Thursday, 29 November 2012

Cash transfers instead of subsidies

India is embarking on a major revamp of its social security system - replacing subsidised food, fertiliser, fuel, etc etc with direct cash transfers to the bank accounts of the "poor". Is this good or bad ?

The current system involves heavily subsidised foodgrain, fertilisers, fuel, etc being made available to ration card holders through the public distribution system. This suffers from a whole host of problems. Bribery, corruption, pilferage, etc ensure that only a fraction of the stuff ends up in the hands of the targeted people.  In some areas like fuel, cooking gas cylinders are widely misused and the diesel subsidy lands into the pockets of rich car owners. The waste is so incredible that something ought to be done.

The solution proposed is to eliminate all subsidies progressively and instead simply transfer cash by electronic transfers to bank accounts of the target population. Initially it will cover various anti poverty schemes, then extend to cooking gas and kerosene and only finally to food and fertiliser. The Aadhar scheme is intended to enable foolproof identification. This way middlemen and cheats are largely eliminated. The poor use this money to buy their requirements from normal shops selling products at market prices.

The scheme has lots of advantages. Firstly corruption will go down, although it will not be eliminated. The middlemen taking cuts will be put largely out of business. The country's subsidy bill will drastically fall - as the waste will significantly reduce. The entire rotten public distribution system can be disbanded (although it works quite well in states like Tamil Nadu and Chattisgarh).  Today's technology can ensure that fraud and stealing can be drastically reduced.

However, my worry is that once cash reaches the intended family, what will they use it on. The problem is that their buying behaviour is not predictable or controllable. Undoubtedly many men will use this money to drink . Families will use this money for atrocious causes such as dowry, or  to show status. The brilliant book, Poor Economics, draws on extensive research to prove how their decisions might not seem rational. Research shows, even with present incomes, the poor could spend 30% more on food, if they cut out liquor and tobacco.  When they buy food, the choices are not based on calories or nutrition, but on taste and style. On the medical front, they shun expenditure on low cost preventive measures like mosquito nets or chlorine tablets, even when provided free, and instead go to the local quack for a costly useless injection.

Of course, it is not for me, or anybody else, to prescribe what any individual wishes to spend money on. But I certainly have a problem if my tax rupees  go to fund drinking liquor.

Cash transfers have worked in some other countries, notably the Bolsa Familia in Brazil. But this is a conditional transfer scheme - they get a small amount of money ($12 a month) if  the children stay in school, mothers attend pre natal care, etc etc. India plans to give some $70 a month or so as a straight dole.

On balance cash transfers appears a good thing, but it is not an altogether perfect solution and needs to be implemented with care (not gunghoism). It is wise to recall how Kamaraj in the 1960s raised the literacy levels in Tamil Nadu. With great insight he introduced the mid day meal scheme. Families sent children to school so that they could have a square meal. I doubt the move would have been that effective if he had instead given cash for them to buy a meal.


J said...

Why not implement something like food stamps where the recipient has discretion over how to spend the money as long as it is for basic food. Can the Indian government not use the banking system to credit the account with cash but the assigned money can only be withdrawn in the form of food stamps. But I guess then the local sabzi mandi guy has to accept the food-stamps instead of cash. More likely that the liquor shop will accept the food stamps :( I would be strongly against dole without restrictions if the objective is to replace the "ration card" system, which is what I am guessing it is based on your description.

gils said...

kalakreenga thala..i cudnt understand this scheme when i read it in papers...nuga post padicha thaan naatu nadapulam velanguthu..indiogite times nu news papera mathiralamay??

gils said...

romba naala kekaknumnu nenachen..athenna indigoite?? antha airwaysla major shareholdera neenga??

Asha said...

I agree with gils idea. Strongly recommend his idea to float indigo times, so many will be benefitted.

i tell you one incident where the cash goes. I don't know for what reason( kuccha housing i presume) but the AP Government has given 40,000 cash to the so called BPL families. one family has used it to buy motorbike and I can see tata sky antenna in many of the construction labourers huts near my home. They draw the power from the upcoming condominiums where they work as labours. ( builders help)

I think instead of cash to the young, they should pay in kind and utilise it for the elderly population & destitutes for their medical facility.

