Will a leaky system defeat cash transfer scheme?

Will a leaky system defeat cash transfer scheme?

Fierce arguments break out on the feasibility of the programme, politics behind it

India has more poor people than any nation on earth, but many of its antipoverty programmes end up feeding the rich more than the needy. A new programme hopes to change that.

On January 1, India began the process of eliminating a raft of bureaucratic middlemen by depositing government pension and scholarship payments directly into the bank accounts of about 245,000 people in 20 of the nation’s hundreds of districts, in a bid to prevent corrupt state and local officials from diverting much of the money to their own pockets.

Hundreds of thousands more people will be added to the programme in the coming months.
In a country of 1.2 billion, the numbers so far are modest, but some officials and economists see the start of direct payments as revolutionary – a programme intended not only to curb corruption but also to serve as a vehicle for lifting countless millions out of poverty altogether.

Finance minister Palaniappan Chidambaram, described the cash transfer programme as a “pioneering and pathbreaking reform” that is a “game changer for governance.” He acknowledged that the initial rollout had been modest because of “practical difficulties, some quite unforeseen.”

He promised that those problems would be resolved before the end of 2013, when the programme is to be extended in phases to other parts of the country.

Some critics, however, said the programme was intended more to buy votes among the poor than to overcome poverty. And some said that in a country where hundreds of millions have no access to banks, never mind personal bank accounts, direct electronic money transfers are only one aspect of a much broader effort necessary to build a real safety net for India’s vast population.

“An impression has been created that the government is about to launch an ambitious scheme of direct cash transfers to poor families,” Jean Dreze, an honorary professor at the Delhi School of Economics, wrote in an email. “This is quite misleading. What the government is actually planning is an experiment to change the modalities of existing transfers – nothing more, nothing less.”

The programme is based on models in Mexico and Brazil in which poor families receive stipends in exchange for meeting certain social goals, like keeping their children in school or getting regular medical checkups. International aid organisations have praised these efforts in several places; in Brazil alone, nearly 50 million people participate.
But one of India’s biggest hurdles is simply figuring out how to distinguish its 1.2 billion citizens.

The country is now in the midst of another ambitious project to undertake retinal and fingerprint scans in every village and city in the hope of giving hundreds of millions who have no official identification a card with a 12-digit number that would, among other things, give them access to the modern financial world. After three years of operation, the programme has issued unique numbers to 220 million people.

Bindu Ananth, the president of IFMR Trust, a financial charity, said that getting people bank accounts can be surprisingly beneficial because the poor often pay stiff fees to cash checks or get small loans, fees that are substantially reduced for account holders. “I think this is one of the biggest things to happen to India’s financial system in a decade,” Ananth said.

Additional effort

Only about a third of Indian households have bank accounts. Getting a significant portion of the remaining households included in the nation’s financial system will take an enormous amount of additional effort and expense, at least part of which will fall on the government to bear, economists said.

“There are two things this cash transfer programme is supposed to do: prevent leakage from corruption, and bring everybody into the system,” said Surendra L Rao, a former director general of the National Council of Applied Economic Research. “And I don’t see either happening anytime soon.”

The great promise of the cash transfer programme – as well as its greatest point of contention – would come if it tackled India’s expensive and inefficient system for handing out food and subsidised fuel through nearly 50,000 government shops. India spends almost $14 billion annually on this system, or nearly 1 per cent of its gross domestic product, but the system is poorly managed and woefully inefficient.

Grains, for instance, pass through myriad hands, with much of the supply being diverted or replaced with rotten or poor-quality grains before it reaches its intended recipients. Rajiv Gandhi, who served as prime minister for five years in the late 1980s before being assassinated in 1991 while running for office, once estimated that only 15 per cent of the money spent on the poor actually reached them; his son Rahul Gandhi said recently that this level may now be as low as 5 per cent.

But so far the government has stopped short of replacing the direct distribution of food and fuel with cash payments because of the enormous logistical difficulties involved, and because many of those involved in pilot projects in which cash was substituted for goods have said they preferred receiving food.

There are several problems with making a switch, experts say. One is that men are often the ones who receive cash in the programmes, and they sometimes squander the money. When food is distributed, however, women are often the recipients, and they are more likely to use the food to benefit their children.

Another problem is that while cash transfers can significantly reduce losses to corrupt intermediaries and traders, simply setting up the system does little to overhaul the sometimes-corrupt decision-making process that determines who is eligible for benefits in the first place.

A group of 208 scholars and activists released an open letter last Monday, the day before the pilot programme started, saying that electronic transfers of pensions and scholarships were fine but substituting cash for food “could cause havoc and massive social exclusion.”

Still, Arvind Panagariya, an economics professor at Columbia University and the former chief economist of the Asian Development Bank, contended that opposition to the programme was shortsighted, dismissing fears that the poor would squander the money they receive. “The argument that people will not spend on the essential goods when given cash for that is spurious and paternalistic,” Panagariya said in an interview.

The Indian government’s aggressive timetable for rolling out the cash transfer programme has led some of its political opponents to claim that the entire exercise is mostly about securing political support for the governing coalition led by the Congress Party. A World Bank study found that there is a direct link between cash transfer programmes and voting patterns, with beneficiaries strongly supporting the party that gave them money. A significant number of early enrollees in the programme live in states controlled by the Congress.

The government has promised to continue the programme’s rollout through 2014, when national elections are scheduled. The Election Commission of India ordered the government last year to postpone starting the programme in eight districts in the states of Himachal Pradesh and Gujarat because of pending state elections, which were held last month.

Rao, the economic researcher, cautioned that the rural poor would need a vastly improved social and commercial infrastructure – better shops, schools and hospitals – for any cash-based welfare plan to significantly improve their lives. “Cash transfers,” he said, “are not a panacea.”

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