Cash Transfers in India: Look Before You Leap

Tuesday, November 24, 2015

The relentless focus on financial inclusion on the deposits side leads to a logical implication that these accounts can be used to transfer money from the government to the targeted recipient, making the action seamless and free from manual intervention. This is the basis of a direct benefit transfer where a wage or pension is transferred to the account without the individual going to the office asking for it. The corollary is the same can be used for other government programmes, ranging from food subsidy to conditional transfers like the mid-day meal programme for children. The examples of Brazil and Mexico have often been given to buttress this argument. How can we evaluate this option?

Cash transfer works well when we are dealing with ‘direct cash’ rather than cash in lieu of a physical product. The UID-linked bank account can be used to transfer MGNREGA wage or pensions of senior citizens to ensure no manual intervention. The subsidy provided on LPG also works fairly well, as the household pays the full cost of the cylinder and is subsequently compensated the balance through a cash transfer. But we may have to think harder in expanding the scope.

Translating the same concept for the delivery of other services raises some ticklish issues that need to be addressed. The usual argument provided against such transfers relates more to timing, when certain sections get excluded because of the difference in time between their having an account and the transfer actually taking place. But this is more of a logistics issue, which in on the administrative side and not ideological.

There are two major issues on cash transfers replacing current government programmes. The first relates to the role of the state. Once we move to cash transfers, the state frees itself from provision of services that are vital for lower income groups. While the quality of services provided by government-run hospitals or schools is abysmal, they are still the only points of contact for the poor, especially in far flung areas where access to private health or education facilities is remote. And where it is available, either the quality is worse or the cost prohibitive.

The larger issue is whether or not the government can withdraw from such services? Governments all over the world play a role in creating institutions for delivery of services. Once we move over to cash transfers, the individual is left to choose the mode of use and the state steps out of the picture. In a way, the government ceases to provide services which are required for maintaining social standards. Can we really think of around 375 million children below the age of 14 years getting education in private schools once a transfer is made to their parents? Or, for that matter, health access for around a billion people who still use public institutions. Therefore, the duty of the state is to provide social services, of which food also becomes a part of the package.

Source: The Financial Express (link opens in a new window)

financial inclusion