Print Email to Friend| From Tehelka Magazine, Vol 9, Issue 50, Dated 15 Dec 2012

CURRENT AFFAIRS   DIRECT CASH TRANSFER

Replacing kind with cash

By doling out cash in lieu of subsidies, is the UPA government trying to run before it can walk, wonders Akshai Jain

Illustration: Anand Naorem

WHEN PATRAM, a daily wage labourer in Kotkasim, Rajasthan, brought out a bunch of empty kerosene cans and two ration cards to show to Reetika Khera, little did he realise that he was illustrating not only what was wrong with India’s subsidy system, but also what could go awry in the tentative efforts to remedy it.

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Khera, an economist, was researching a pilot project launched by the government in Alwar district. It involved replacing subsidised kerosene provided by the Public Distribution System (PDS) with cash that would allow beneficiaries to purchase kerosene at retail prices. If successful, not only would this reduce the diversion of kerosene to the black market, but also give beneficiaries the choice of buying it from a store most convenient to them.

Initially things had gone well, but in the past few months, Patram hadn’t been able to afford kerosene. This, despite having two ration cards, in his and his father’s names, instead of one that he was entitled to.

The project was part of a grand plan first outlined in the then finance minster Pranab Mukherjee’s budget in March, to gradually replace the leaky and notoriously corruption-prone subsidy mechanism with direct transfers of cash.

Not surprisingly, at that time few people noticed. Direct transfers were not new. They were being used for MGNREGS payments in Andhra Pradesh; in Janani Suraksha Yojana, a programme that incentivises institutional childbirth; and in a number of small projects like the Kotkasim one, launched in December 2011.

As is the case with most government endeavours, people assumed that any radical expansion would be many years in implementation. So, when on 26 November, Prime Minister Manmohan Singh, speaking at the conclusion of the first meeting of the National Committee on Direct Cash Transfers, announced a timeline for countrywide implementation of cash transfers, almost everyone was taken by surprise.

The committee had selected a list of 42 schemes in which cash transfers were to be implemented. Of these, transfers would first be launched in 29 schemes, run by the ministries of social justice and empowerment, human resources development, minority welfare, women and child development, health and family welfare, and labour and employment. In his budget speech, Mukherjee had also mentioned LPG and kerosene. Those presumably would follow.

The rollout was to be fast — covering 51 districts by 1 January 2013, 18 states by April and the entire country by April 2014. What was supposed to be a marathon had been turned into a sprint, timed not surprisingly to cross the finishing line before the 2014 Lok Sabha election.

Aadhar, the unique identification number (UID), was to be the platform on which the entire system would be based. With Aadhar and a bank account linked to it, beneficiaries of subsidies would get cash instead of kind. In the case of scholarships and pensions, the money would be credited directly to bank accounts instead of being routed through educational institutions and offices.

The government was euphoric. This, crowed Finance Minister P Chidambaram, was going to be a “gamechanger”. A panacea for all ills — it would reduce corruption, help better target subsidies and empower the poor by giving them the ability to choose.

The BJP was first stumped, then protested that the announcement violated the ‘model code of conduct’ that was in place for the Gujarat and Himachal Pradesh elections. The Election Commission has, on their petition, delayed its implementation in the two states till the elections are over.

Meanwhile, academics, civil society groups and activists are questioning the rush. There’s little detailed information coming from the government.

Such an ambitious undertaking, with huge financial and social implications needs to be thoroughly examined, they maintain. Even the names of 29 schemes in which cash transfers are going to be implemented have not been made available. “We are arguing,” says Nikhil Dey of the Mazdoor Kisan Shakti Sangathan, “in a miasma of not knowing.”

However, Kotkasim has achieved instant fame. The government projected the experiment as a complete success, claiming that it had managed to scotch the diversion of kerosene. The massive 82 percent drop in kerosene sales from PDS stores in the block was indicative, they said.

‘If the idea is to control corruption, what’s happening currently is only a big repackaging exercise. Corruption is much better controlled by digitising records and making them publicly available’ Reetika Khera Economist and Social Activist

What actually happened, says Khera, was that most beneficiaries only received their first instalment of cash. With the money drying up, they could no longer afford to buy kerosene at market rates.