As long as the cash is utilized sensibly for some poor family's basic need it is fine with me too, if it is for the luxury of the BPL families like the so called chinese tV sets, laptops for the 12th std children, It is a matter of concern.

I also feel that the money from the temples like tirupati should be utilized by the govenment for the welfare rather than decorating the god with expensive outfits .(with due respects to god) (an expensive saree was gifted to the god recently studded with diamonds by a business house. Periodically many diamond studded crowns are donated to the temple). Many temple amounts when accrued can be more than the money at World bank i suppose.

Ravi Rajagopalan said...

@Ramesh: Since you are on my Board you know this is an area I dabble in. So allow me to share some views.

1) Most knowledgeable people in Government feel this cash transfer is going to be an unmitigated fiscal disaster. How will this be funded. Worse how will it be funded in the next year and the year after that.

2) It has already distorted rural economics. Risk taking has been affected. Since Mamta and Co have wisely made it impossible for rural industrialisation, surplus labour either migrated to the city, started a small business or found farm employment. MNREGS has severely impacted all of these.

3)Migration levels are dropping slowly, and in Tamil Nadu at least, farmers are finding it difficult to employ people. So what they do is shift to cash crops, automate, import more quiescent labor from BIMARUCJ states, and worsen the rural employment problem in Tamil Nadu.

4) A 20% leakage will be built in. As someone told me, this pays for the political system we enjoy.

A nation of intelligent people in hock to a corrupt political system will create disasters like this.

Ravi Rajagopalan said...

@Asha: I will write a longer comment. Rural Tamil Nadu pre-British rule is instructive. Gotta go now.

Ramesh said...

@J - Food stamps in India will become like Sodexo coupons - they will become currencies in their own right. It is going to be a dole and covering some 750 million people - that's a lot of people to dole out to, although to be fair, an even greater number is perhaps receiving some form of benefit or the other

@Gils- Honoured by the comment. One day I'll tell you why indigoite !

@Asha - Honoured. Your observations on the use of the cash hits the nail on the head. We shoudn't grudge the poor some of the luxuries, in a dreary life, the luxuries are their only source of happiness. My problem is with liquor and tobacco or completely useless activities like extravagance in marriage.

@Ravi - Yes its a huge issue - doles encourage laziness as NREGA has demonstrated. There is actually a shortage of unskilled labour in India - can you believe it. Much interested in your example of Tamil Nadu before independence - do write.

sriram khe said...

I am not optimistic about this latest government program. I am in complete agreement with Ravi here. Instead of writing anything, which might end up repeating Ravis's points, I want to approach it from another perspective.

Over the years, when it comes to any kind of a "problem," it seems like the answers are expected to come from above--from the central government, or from the state government. This appears to be the attitude with all kinds of "problems"--from micro-problems of piles of garbage in neighborhoods to macro problems of poverty.

But, whatever happened to the old Gandhian idea of local organizing and working from the bottom-up?

Overlay on this an academic argument that many of these "problems" are also business opportunities.

Oh well, .... enough rambling for one morning, I suppose ... for all I know, it is the fever talking

Ravi Rajagopalan said...

@Sriram: Mahatma Gandhi, that wise old bird, was absolutely correct to surmise that the destruction of the village community through urbanisation had to be reversed. This is often misinterpreted as Luddite revanchism, especially when juxtaposed against our mental image of the charkha. His point was more subtle - villages encourage communities that take responsibility for themselves, including their social ills. If local support fails, someone has to step in - the local raja, the maharaja in the province, the suzerain sitting far away. Or larger economic forces take over. But the first stop has to be the village and its people.

This concept of communities applies to urban India as well. When communities do not take responsibility the giver of such aid and services assumes too much power, and leads to the egregious corruption and rent-seeking you see in the smallest ward office of any Indian municipality.

This is why the Hazare movement itself was flawed - it did not focus on local communities and it died a natural death (it was also my biggest objection to all those "fasts" in Jantar Mantar).

