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India to shift to direct cash transfer for welfare of poor

Feb 02, 2011

The Indian government has decided to directly transfer cash to the poor instead of spending on development programmes as the cost of reaching welfare to beneficiaries has significantly risen and no tangible results are seen yet. The new system is expected to plug leakages within the PDS and save enormous amounts of money but questions about feasibility still remain as 40% of the poor are still not officially recognised.

 

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It is logical for India to be one of the few countries to spend about two per cent of its gross domestic product on the social sector. After all it hosts the world’s largest number of poor. But it sounds illogical that nearly three-fourths of it is the cost of reaching development to the poor. To reach one rupee of development, India spends Rs 3.65, according to its own official estimate. To put it in perspective, India needs to triple its development budget to ensure each rupee currently allotted reaches the intended beneficiary.

For the current fiscal India earmarked Rs 1,37,674 crore for the social sector, that is 37 per cent of the total budget. If one takes into account the state spending as well the total social sector spending in the previous fiscal was Rs 3,69,053 crore, as calculated by the Centre for Budget and Governance Accountability in Delhi.

The expensive mode of reaching development has been a point of debate for decades. Currently, India adopts two ways of reaching out to the poor: create development schemes and top them up with subsidies in food, fertiliser and fuel (see ‘How much Centre spends’ on). In 2009-10, the Central government budgeted Rs 1,99,932 crore as subsidies. Nearly half of it was for food, fertiliser and fuel. The public distribution system (PDS) that aims at distributing at least 35 kg food grain and kerosene a month to each of the estimated 62.5 million poor families in the country is sustained by this subsidy.

If the Rs 180,000 crore spent on Centrally sponsored schemes and subsidies on food, fertiliser and fuel (in ’07-08) were distributed equally among poor families, it would have meant a monthly transfer of Rs 2,140 per family. This is more than the poverty line income for rural families and more than 70 per cent of the urban poverty line income.

But poor remain poor

The mathematics of development goes awry on the ground. Take the extremely poor Daretha village in Madhya Pradesh’s Tikamgarh district. In many ways Daretha illustrates the dilemma: why are villages still poor despite the impressive budget figures? Officially, more than 150 development schemes are under implementation in Daretha. The schemes cover a person’s welfare from mother’s womb till his/her death. With an annual development investment of more than Rs 2 crore, each of its 500 families should have got Rs 40,000. This is double the household poverty line for rural India.

But half the people in the village are poor, officially. The panchayat says 25 per cent more people should have been declared poor. For over 13 years Beti Bai Sahariya, a 50-year-old resident, has been chasing the desperate dream of being officially recognised as poor. It decides whether she starves. Inclusion in the below-poverty-line (BPL) list will get her a ration card that will ensure 35 kg of food grain at a highly subsidised rate. Besides, with a BPL tag she can benefit from 12 other development programmes. The panchayat recommended her name to the administration six times but she did not get the card because she could not afford a bribe of Rs 500.

Fudging of the BPL list is common. It includes those who do not deserve the BPL tag and leaves out those who need it the most. It has been like this since 1997 when the PDS adopted two categories, below and above poverty line, to target the poor. Now most rural development schemes target BPL families. “Still about 30 per cent of the BPL cardholders are rich, while most of the non-BPL people are poor,” said Mamata Verma, a member of the Mohangarh block panchayat.

“There is a desperate need for reforming the rural sector,” said Mihir Shah, a member of the Planning Commission. “Rural development programmes have been killed by corruption and lack of vision required for implementation.” Widespread fudging of the list of beneficiaries and corruption have kept the poor out of the programmes’ reach. Brokerage firm CLSA Asia-Pacific Markets estimates that between 2010 and 2015 India would have spent Rs 11,25,000 crore in subsidies.

According to it, 40 per cent of it would be siphoned out by fudging of beneficiary lists. Data from the 61st National Sample Survey shows only 44 per cent of the families among the bottom of the poor have BPL cards—key to access many development programmes— while 17 per cent of the families in the rich group do so. Only 39 per cent of the eligible families have received BPL cards in the country.

Give them hard cash

The government thinks it now has an answer to this development riddle: transfer money directly to the beneficiaries. In fact, some states already have schemes where cash is used as an incentive for the poor to take part in them. Under such schemes of conditional cash transfer (CCT) money is given on conditions like families send children to school. The government has cited three key reasons for the shift in its strategy to deliver development. First, the cost of reaching development programmes to people is very high. Second, the intended beneficiaries are not getting the benefits. Third, the impact of development programmes is not tangible. For example, the absolute number of poor in India has remained the same for the past three decades.

Since food and fertiliser subsidies account for the largest chunk of the Central subsidy pool, they are targets for the cash transfer method (see ‘Where subsidies go’). PDS is prone to pilferage because of the huge subsidy. The government spends Rs 1,544 on every quintal of food grain sold to the Antyodaya families at Rs 200, according to the depatment of food and public distribution. In a system of cash distribution of subsidy, the PDS food could be priced at the economic cost, leaving no incentive for diversion. Government will just transfer the subsidy component to the poor. This cash payment through smart cards to be prepared under the unique identification (UID) programme called Aadhaar is increasingly being seen as an option to prevent leakages in PDS.