There were procedural issues related to opening of bank accounts too. “In a block where over 25,000 families have ration cards, only 15,000 bank accounts were opened,” she says. “No wonder the consumption came down.”

There are similar problems and questions with other pilot projects. Neither have the modalities of cash transfers, even in the case of scholarships and pensions, been disclosed. “The government would have done itself a big favour,” says Dey, “if it had gone about this methodically and not made such a big issue of it.”

THE BIG PICTURE
The government provides subsidies in nearly all areas, the largest of which are fertilisers and food. Those are not being considered for direct subsidies yet. Pensions and scholarships, which are currently the focus, accounted for Rs 5,110 crore and Rs 4,519 crore respectively in 2010-11.

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Direct transfers, as the prime minister mentioned in his announcement, will work only if everyone has an Aadhar number and a bank account. They also require a computerised infrastructure that integrates Central government databases with those of state governments and local bodies.

That’s where the problems start. As of October, only 210 million Aadhar numbers had been issued. This excludes states such as UP, Bihar, Odisha, Chhattisgarh, West Bengal and Assam where enrolment is being doing by the Registrar General of India. The chances of covering the entire country by April 2014 are remote.

A number of privacy concerns have also been raised about Aadhar, none of which have yet been addressed. There is no overarching policy governing the collection of data. A report on the subject by former judge AP Shah for the Planning Commission observes that this has “led to ambiguity over who is allowed to collect data, what data can be collected, what are the rights of the individual and how the right to privacy will be protected”.

The infrastructure that would allow for a monitored yet centralised cash transfer directly to beneficiaries is a bigger challenge. “It has taken 10 years in Gujarat to establish a system where even anganwadi workers get money directly into their accounts,” says economist Bibek Debroy. That has happened only in two or three states.

In rural areas, where access to bank accounts is difficult, the government has been relying on ‘business correspondents’, individuals affiliated with banks, to open accounts, dispense and receive money. These are what, Dey says sarcastically, “the government means by micro-ATMs. The idea was to ensure that people did not have to pay bribes to get their money. Instead, one source of corruption is being replaced by another”. According to him, banks in Andhra Pradesh have already started withdrawing from this model.

Sharon Barnhardt of the MIT’s Abdul Jameel Poverty Action Lab (J-PAL) says banking correspondents have been good at setting up accounts because they have been given incentives to do so, but they have been terrible at maintaining them.

‘It took Gujarat 10 years to establish a system for depositing money directly into the accounts of just anganwadi workers. Doing this for the entire country in a little over a year is impossible’ Bibek Debroy Economist, Centre for Policy Research

Even the Nandan Nilekani-led task force on direct transfers recommended in its interim report (in June 2011) that “if technology is being introduced for the management of a subsidy scheme, then it may be best to not alter policies drastically until computerisation and automation is completed”.

The government’s assumption that cash transfers will help it reduce subsidies are also tenuous. This is possible only when below poverty line (BPL) populations are correctly identified. National Sample Survey data indicates that nearly 62 percent of all BPL and Antyodaya Anna Yojana cards are in the hands of non-poor households. But this is not something Aadhar is even addressing.

Eliminating ‘fake’ beneficiaries, Khera believes, is better done by introducing biometric systems, as has been done for MGNREGS payments in Andhra Pradesh. “Digitising records and pasting information on village walls is a far more effective way of controlling corruption.”

In the case of LPG, kerosene, food and healthcare, cash transfers would also need to be ‘indexed’ to inflation and regional variations in the prices of these services. There is, as yet, no discussion on how this will be done. Even if it is possible to implement it, “it will end up being arbitrary and subjective,” says Debroy. The CPM has warned that if this is not done carefully, it will have “an adverse impact on increasing malnutrition and hunger”.

The biggest concern, though, is that the way cash transfers are being introduced heralds a governmental retreat from its responsibilities. Replacing kind with cash does allow people to make a choice, but that is on the assumption that there are things to choose from.

Even the World Bank believes that cash transfer programmes work best “where the supply of health and education services is extensive and of reasonable quality”, the case in Latin American countries such as Brazil where they have been successful.

In India, this is far from true. In parts of the country where infrastructure, especially healthcare, does not exist or is too expensive, cash transfers might just have a devastating impact on the poor.

