For a long time, the debate on cash transfers versus food rations has been central to welfare economics, focusing on their respective impacts. A recent study on Karnataka’s Anna Bhagya Scheme (ABS), a cash transfer programme launched in 2023, has revealed some interesting findings.
Unconditional cash transfer programmes for foodgrains can significantly improve household welfare, leading to increased consumption and savings while integrating marginalised communities into the formal banking system.
The average Indian consumed approximately 9 kg of cereals per month, according to National Sample Survey Office (NSSO) data for 2022-23. Through its national food security programme, the central government provides more than half of this — 5 kilogrammes (kg) for free to identified beneficiaries.
In 2023 Karnataka aimed to further support these beneficiaries by covering the remaining 4 kg. However, due to the unavailability of additional rice, the state introduced an unconditional cash transfer instead.
In July last year, Karnataka pioneered direct benefit transfer (DBT) for foodgrains by transferring Rs 34 per kg per person each month under its ABS. On average, households received Rs 576 to Rs 583 monthly, which, though a small amount, had a significant impact on household income.
The study, conducted by Shweta Saini, agricultural economist and chief executive officer of Arcus Policy Research; Siraj Hussain, former Union Agriculture Secretary; and Zeeshan, former senior research analyst with Arcus Policy Research, was released on October 9, 2024. It offered crucial insights into household economics and financial behaviour.
For instance:
Most DBT funds were used to purchase more or better-quality grains.
Although the DBT amount only accounted for about 5 per cent of household income, it facilitated additional spending on education, healthcare and loan repayments.
Around 43 per cent of rural and 33 per cent of urban respondents opened their first bank accounts after the introduction of ABS.
The researchers surveyed 1,620 ABS beneficiary households in rural and urban areas across six districts of Karnataka in August and September 2023, using a structured questionnaire. The first round, conducted in August, involved physical surveys of the households, while the second round, in September, consisted of follow-up telephone surveys.
The districts surveyed included Bengaluru, Bengaluru Rural, Chikballapur, Kolar, Tumkur, Mysuru and Ramnagara.
The study found that an increase in DBT amounts led to a substantial rise in household consumption. The primary use of DBT funds in both rural and urban areas was to purchase grains, with 79.77 per cent of respondents using the funds for this purpose.
However, a significant portion of the funds (22.54 per cent in rural areas, 17.84 per cent in urban areas) was spent on other needs, demonstrating the flexibility of unconditional cash transfers in addressing various necessities.
The scheme enhanced financial inclusion, as many households opened bank accounts for the first time following the introduction of ABS—about 43 per cent in rural areas and 33 per cent in urban areas.
“Such an increase in the rate of financial inclusion aligns with research findings where government interventions, such as cash transfer schemes, are associated with a significant boost in financial inclusion, particularly among vulnerable populations,” said the study.
The analysis revealed that DBT boosted household savings. In July, rural households saved Rs 350 (61 per cent of the DBT amount), increasing to Rs 546 (95 per cent) in August. Urban households saved Rs 319 (55 per cent) in July and Rs 566 (97 per cent) in August.
“A noteworthy portion of households retained part of the DBT amount in banks, suggesting a nuanced approach to financial management among the beneficiaries,” it said.
Reasons for saving included house repairs, weddings, children's education and medical emergencies, reflecting diverse financial priorities across different settings.
Interestingly, indebted households on average saved more than those without debt: indebted rural households saved Rs 1,865 and urban households Rs 1,906, compared to non-indebted rural households’ Rs 1,672 and urban Rs 1,859.
“This trend might suggest that indebted households are more savings-conscious, potentially to manage debt obligations,” the authors noted.
However, between July and August, the percentage of households withdrawing the full DBT amount increased, from 59.1 per cent to 69.4 per cent in rural areas and from 61.1 per cent to 70.6 per cent in urban areas. The proportion of households retaining some DBT in banks, therefore, decreased from 40.9 per cent to 30.6 per cent in rural areas and 38.9 per cent to 29.4 per cent in urban areas.
Among the sample, about 40 per cent of the respondents favoured receiving cash. Among these, 55 per cent were from rural areas and remaining about 45 per cent from urban areas. Of the remaining 932 respondents who responded with a preference of grains over cash, the urban-rural spilt was evenly divided.
One of the major reasons for a higher preference for grains over cash was the cost involved in accessing banks or automated teller machines (ATM). Visiting a bank cost these respondents an average of Rs 13.68, while visiting an ATM has an average cost of Rs 11.91.
A small percentage of respondents reported that male household members had spent funds without the household head’s knowledge (4.23 per cent in rural areas and 5.37 per cent in urban areas). Additionally, 18.93 per cent of rural and 14.45 per cent of urban respondents reported that DBT funds were used for smoking, drinking, or gambling, raising concerns about non-productive use.
“Despite these challenges, a majority of respondents (76.84 per cent rural, 80.18 per cent urban) reported no misuse of DBT funds, indicating that the funds were largely used as intended, either for grain purchases or other constructive purposes considered more important by the family. This demonstrates the scheme's effectiveness in fulfilling its objectives while also pointing to areas of potential improvement,” the study highlighted.