as well as implicit, are cornered by the middle class. Some sacrifices will have to be made by it.

To avoid pitfalls, the government must go about its cash transfer system in a phased manner. Schemes in the first phase must be chosen carefully, in order to demonstrate its success within a short period of time. The government must take care not to dismantle the existing schemes that are working relatively well. For instance, subsidised food distribution is going quite smoothly in states like Kerala, Tamil Nadu, Chhattisgarh etc. There is no need to fix what is not broken.

If executed well, the direct cash transfer programme would not only reduce poverty faster, it would also curb a lot of the wasteful spending that has fattened vested interests at all levels. Needless to say, political communication is the key.

(The writer is managing editor, The Financial Express)