Proponents of cash transfers have, however, argued that one of their biggest benefits is that they allow the poor to use the subsidies that they are entitled to but have not availed because of lack of access to information. “We are not against all cash transfers,” says Dey, “we just want them done carefully and case-by-case.”

PENSIONS AND SCHOLARSHIPS
Scholarships and pensions are the least controversial of the areas in which cash transfers are proposed. “These are areas where there’s much lower variation, which is an important consideration for the success of cash transfers,” says Barnhardt.

The exercise here is one of repackaging, especially since studies have shown that corruption in pension schemes is small, in the range of 4-7 percent. However, there is concern that pensioners will find it difficult to manage the paperwork associated with getting an Aadhar number.

The current system of channeling scholarships through educational institutions also ensures continuous student enrolment and performance. Depositing the money directly into a student’s account could undermine this and open it up to misuse.

LPG AND KEROSENE
Direct transfers could help curb the massive black market in LPG and kerosene, but this will only be possible once pilot projects, like Kotkasim, are fine-tuned. That is likely to take some time, as most of the projects have been half-hearted.

Replying to a question in Parliament, Petroleum & Natural Gas Minister M Veerappa Moily stated that a pilot LPG project had been started in Mysore, and that “a token transfer of money for 10 customers has also been made to test the cash transfer mechanism”.

A cap on the number of subsidised LPG cylinders recommended by the task force on direct transfers has already been introduced. The next phase requires the direct transfer of subsidies to consumers. What’s envisioned is a model based on usage, where customers will be reimbursed after a dealer confirms the delivery of a LPG cylinder. It isn’t clear whether a similar model will finally be implemented for kerosene.

FERTILISER
At a press conference explaining government strategy on direct transfers, Chidambaram admitted that “food is a complex issue and fertiliser is more complex than food”. At Rs 62,301 crore, fertilisers hog the bulk of India’s subsidy spending. Part of the reason for this is the rampant diversion of fertilisers to industry.

The Nilekani task force had outlined an ambitious plan to create a system of tracking fertilisers along the supply chain from manufacturer to retailer. Ten pilot projects are due to start by the end of the year, but given the number of points of sale and the difficulty of monitoring demand, even this rudimentary system is likely to take a few years.

FOOD AND HEALTHCARE
A 2011 survey done by a group of J-PAL researchers in Bihar summed up some of the glitches in the PDS system. Fair price shops were open infrequently (10 days per month in urban areas and six days per month in rural areas), had long lines (52 percent of rural respondents waited more than 45 minutes), and frequently adulterate food grains (80 percent of respondents).

Yet, there are states such as Chhattisgarh and Tamil Nadu where the PDS is functioning extremely well. And others such as AP, Himachal, Kerala and Rajasthan that are moving towards making PDS near universal. Levels of pilferage have also come down drastically, says Khera, from 75 percent to 30 percent in Odisha and 50 percent to 10 percent in Chhattisgarh.

The shift to direct cash transfers in both food and healthcare will reduce subsidies only if it is accompanied by a concurrent reduction of government services in both areas. In case of the PDS, that is going to have an effect on government procurement of foodgrain and subsequently on the entire agri sector. In these areas, the private sector is not a substitute for the government, especially in rural areas. Acknowledging this, a study done by Santosh Mehrotra of the Institute of Applied Manpower Research proposes that any cash transfers in PDS be limited to cities, where there are enough shops to meet the demand.

However, if the goal of cash transfers is to empower people, it would make sense to ask them whether they prefer food or cash — and the system most likely to work will require the parallel presence of both.

But these are finer points that the government seems to have overlooked.

A slew of pilot projects in already on the drawing board. The Ministry of Consumer Affairs, Food and Public Distribution had plans to introduce them in six Union Territories. The Delhi government’s Dilli Annashree Yojana targeting 6 lakh families is set to start on 15 December.

The government is hoping the cash transfers, tagged “Aapka paisa, aapke haath” will do for it in 2014 what MGNREGS, with its catchline “Congress ka haath, aam aadmi ke saath” did in 2009. Meanwhile, Patram, the eponymous aam aadmi, illuminates his house with candles and the feeble light of his cell phone.

akshai@tehelka.com