And this is why NREG and similar schemes will exist. I do not argue against poverty alleviation because poverty is a condition not a character flaw. But we live in Dystopia.

Ravi Rajagopalan said...

@Ramesh/Asha - I am hogging this blog but I hope you will forgive me.

I took some time to refer to my copies of works by David Ludden and the venerable Nilakanta Sastri, both of whom have written extensively about the history of South India. This is what they say.

"The temple was not merely a place of worship; it filled a large place in the cultural and economic life of the people", says Prof Sastri. This is obvious but the specifics are interesting. Temples were the repository of land records in the community. Gifts and endowments made were recorded - if made by the King they were of course inscribed on the walls. Agreements were negotiated in the temple precincts. Most important temples had a staff of priests, florists, cleaners, scupltors, artisans, cooks, nautch girls, etc. These were paid for from lands held by the temple. In times of need, it acted as a banker and donor to those who needed it. Famine and drought were common. Particularly in the latter case, the temple tank apparently acted as the fulcrum of a network of ponds and tanks that would provide some relief to farmers growing vegetables if the rain was insufficient to water grain. And of course temple granaries stored grain for famine relief.

This system of social security was built around the caste system. It provided a social structure, a semblance of which is necessary to make any economic framework function. It is remarkable that despite depredations of invaders both local and foreign, village life in India continued broadly unchanged, and to a large extent it is because of temples and houses of worship.

In modern times this apparent impermeability to change is a source of wonder as well as frustration. But the shock of modernity has destroyed a number of things in its wake while bringing about a lot of change.

Since the temple was a part of a social set up involving the raja, the praja, the vaisya, the priest, the workers and other members of society, it worked well. In modern India, it is unthinkable.

Any further exploration of this theme could end up with me getting beaten up. So I will stop here.

Note that I am NOT a casteist - nor do I hanker for the good old days.

Asha said...

@ Ravi - Thanks Ravi for sharing those informative lines about the significance and utility value of temples in days of yore. very useful read. Hope to pick up those books you mentioned.

I heard those similar lines from The hereditary head priest of Chilkur Balaji temple Dr. M. V. Soundara Rajan who is pushing for the de-politicisation and de-commercialisation of temple administrations. After successfully amending the endowment act( government interference in temple admin by issuing VIP tickets,mis managing temple funds, temple jewels etc.,) to make Chilkur an autonomous temple.
He is now trying to prevail upon the TN politicians to introduce free darshan, ticketless ‘archana’ and ensure administration of temples without political interference in TN too.

DR. MVS – the chief hereditary priest had already impressed upon Y.S Rajashekar reddy (Ex. CM) who had visited the temple during the 2004 pre-election days, and after his glorious win , kept up the word and amended the endowment act to make Chilkur balaji temple an autonomous trust. Similar was the case with the Karnataka politicians who visited this temple, they too honored their words .

If his demands are met, then Tamilnadu – the land of ancient temples would definitely become a travelers/tourist/devotees delight.

P.S: Chilkur balaji does not encourage donations, VIP darshans,special privileges, Hundi collections(there is no hundi in this temple, hundi he says is a hawala word in the dictionary). Encourages handloom weavers, donations only through two nationalized banks which are well accounted, no plastics used and is an institution where traditions, culture and healthy lifestyle and moral values are preached through discoursesand preserved.

This temple is hailed as visa Balaji temple because it is famous amongst students to make parikramas for the visa and this info is acknowledged in wall street journal.

Asha said...

@ Ramesh - Thanks for the comment space and interaction with insightful and informative commentors like Ravi, you and others. It is a delight to be here and learn so much about business, economics and other related info. Thanks so much :)

Ramesh said...

@Ravi /Asha / sriram - I am following your discussions with great interest and learning. I think I stand the most to gain from this blog as all of you contribute such a wealth of information and perspective. Thank you so so much.

Ravi Rajagopalan said...

@Ramesh: I echo Asha's comments that you provide a space for people to express themselves. Possibly why you were such a gifted manager.