The Planning Commission has put in a blueprint for the cash transfer method. Santosh Mehrotra, directorgeneral of the body’s Institute of Applied Manpower Research, has prepared the paper titled ‘Introducing Conditional Cash Transfer in India: A Proposal for five CCTs’. It argues: “India has had a long history of untargeted or poorly targeted subsidies, which are in need of replacement, especially because the fiscal burden of these subsidies has become increasingly unbearable after the multiple fiscal stimuli post-2008 economic crisis.”

The paper has suggested five cash transfer programmes with conditions (see ‘Five-point blueprint’). These include one that transfers certain amount of money directly to the BPL families as minimum income guarantee and another replacing food grains in PDS with cash. The proposal also supports converting part of the Integrated Child Development Scheme into cash transfer.

The push for cash transfer to PDS beneficiaries came from the department of food and public distribution that deals with PDS. In September 2008, it proposed payment of food subsidy in cash to eligible people. The ministry sought a grant of Rs 242 crore from the finance ministry to run a pilot for the cash transfer scheme. The Economic Survey of 2009-10 proposed a similar scheme as a pilot. Under this scheme people will get a coupon worth their PDS entitlement. They will use it to buy food grain from the open market. The store owner will cash the coupons in any bank. Once implemented, this will do away with PDS.

The government sees benefits of substantially low administrative cost and better targeting. Last year the parliamentary standing committee on food, consumer affairs and public distribution urged the finance ministry and the department of food to take an early decision on the proposal.

In September 2010, the ministry of finance released a working paper prepared by its Chief Economic Adviser Kaushik Basu titled ‘The Economics of Foodgrain Management in India’. He gave his approval: “This is a legitimate policy suggestion and a system with directed cash transfer would, arguably, be better than the current one involving the direct delivery of foodgrains to the poor through pre-specified ration shop.”
Support is growing

The agriculture ministry has jumped on the bandwagon. In the middle of the debate over the quantity of food grain entitlement under the proposed food security act, it suggested part of the entitlement be paid in cash. It recommended a backup fund for times of drought or flood. The ministry wants to include the provision to reimburse families with cash in case there is a shortage of food grain and the government is not able to provide it through PDS. “It is a continuation of our attempt to adopt more direct transfer to people,” K V Thomas, minister of state for agriculture, told the media.

The ongoing Aadhaar programme is being touted as the magic formula to make the cash transfer foolproof. Under this scheme individuals will get an electronic card with unique identities like fingerprint. Thus, it is said, it will make it difficult to fake identity. However, the card will not be an automatic entry into the BPL list. The list will continue to be prepared through household survey at the village level. Inaccurate BPL list is the biggest reason social schemes do not reach the poor, and Aadhaar will not make the list more accurate.

Number of deliveries increased four times at Mohangarh health centre after cash incentivePolitical support for the cash transfer system is, however, growing. Telugu Desam Party chief Chandrababu Naidu, a former chief minister of Andhra Pradesh, was the first politician to promise direct cash transfer to the rural poor in his election manifesto in 2009 parliamentary elections. “My 10 years in government convinced me that development programmes were missing the target. I saw in Latin America cash transfer programmes reached well to the deserving people,” he said. During the elections a group of 100 NGOs working in Andhra Pradesh demanded transferring minimum cash (Rs 15,000 a family a month) to farmers. However, M S Swaminathan, a Rajya Sabha member and agriculture scientist, supported a different arrangement for farmers. He suggested an income commission for farmers. “The major political parties should establish such a commission which can go into the totality of the income of farmers and suggest ways of ensuring a minimum take-home income,” he said.

Chief ministers of Bihar, Chhattisgarh, Delhi, Gujarat and Karnataka are exploring ways to convert the current development programmes into cash transfer ones.

How much money is it?

According to the Centre’s proposal, it will transfer the subsidy component as cash to people. In PDS it will be the difference between the market and PDS rate of food grain. According to the Planning Commission briefing paper Rs 8.5 a month per person. Considering the national average of five members in a family, this comes to Rs 42.50 a family a month. At present, the subsidy amount varies from state to state and it is much higher for the poorest sections like those covered by the Antyodaya card.

According to a calculation done by Devesh Kapur, professor at University of Pennsylvania, and Partha Mukhopadhyay of the Centre for Policy Research in Delhi, if the government simply gave eligible families the amount of money it spends on PDS, this alone would entail a monthly transfer of more than Rs 500 to each family. The flip side of giving food subsidy in cash is it does not factor in inflation. Under the current system, inflation is not a factor as it is based on entitlement of food grain neutral of price.

