Kind to cash

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.

If Central spending on social sector schemes and subsidies is directly given to the poor each family will get Rs2,140

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.

Inaccurate BPL list is the main reason social schemes do not reach the poor. Aadhaar won’t make the list precise

“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.

Political 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 a 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.

I delivered in a hospital and got a cheque of Rs 1,400 as incentive. But since I do not have a BPL card I still cannot benefit from many other schemes       MANRU SAHARIYA, Daretha village,Madhya Pradesh

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.

Latin American countries were the first to flirt with the conditional cash transfer model. It evolved in response to the economic crisis of the 1990s. Many governments found that in the face of the crisis the poor were not availing themselves of education and health services. At the same time governments had to cut their social spending and subsidies. They wanted the poor to use social services but without expanding the budget for it. Conditional cash transfer programmes emerged as a response to this twin challenge; they put hard cash in the hands of the people but on conditions like they sent their children to school or for health check-ups.

Mexico was the first country to start such a programme called Progresa in 1997, the year it faced economic meltdown. Progresa is a poverty alleviation programme that transfers cash to the woman heads of the extremely poor rural families. The condition is that each of the children must attend school between Class III and VIII. With change in government in 2000 the scheme was renamed Oportunidades. It was also scaled up from BPL families in rural areas to all rural and urban families. Oportunidades replaced the country’s poorly targeted and ineffective consumption- based subsidies. By mid- 1990s the country was running 15 food subsidy schemes. Still about 60 per cent of the poor rural families received no support from the federal government.

In Brazil the much-talked-about family stipend programme Bolsa Família started in 2001. It evolved from a series of localised schemes introduced in urban areas during the 1990s. Luiz Inacio Lula da Silva, the former president, expanded it in 2003. This substantially contributed to his re-election in October 2006 (see ‘Cash swings votes’). The programme became a central part of Lula’s ‘zero hunger’ campaign. In 2010 it covered 12.4 million families, up from 11 million in 2006 (Brazil’s population is 193 million). In the recent presidential elections, every candidate promised to expand it.

Conditional cash transfer has had an impact on poverty and income inequality, according to the World Bank assessment. It attributes 21 per cent of the reduction in income inequality between 2000 and 2007 to conditional cash transfer schemes in Brazil and Mexico. Such programmes have been fairly successful in reducing acute distress and increasing consumption levels of the poor. For example, in Mexico and Brazil such schemes contributed 25 per cent and 50 per cent of the total income of the poorest families respectively. In Mexico the poverty gap declined by 12 per cent, severity of poverty by 19 per cent and the number of poor by five per cent, according to the World Bank review.

In Brazil, where the health and welfare ministry evaluated Bolsa Família between 1995 and 2004, over 82 per cent beneficiaries reported eating better and prevalence of stunting in children was 29 per cent lower compared to non- Bolsa families. In Mexico, Progresa participants reported a 16 per cent rise in me an growth rate a year (1 cm) for children who received treatment in the critical age of 12 to 36 months. A good part of the success owes to the size of the schemes.

Before long several countries began copying the conditional cash transfer model. The number of countries running such schemes swelled from three in 1997 to 40 in 2010. Another 30 countries have only recently adopted such schemes. African countries are the latest to adopt this model. Most of the bilateral and multilateral donor agencies are pushing for conditional cash transfer. The scope and size of such programmes have also gone up. Mexico’s Progresa started with about 0.3 million families in 1997, but now covers five million families. Brazil started with municipal Bolsa Escola scheme in Brasilia and the municipality of Campinas. Today the federal Bolsa Família programme serves 11 million families across the country. In Colombia, Famílias en Accion programme, similar to Progresa, benefited 0.4 million families initially; it has expanded to 1.5 million families by 2007.

In Brazil over 82% people covered by Bolsa Família reported eating better. Stunting in children lowered

Reasons for the model’s replication remain economic. Countries that have adopted it are going through structural changes in their economies. They have been looking for ways to reduce social spending and better deliver services. Conditional cash transfer programmes are politically feasible and economically affordable. Politically, the rise in human development index, like increase in school attendance, brings electoral dividends. Economically, it is considered a better option than a universal dole program me. Recent studies of the model in over 70 countries by the World Bank and UNDP show that the cash or coupon delivery mode can be more cost-effective provided there is social infrastructure and transparency. Unlike the dole programmes in countries like India where 85 per cent of allocated funds are devoured by the administrative machinery and corruption, in conditional cash transfer the cost of delivery is 6-12 per cent of the amount delivered. So the potential saving is immense, especially for India, which is among a dozen countries spending over two per cent of GDP on social security and subsidy schemes.

The cost of administering conditional cash transfer schemes as a proportion of GDP has been less than one per cent in the countries reviewed, except in the initial period when one has to factor in the cost of setting up the schemes. While governments save money it does not necessarily mean more funds would be available for the poor. In Brazil the spending on the poorest is constantly shrinking. The expansion of Brazil’s well-targeted Bolsa Família to cover the bottom quintile of the population will cost 0.4 per cent of GDP, while the government spends nearly 10 times that amount on covering the deficit in the main federal pension programmes, which deliver more than half of their benefits to the richest quintile.

