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EDITORIAL : Cashing in on schemes for poor
Friday, 30 November 2012 11:41

Cashing in on schemes for poor

Any political benefit the Congress hopes to reap in 2014 will come at the cost of reducing the effectiveness of social welfare schemes

In getting its ministers to endorse the shift to cash transfers from the AICC office in New Delhi, the Congress has highlighted the political nature of the move. The party clearly expects cash transfers to play the same role for it in 2014 that the National Rural Employment Guarantee Act did in 2009. By pouring money directly into the bank accounts of voters across the country, it expects to be paid back with additional seats in the Lok Sabha. But the politics of cash transfers is not the same as that of the MGNREGA. And even if there is political gain for the Congress from this move, it will come at a great social cost.


The fundamental difference between the political economy of the NREGA in 2009 and the cash transfers today is in the impact on inflation. The NREGA was launched at a time when the macroeconomic goal was to provide an impetus to the Indian economy at a time of a global slowdown. The impetus took the form of raising the fiscal deficit substantially, thereby providing the resources for the NREGA. Since the economy needed the additional expenditure there was only a limited immediate impact on inflation.

This is not the macroeconomic situation today. With inflationary pressures remaining a concern there is need to be wary of any massive transfer of cash to voters. The politicians in the Congress possibly believe they have got this covered since they are simply changing the way of delivering existing subsidies. As there is no additional expenditure involved, they seem convinced there will be no inflationary pressure from the move.

The economist in the Prime Minister must however know otherwise. He will be sensitive to what economists call the multiplier effect. Simply put, when cash is paid out to an individual she saves some of it and spends the rest. What she spends becomes income to someone else. The next person again saves some of this income and spends the rest, thereby creating income for a third person, and so on. The overall effect of putting cash into the economy is then several times greater than the original infusion, the exact multiple depending on the proportion of income that is spent.

In the case of a transfer of welfare in kind, there is little scope for this multiplier to take effect. When a beneficiary receives food from a ration shop her family consumes the food without creating additional income for anyone else. The multiplier comes into play when the supply of subsidised food from the ration shop is replaced by cash. And if the government were to try to control the inflationary pressures by curbing money supply it runs the risk of going to the next elections with the economy slowing down. It is therefore no surprise that the food subsidy and the fertilizer subsidy have been kept out of the initial shift to cash transfers.

The 29 schemes that are to form the initial round of cash transfer from January 1, 2013 focus primarily on reworking cash based welfare schemes such as pensions and student loans. The apparent political potential of this move, in the current system of patronage politics, explains the glee in the AICC office when the shift to cash transfers was endorsed. The entire transfer of the cash value of welfare schemes will now be seen as coming from the Congress. The old process, in which a local politician was the link between a scheme and its beneficiaries, thus earning loyalty and building constituency, will no longer be valid. This would not only hurt opposition parties but would also weaken the grass root Congress worker, while strengthening the party high command.

The social costs of this move are however quite evident when we consider the precise mechanism through which the shift to cash transfers is to take place. The beneficiaries are to be identified using the unique identification of Aadhar. There may be those who challenge the claims to perfection of the Aadhar process, but that view is unlikely to overcome the widespread Indian belief that what is technologically done must be perfect. Even if we grant Aadhar perfection, though, we must keep in mind that it is only a system of unique identification, nothing more. All that it does is to ensure that once a person says she is X, she cannot later say she is Y.

Such a unique identification does not even guarantee that the person is in fact an Indian. It is quite possible for a person from, say Bangladesh, to cross our porous borders, go up to an Aadhar office and get a card. Aadhar does not believe it is its business to guarantee the nationality of the individual. With a convenient Indian address she could then be eligible for direct cash transfers. This can make a significant difference to the working of cash transfers in some regions where borders are porous.


Moving away from the northeast there is an even greater challenge in an overreliance on Aadhar. The proof that the person has once identified herself as X tells us nothing about whether X is, in fact, poor or eligible for the subsidy. The problem with ration cards today is twofold: there are multiple cards issued to the same households, and the Below Poverty Line cards have been issued to those who are not poor. Aadhar could help solve the first problem, but not the second. Even with Aadhar based identification, the non-poor can be classified as poor.

What should cause greater concern is that there is little attention being paid to the transaction costs of the poor and illiterate accessing the bank accounts. In a study of the working of the Mahatma Gandhi National Rural Employment Guarantee Scheme in Karnataka, it was found that the poor did not always get their full wages. In the more backward districts of the State, there was a significant difference between the wages paid out according to the MGNREGA records and the wages the workers said they received. And it is not difficult to imagine how this could happen. The poor, especially if they are illiterate, are dependent on bank officials to tell them whether the money has been credited into their accounts. And if they seek the help of others in the village that too can come at an economic, if not social, cost.

Even in cases where the money reaches the right bank account and the right person, there could still be leakages in terms of how that money is spent. In some schemes this would not matter. A pension has served its stated purpose the moment it reaches the beneficiary. But there are other schemes such as student loans where a mechanism is still needed to ensure that the money that is transferred to the bank account is actually spent on education. When the cash transfer is from a distant source and the expenditure to be made is local, monitoring how the money is spent is no easy task. And if the money is not used for the stated purpose, it is a leakage of another kind.

The experience of MGNREGA tells us that preventing this leakage could cause greater pain to the beneficiaries. In some States by the time the work done is measured and the payments are released, the workers could end up waiting for months to be paid. In the case of cash transfers too while the actual transfer of funds into bank accounts may be instantaneous, the process of ensuring the money is spent on the stated purpose could cause either leakages or substantial delays.

It is here that the gap between the political interests of the Congress and the social interests of the country is the widest. If the cash transfers are to be politically viable the government must transfer the subsidies on time. And it would be in the Congress party’s interest for the cash to be transferred without worrying too much about whether it is being spent on the stated purpose. If its record is any guide, it would not mind transferring cash for a student loan even if the money is spent on a school or college that is unworthy of that expenditure.

Faced with a choice between a possible political benefit in 2014, and a further reduction in the effectiveness of the social welfare schemes, the Congress has made its choice public. And in a country where we celebrate our economic growth even as over 40 per cent of our children remain malnourished, it is a choice that is unlikely to cause much consternation.


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