Real and imaginary problems of electronic cash transfers

The Congress Party is about to launch what it hopes is an election winner — an electronic cash transfer scheme (CTS) to send government payments and subsidies directly into the accounts of beneficiaries, instead of through existing channels bedeviled by corruption and waste. Starting January 1, the government will transfer 29 sorts of benefits (like pensions, scholarships, fuel subsidies) through the CTS, taking advantage of the Aadhar scheme for electronic identification of all individuals. In due course the scheme will be expanded to cover 42 benefits, and will cover the whole country by 2014, in time for the next election.

Right now, says finance minister P Chidambaram, it costs the government Rs 3 to transfer one rupee to the pockets of beneficiaries. The rest goes on administrative expenses, waste and corruption. Cash transfers can eliminate intermediaries of all sorts, greatly reducing corruption and administrative burdens.

Right now, beneficiaries have to produce different paperwork for every benefit. CTS has the potential to consolidate all paperwork, drastically reducing red tape and improving efficiency. Total transfers are estimated at Rs 320,000 crore, so if just one-third going to waste and corruption is avoided, it will mean Rs 100,000 crore more cash to beneficiaries. This would hugely benefit hundreds of millions of people.

A host of objections and criticisms have come from rival political parties and statist ideologues. Some problems of CTS are real, but many others are imaginary.

The most imaginary and hilarious objection (from Arvind Kejriwal, the BJP and CPI) is that a cash transfer is a bribe to voters. Political parties have for decades offered welfare goodies such as free electricity and water, subsidized food, free TVs, free bicycles and so on. These are unashamed ways to woo voters. But a bribe is illegal gratification. Welfare giveaways can be called unwarranted or misdirected, but not illegal.

Others say cash benefits for education or fuel may be diverted by a beneficiary to liquor instead. True, but this is equally true of benefits in kind. Mid-day school meals mean less family spending on food, so the money saved can be spent on liquor. Subsidised kerosene or rice can be sold in the open market and the proceeds used for liquor.

In this, look at the example of the Nitish-BJP coalition government in Bihar. Nitish Kumar decided to use cash transfers instead of physical delivery of free bicycles for school kids, to eliminate the myriad leakages in physical delivery of other government services. Was some of the cash spent on liquor instead of bicycles? Maybe, but overall the scheme was a thumping success. Thus opposition parties have themselves proved the efficacy of cash transfers.

Some critics claim that cash transfers will be a way of reducing total benefits. That’s pure mendacity. In fact, much more money will actually reach beneficiaries, which is why rival politicians are so worried.

Still others say cash transfers might mean the dismantling of all public systems like ration shops and government schools. Sorry, but the Congress is ideologically incapable of such libertarianism. Montek Ahluwalia has clarified that ration shops will continue, and government educational and health facilities are being expanded rapidly.

However, there are indeed many real problems. There is no good system of identifying those truly in need, so benefits can go to better-off folk, especially those mis-identified by sarpanches. It may prove politically impossible to withdraw benefits from once-poor folk who become better off. Many poor illiterates may not be registered under Aadhar or may not be linked to bank accounts, and can get left out.

However, such problems of inclusion and exclusion are so terrible in existing systems that even a flawed CTS should be far better. A big administrative effort will be needed to ensure that Aadhar and bank accounts eventually cover everybody.

Many glitches will arise in rolling out such a scheme. Some pilot projects have already tested different transfers in different areas, and corrected the glitches. But more experimentation is needed. The danger is that the scheme will quickly be extended to the whole country in half-baked shape simply to help the election prospects of the Congress. This can mean a flawed CTS that later needs overhaul.

The biggest danger is that CTS will not substitute existing subsidies but add to them. Vested interests will resist winding up any existing delivery mechanism. So instead of substituting subsidized kerosene or LPG with cash, politicians might provide both cash and subsidized fuel. Ditto for subsidized food, electricity, and dozens of other items. Such populist excesses would serious strain already stretched government finances. Provided this is avoided, cash transfers should be a big success.

4 thoughts on “Real and imaginary problems of electronic cash transfers”

  1. More Working Capital

    If a person wants to buy an LPG cylinder they have to pay almost double and then receive the cash transfer. For the middle class it is not a problem. For the poor a real problem. India is the only country where match boxes are manufactured since Re 1/ is revenue Expenditure but Rs 10/ for a LPG lighter is Capital expenditure.

  2. What Mr Swaminathan has said is a practical difficulty Govt. will face while implementing Cash Transfer. Subsidies meant to be discontinued, must be done by the govt gradually or else the whole purpose will be defeated. Govt must muster enough political courage to do away with the subsidies.
    Freebies mentioned by Swaminathan,must also be done away with before the next General Election by tne Chief Election Commission Office. CEC must declare this outlawed, and any political party resorting to promising freebies such as free electricity,free TV etc, their candidates must be forthwith banned from contesting elections. Most electricity utilities are not doing well because of the freeby given by the State Govts.
    As it is we are illfated to get fragmented coallition Govts. election after election,I therefore humbly put forth that our respected constitutional bodies such as President’s Office, CEC, and Supreme Court Judiciary,must rise to the occassion and devise a methodolgy by which the Govt of the day must have complete authority to run the Govt freely and implement the policies so devised. We have seen lately that dut to ot having enough numbers in the Parliament, Govt is not free to omplement economic policies that will lift the country to its maximum potential. President I think is duty bound to find away. Its a catch 22 situation from which we must get out as soon as possible. The crux is coallition Govts are no good for the country.

  3. Excellent article by Mr Swami Aiyar . I have always been a great fan of his posts .
    I have a Q :How does Government identify the “poor” who really needs the benefits ? Is there anyway to track the income of people working in the unorganized sector ? For e.g a Tea Stall vendor /Hawker /Auto Rickshaw driver (one has to be close to the political bosses ) may be earning more than a middle level executive in the Organized Sector . I have a feeling (I may be wrong !!!) that the income Indians are earning & what they are giving back to the Government in form of Taxes etc are not standardized for everyone apart from the Salaried class & other income where TDS is applicable .
    Anyway the CTS scheme is a great thought by the Government & IF & Only IF … implemented successfully will be good for the country as a whole (at least hope some of the leakages will be prevented )

  4. Now that the Aadhar has got some limelight again …

    Subsidies made in kind or not EQUALLY likely to get “diverted” to unwanted expenses. Let me explain. Come back to the bicycles in Bihar. You claim that if a bicycle itself is given to the family, it is going to save the family some money which it could use less than wisely. But there’s an underlying assumption that the family was going to buy the bicycle anyway — which may not be the case!

    While giving bicycle in kind gives bicycle and maybe some cash for unwise use (if the family has saved some cash to buy a cycle), giving cash might ONLY give cash for unwise use.

    And certifying beneficiaries correctly / wisely is a VERY big problem. It is my observation that it’s far easier for the rich to “prove” that they are poor than for the poor to prove that they are poor.

    One way to not end up subsidising the rich at the cost of the poor is to subsidise for everyone (in kind as far as possible). Like government-run schools in developed countries which children from well-to-do families too attend.

    Conversely, some other subsidies should be done away with altogether — I believe diesel to be one such.

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