The government will begin switching over to a system of direct cash transfers for welfare in the New Year and hopes to roll it out all over the country in the ensuing 364 days. This is a radical departure from the existing welfare delivery mechanism so riddled with leaks that a mere fraction of
the benefits reach the intended target groups. By co-building these transfers with biometric enumeration under the Aadhaar scheme, Prime Minister Manmohan Singh hopes to bring banking to a large chunk of the population that is financially denied today. If the Congress pulls it off, cash transfers will pay handsomely in political, economic and social dividends. The question is whether it can telescope the process within the schedule it has set for itself.
Direct cash transfers are an improvement over, say, actually providing the poor food rations in that it avoids the twin traps of the benefit reaching those who do not deserve it and not reaching those who do. With iris and fingerprint scans working as passwo-rds for bank accounts, the target population is more scientifically identified. Pushing money into such bank accounts also cuts out the layers of intermediation in, say again, buying, storing and selling subsidised grain. This is another efficiency gain that should help. What cash transfers cannot do, however, is track whether the intended beneficiary is using the money he gets for the desired use, like buying food and medicine instead of liquor. Grain provided in ration shops can be sold in the open market but it is eventually eaten by somebody. Cash in bank accounts can be used for just about anything. Governments elsewhere have experimented with food stamps to guard against this eventuality, but such vouchers themselves become an alternative currency that is traded. If direct subsidy is the way forward, cash remains the best tool.
The government is, therefore, justified in feeling its way around the new mechanism. Initially, scholarships, pensions and women’s and children’s health benefits — which are less prone to diversion — will be sent down the cash pipe. Food, fertiliser and fuel, the three big buckets of India’s subsidies, will have to await the positive outcome of the country’s most ambitious attempt to reform welfare delivery. Mr Singh has warned of the consequences of diversion of money intended for the principal subsidies to other uses and thereby has limited the scope of cash transfers. A limited rollout as the administration fixes the last-mile connectivity of a bank account for every needy Indian would work in favour of a bigger government initiative down the road. Plugging the leaks in delivery is critical to India’s ability to provide more welfare. The switch could be jeopardised if we rush headlong into cash transfers before adequate safeguards are built around it.