Though cost-effective, cash transfer models are as prone to flawed targeting as any other. Progresa, for example, excluded a large number of poor people because it covered only those who had access to health and education services. Bolsa Escola, the precursor of Bolsa Família, excluded families who could not send children to school and people like migrant labourers and homeless. Poor targeting can also mean inclusion of people who are not the intended beneficiaries. Bolsa Escola faced widespread allegations of leakage of benefits and political patronage for inclusion of beneficiaries. The government is accused of deliberately keeping the target low due to financial constraints. It took the poverty line as the sole criterion.

The inclusion error in Bolsa Família was calculated to be 49 per cent as compared to 36 per cent in Oportunidades in Mexico in 2007-08. However, given that fluctuations in the incomes of families render identification of beneficiaries at any given time inappropriate at a later point in time, and the fact that the leakages were to those just above the poverty threshold, Bolsa Família focussed more on minimising exclusion errors. Brazil’s National Household Survey in 2004 found that Bolsa Família was highly targeted at the poor and exclusion errors minimised over time.

The conditional cash transfer model has scope for improvement. Global experience has taught three fundamental lessons in making it successful. One, there must be a robust mechanism to identify the poor. Two, services that are made compulsory for cash must be available to the targeted beneficiary. Three, a highly effective system must be in place to monitor the scheme.

Madhya Pradesh is set to overhaul its public distribution system. It has decided to issue PDS users in the state with biometric cards so that no one can impersonate or fake identity. It will also replace food grain with food coupons. In August last year the state signed a Rs 250-crore deal with HCL Infosystems, an information technology company, to set up a biometricbased card system for PDS. This is the country’s largest such initiative and is being done in consonance with the Aadhaar programme. The state will hold a BPL survey in early 2011, after five years. The survey and biometric cards will decide who gets subsidised food grains.

Government officials say the new system is foolproof but people in villages do not buy the claim. Their typical response is: cards will be made for those who have been identified as BPL. Who will decide whom to include in the BPL category? “The coupon system will not solve the problem of siphoning away food grains meant for the poor to nondeserving people,” said Ashram Kumar, a community leader in Brashanpura village in Tikamgarh district, where a pilot study for the coupon system will be done in near future. And what about replacing food grain with cash? “Good. But if the BPL list is flawed, it will land up in wrong hands,” replied Kumar.

India’s move to adopt cash transfer has attracted polarised debate, especially after the Planning Commission targeted the food grain subsidies. The opposition is on two counts. First is that cash transfer requires precise identification of the poor, while India is struggling to get it right. Like the current model, it may leave a substantial number of poor out of the benefits. Second, many experts say a clinical adaptation of the Latin American model without addressing the conditions needed to implement conditional cash transfer will be disastrous. In Latin America cash transfer schemes are usually highly targeted and cater to a very small percentage of the population. “There is a good deal of illinformed enthusiasm about the model. There is no evidence that conditional cash transfer works better than conditional kind transfer,” said Jean Dreze, an economist and food rights activist.

PDS suffers from targeting errors. The 61st round of the National Sample Survey shows only 39 per cent of the BPL families have ration cards, while 17 per cent of the families in the rich group do so. “Policy makers want to wash their hands off failures. How will cash transfer help if you still have a flawed list of the poor?” asked Mihir Shah, a member of the Planning Commission.

Most of the exclusion of the poor in Brazil and Mexico has taken place due to poor identification. The Indian government cites Aadhaar as a solution. “There is nothing inherent in the unique identification programme that will ensure an accurate BPL list,” said Shah. Brazil and India also have some key contextual differences. Brazil did not have expensive social programmes like in India when it started Bolsa Familia. “If India is to consider cash transfer, it will have to do away with traditional programmes,” said Vinod Vyasulu of Bengaluru-based research group Centre for Budget and Policy Studies.

Countries like Brazil and Mexico had substantial public health and education coverage. So when they incentivised use of the services, people could access them easily. In India outreach of basic necessities is poor. A conditional cash transfer scheme must invest in the services it incentivises. “An illusion has developed in some quarters that conditional cash transfer can replace public facilities by enabling recipients to buy health and education services from private providers. This is not how such schemes work in Brazil and Mexico. They have the facilities to begin with,” said Dreze. Despite being welfare states, Brazil and India differ a lot in institutional structures. As Vyasulu pointed out strong local governments are critical for conditional cash transfer. This is the missing link in India’s policy.

Given that India has fairly covered the education and health sectors with conditional cash transfer schemes, many believe food subsidies are the ultimate targets for wholesome cash transfer. It raises many questions. One of them is: will cash transfer help people tide over inflation? People get PDS grains at fixed prices irrespective of market fluctuation. Dreze points out another constrain: “While the PDS network is wide, we do not have a matching bank network required to send money.”