@Asha: thank you, and I enjoyed the interaction with you. Re the possibility of the Hindu Charitable and Religious Endowments Act being amended or repealed - forget it. In small temple after small temple, you will hear stories of how the temple lands have been misappropriated by the local goonda-turned-MLA. Some of these people have their hands in idol theft, substitution of gold ornaments with fakes, etc. Sadly since the priests are expected to live a middle class life on a pittance, they also participate or connive in such robbery. It is a big fat milch cow, and no politician will let go of it. Particularly since the Tamil variety of politician is a particularly Godless kind, I do not have any hope...

sandhya sriram said...

There is such intellectual conversations that are happening here that i feel really small writing onto here.

But then, on the topic, as you know, i was in Rameswaram last week. I was chatting up with some people on NREGA, supposedly, another cash avenue. some of them openly shared with me that many the people, just have to sign a register and log attendance until 4.00 PM. no one is really bothered whether they work or not. Of course, it is a little coloured view, but in a country of our span, it is very difficult to manage any cash transaction of that magnitude. I just also wonder what better choice could we have.

PS: GILS - Ramesh should have ideally raised a copy right case on the airline but he let it be.

venkat said...

itha vida kiltharama oru arasaangam thanudaya makkla kevala padutha mudiyathu. porupu illtha nadavatikkai ithu. rural economy pathi yosika kuda intha arasukku neram illa, innam koduthu mkkalai somberi aakuthu. innaiku vivasayam alinjukittu varathukkana adipadai kaaranatha purinjikitu athu sampantha patta thidankalai varuvaai itti tharum villai nirunaiyathai sari seythaale pothum, kiramapura porulaatharam valarum, atha vituttu salli thanama ottu vanga nenaikira kevalamaana thittam, intha innamkal. (naan posta padikala karanam to be in control)

venkat said...

After reading post i got little clear view. public distribution system like ration cannot be disbanded, it has to be upgraded with digital technology. when we have UID now we now exactly how much grains per person to be supplied in particular area, so send only that limited quantum to ration shops and make all the subsidized things available only through ration (even gas). leakage happens in the way most ration shops sell it outside, now every selling must be done through digitized entry linked with adhars card so that leakage is prevented. digital complain box also can be introduced to monitor frauds. on petrol subsidy same way of discount through adhars card can be introduced. problem is how identify the poor and how they are eligible to avail subsidy is critical.

Ramesh said...

@Sandhya - That's true. NRGEA has caused a lot of problems

@Venkat - The problem Venkat is that in a large country like India its almost impossible to stop corruption and leakage. So there is some merit in cash transfers since that can be the best way to minimise leakage. But as commenters have pointed out here, this is a complex area.

venkat said...

but sir i am sure this will increase leakage in other form. finding an easy solution may not be a right solution always. this is good only for pension schemes. i am not opposing your view, my voice is to few journalists who visits this space.

Ramesh said...

@Venkat - Oh you are very knowledgeable about rural India. Please debate your point of view. I'm sure other blog readers would also very much welcome your perspective and debate, for you know a lot about this area.

Ravi Rajagopalan said...

@Venkat: I would like to hear your views. Incidentally in today's Hindu there is an account of what happened in the first case of cash transfers for subsidies instead of product subsidies. Do read it. It is instructive.

It all comes down to very strong local self-government, that can exercise some supervision. But then, anyone who is familiar with England would remember the magazine "Private Eye" - a section of the magazine is called Rotten Boroughs and it is a weekly expose of corruption in councils in British towns and villages.

As Ramesh put it, if 70% of the money reaches those who it is intended to reach, it is a 10 fold improvement on the present situation.

venkat said...

:) thank u, in this 2 years all i learned is bloggers do not like opposite views. i am happy not saying opposite view. knowledge ka baath tho thoor hai.

Vishal said...

Oh.. thanks for enlightenment, Ramesh, once again! though I have heard these stuffs in headlines in recent times, but could not read much about it... thanks to your space, once again!

Ramesh said...

@Vishal - You are working too hard - need a break my friend :)

Follow by Email

Blog Archive

Featured from the archives