In support of cash transfers

By Ashwath Komath

Edited by Michelle Cherain, Associate Editor, The Indian Economist

The government has planned to replace the much-criticized subsidy system to direct cash transfers to the accounts of the beneficiary. Subsidies in India have been a subject of much criticism from every corner, with people advocating for the further subsidization of goods and at the same time, many others who are demanding that the subsidies be rolled back or at least reduced over a period of time. India has also faced criticism from many countries in international trade calling on for India to stop its subsidies and let the market dictate the prices.

Within the government as well, there have been many ideas on a transition to lesser subsidies. It started off with the decision to streamline the subsides and allot them to target groups than providing subsidies to everybody. An example of this would be the decision to limit the allotment of a maximum of 12 LPG cylinders per family a year.

For poorer sections of the society, there was an idea to directly transfer the amount to the beneficiaries than to spend on subsidies so that they may directly buy it from the market. This obviously has several advantages to it. First of all, it would help reduce the distortion of prices which are caused due to the subsidies. People can directly buy items, especially foodgrains, with money they have been given rather than wait for the government to subsidize items. This gives the people choice in their economic decisions which is beneficial.

Secondly, given that things like the Public Distribution System has its costs involved, the costs are reduced because there will be no need to constantly subsidize foodgrain and other essentials when this will be purchased in the market. Subsequently, the markets may reach some stability given the added supply which may stabilize the prices of these items. This will in turn, prevent any sort of misuse of the PDS like having people sell their subsidized goods to the market for profit. Thirdly, it will help increase financial inclusion especially in the rural areas. This is a very important goal given that the financial inclusion in India is a mere 59%. Given that monetary policy in this country greatly relies on the formal sectors of banking, it is important that financial inclusion be prioritized and this programme is a great way to get people to sign up for bank accounts. Apart from helping people to organize their finances, this would also help mobilize small savings and boost income, even if it is in small amounts.

So turning the subsidies programme and phasing it out to Direct Cash Transfer has a lot of advantages to it. It should definitely start with pilot projects and see how its implementation goes. Of course, another conflict to resolve here would be the Aadhar card issue and how it will play out in future public policy and programmes. But the replacement with cash transfers should actually be taken ahead in order to promote social welfare. This can be done by making the Cash Transfer programme conditional rather than direct. The idea has roots in successful programmes in South America namely the Bolsa Familia and Oportunidades from Brazil and Mexico. They have made cash transfers to their beneficiaries on certain conditions that they have to fulfill.

So the conditions could be sending the children of the household to school, compulsory health checks from time to time and other such conditions. Now the difference here in the Brazilian and the Mexican cases is that this money was allocated for this very intended purpose. It was not subsidy money that was being used. In India, the plan is to roll back on the subsidies and use that money to transfer to the beneficiaries so that they may directly use markets instead of having alternate channels.

Given the many goals India has in its public policy and the multiple objectives that need to be fulfilled, such conditions would only multiply the benefit that would be achieved if a cash transfer programme were to be initiated on a mass scale. We can start with objectives such as education and healthcare like in the South American case. Further conditions could be added depending on the kind of problems they face and if they would be solved based on the compulsions of such a program which would help the situation overall.The Brazilian and Mexican cases have been hugely successful. Though it must be noted that the only factors which are holding their programmes back is the fact that they are not able to provide the education and healthcare services on the scale of the number of beneficiaries. So they have structural problems that need to be addressed and India finds itself in a similar position. But the benefits are immense.

First and foremost, literacy rates go up as children attend school and their health improves. Secondly, the added income to the family helps them do a lot more with their lives. Many people in such programmes go on to start small businesses in order to augment their incomes. Access to more streams of income is a very important part of poverty eradication. And these programmes reinforce the very notion that the poor are not looking for mere handouts. They are looking to step out of their poverty on their own. Subsidies help the poor survive, such programmes help them live. So if India were to implement such a programme, it needs to start by introducing pilot programmes which would check the feasibility. It should be done on a case by case basis because problems vary from region to region and the conditions should vary as well. At the same time, the government must prepare the infrastructure for the implementation of these conditions by improving the conditions of the schools and the hospitals and other infrastructure required for the full realization of potential of the people. Conditional Cash Transfers, rather than Direct Cash Transfers should be prioritized as a means of public policy.