Many schemes, with conditions

One way, the policy shift to cash transfer is fuelled by India’s experience in such programmes in health and education sectors. Cut to Tikamgarh. Like Beti Bai her neighbour Manru Sahariya in Daretha has not received a BPL card. But maternity and education benefit schemes ensured she not just had a safe delivery, her two-year-old daughter will be a lakhpati. “I delivered in a hospital and got a cheque of Rs 1,400 as incentive,” she said. Under the Janani Suraksha Yojana of the Central government, a woman gets cash benefits if she delivers in a hospital. Under the Madhya Pradesh government’s Ladli Laxmi Yojana, upon fulfilling certain conditions, like two children per family and admission in school, her daughter will be entitled to funds paid in instalments from sixth standard onwards. Under the scheme to promote education, the government buys National Savings Certificates worth Rs 6,000 every year in the name of the girl for five years. This investment gives her a lakh rupees in 21 years but she can avail of it only if she takes the Class XII exams and does not marry before the age of 18. In addition to this she gets Rs 2,000 on admission to Class VI, Rs 4,000 on admission to Class IX and Rs 7,500 on admission to Class XI. For two years after being admitted to Class XI, she gets Rs 200 per month.

Some 20 kilometres away from Daretha, the Mohangarh public health centre is literally delivering 60 lakhpatis every day. “The cash incentive for hospital delivery has done magic,” said L L Chanderia, the doctor in charge of the centre. The number of deliveries at the centre has gone up four times within four years. But the hospitals lack basic facilities.

Conditional cash transfer programmes, as the name suggests, make certain conditions binding for cash incentives. At present, Central and state governments are running roughly 34 such programmes. A back-of-the-envelop calculation shows these programmes transfer Rs 5,000-8,000 crore a year directly to beneficiaries.

The first such programme was launched in 1997. Balika Samridhi Yojana, a Central government programme, provided cash to a girl child at various stages of her life, as post-delivery grant to mother, as annual scholarships up to ninth standard. To dissuade child marriages the scholarship was available to the girl as long as she did not marry. In 2005, Janani Suraksha Yojana, one of world’s largest conditional cash transfer programmes in terms of the number of beneficiaries, was launched. It aims at reducing maternal and neonatal mortality. With an annual budget of Rs 1,540 crore in 2009-10 it transferred cash to about 9.5 million women who delivered in hospitals. This is a phenomenal jump from 0.739 million beneficiaries in 2005-06.

The scheme splits its targets into focus and non-focus areas. In 10 states where maternal and neonatal mortality is high, the incentive is higher as well the coverage is universal. In these states the incentive money is Rs 1,000 in urban areas and Rs 1,400 in rural areas. In the non-focus states the incentive is less and only for people with BPL card and for two live births.

A recent study by Lancet found that the proportion of births occurring in a health facility increased more in states that had a large uptake of the scheme. In 2009 the UN Population Fund studied the impact of Janani Suraksha Yojana in five states. It found hospital deliveries nearly doubled from 23.5 per cent in 2005 to 45.1 per cent in 2009.

But this scheme did not take care of a pregnant woman’s nutritional needs. This was corrected in Indira Gandhi Maitriva Sahyog Yojana in 2010. The Centre launched the conditional cash transfer programme with an annual budget of Rs 390 crore in 52 districts. It will give Rs 4,000 to pregnant and lactating women over a period of six months on fulfilling conditions like registering pregnancy with hospitals and adhering to a fixed number of check-ups.

Many state governments have been running programmes that incentivise school attendance, particularly of the girl child. Madhya Pradesh’s Ladli Laxmi Yojana is a variant of the Central government’s Dhanalakshmi programme introduced in 2008 as an experiment in 11 educationally backward blocks across seven states. Several states have education vouchers. Uttarakhand has Pahal for those who do not have a government school within a kilometre of their house. Rajasthan has two separate schemes: Gyanodaya Yojana, under which new secondary schools are set up by the private sector and state-funded vouchers are used, and Shikshak Ka Apna Vidyalaya, under which trained and unemployed teachers set up schools in backward areas and vouchers are used.

Politically feasible

Such programmes have delivered rich electoral dividends. In the Assembly polls in Bihar victory of the ruling party is largely attributed to more women voting. Analysts say women came to vote in large numbers due to the state government’s incentive of a bicycle to a girl child joining the ninth standard under a scheme called Mukhyamantri Balika Cycle Yojana, started in 2006. Girls get Rs 2,000 to purchase bicycle and Rs 700 for uniforms. In three years, from 2007-08 to 2009-10, about 8,71,000 girls have received bicycles.

It is a universal scheme and not limited to BPL. Dropout rates for girls in the 11-14 age group in Bihar dropped from 17.6 per cent in 2006 to six per cent in 2009. “Wherever I travelled I asked people whether they got subsidised food grain, kerosene and health provisions. The answer was a loud ‘no’. I asked if cash transfer will help. People said a loud ‘yes’,” said Nitish Kumar, Bihar’s chief minister.

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