Kitna Paisa, Kiske Haath? (How much money, in whose hands?)

[A guest post by Kartik Akileswaran and Arvind Nair. Arvind and Kartik are graduate students at the Harvard Kennedy School studying public administration and international development. Kartik has a background in public policy and international development, and has three years of experience in impact evaluation with Innovations for Poverty Action and the Jameel Poverty Action Lab. Arvind has a background in economics and policy research, and has worked in the Ministry of Finance in Sierra Leone for two years.]

The Indian welfare state is set for a reinvention, as subsidies of all kinds are in the process of being monetized.  Some commentators view this effort as a hastily thought-out big push in an election year.  Meanwhile, the Government’s selling point is that cash transfers will bypass the existing welfare machinery and deliver benefits straight to the people.  Aapka Paisa, Aapke Haath  (“Your money in your hands”) is the pithy campaign slogan that is meant to convince the people of the reform’s value.  Yet we need to analyze whether this sort of direct transfer of purchasing power is possible and, even if it is, whether the Indian state is capable of delivering cash to the people in a reliable way.

On the former issue, of the feasibility of transferring purchasing power through cash, economists have long touted the greater efficiency of cash in enabling poor households to purchase goods and services that they need.  Empirical studies of cash transfer programs support this claim.  Of course, switching to cash makes sense if the cash transfer bestows purchasing power on households that is equal to the value of the subsidy that the households receive currently.  In other words, a transfer of purchasing power in cash only works if it is equivalent to the current transfer of purchasing power in subsidies.  In a narrow technical sense, this would require that cash transfers be indexed to regional, and preferably, local measures of inflation for essential commodities.  This is administratively complex and may not even be feasible.  Given the lack of competition in rural agricultural markets, prices of food, kerosene and other essential commodities may increase with an influx of cash.   The cash transfer pilot for kerosene in Kokrasim in Alwar district provides a sobering example: the cash transferred was insufficient for families to purchase their monthly requirement of kerosene, as market price increased substantially.

The latter issue, of the Indian state’s capability to implement the cash transfer program, is of equal concern.  A series of challenges immediately come to mind when thinking about how the cash transfer will be implemented:

Identification and Targeting: The UIDAI has issued an estimated 280 million UID cards over the course of three years, meaning that 800 million more cards need to be issued before April 2014, when the cash transfer is set to cover the entire country.  Such a vast increase in the rate of issuing cards seems unlikely.  Furthermore, while the Government plans to target the transfer based on a census identifying socioeconomic status and caste, Union Rural Development Minister Jairam Ramesh claims that this census will only be completed in July 2013, several months after the transfer is planned to be rolled out to 18 of 28 states (others suggest that this timeline may be wishful thinking).  Even after compiling this eligibility list, there is no guarantee that it will accurately identify the poor.  Many non-poor households have finagled their way onto BPL lists, for example, leaving the poor behind.  In 2009, a National Advisory Council panel estimated that only 39% of households deemed “poor” had received a BPL or Antyodaya card.

Financial Instruments and Bank Accounts: Financial access is a key element of the cash transfer, both because cash will be delivered directly to beneficiaries’ bank accounts and because beneficiaries need a way to access the cash in their accounts.  The status quo in India on both fronts is discouraging.  A recent World Bank study estimates bank account penetration across India at 35%, and is even lower for the poorest households.  Moreover, as many (particularly rural) poor households do not have access to bank branches or ATMs, it appears as though the Government will pursue a model whereby “banking correspondents” (essentially roving banking agents) will administer a system of micro-ATMs.  The problem is that banking correspondents only cover 70,000 villages at present, and will need to grow tenfold by the April 2014 countrywide rollout of the transfer.

Grievance Redressal: In the event that all of the aforementioned challenges are adequately addressed, there will undoubtedly be cases of non-payment, late payment, or inadequate payment to beneficiaries.  In these cases, it remains unclear how citizens will be able to file grievances and how these grievances will be redressed by the Government.  These same issues plague another of India’s massive social programs, MGNREGA.  Government reports and household surveys indicate that the lack of a grievance redressal mechanism in NREGA has allowed states to drag their feet on resolving complaints, perpetuated embezzlement of funds by public officials, and prevented money from reaching intended beneficiaries.  At present, there does not seem to be a strategy in place to avert these same problems in the cash transfer program.

Does the current implementation strategy of large scale “piloting” in 51 districts in 2013, and scaling up by 2014, help address the challenges? The answer, most clearly, is no.  Firstly, while the Government is technically “piloting” the cash transfer, the pilot is set to last only a few months, with no systematic and rigorous evaluation, and will likely be carried out in districts that have relatively high UID coverage and bank account penetration.  Consequently, the results of the pilot may not be that informative and, even if they are, will not be representative of how the program will work across India.  A better approach to piloting would be to conduct a proof of concept of the technical aspects of the transfer, followed by a larger pilot of the program in a representative sample of households with a concurrent evaluation.  (Such a strategy was suggested by Karthik Muralidharan, economics professor at Univeristy of California-San Diego, and others to the Government of Bihar in December 2011).

Second, rushing into a massive cash transfer program may complicate the Government’s ability to rectify problems on the fly, both politically and administratively.  The famous Brazilian cash transfer program, Bolsa Família, is often touted as the model for the cash transfer in India.  Lest history fall by the wayside, Bolsa Família grew out of a combination of other transfer programs that had started at the municipal and state levels and had been operating for several years prior to the launch of Bolsa Família.  These subnational cash transfer programs were then individually scaled up to the national level, and subsequently consolidated into Bolsa Família.  The Indian cash transfer program parallels the consolidation aspect of Brazil’s approach.  Nonetheless, the fact that cash transfers in Brazil started from the bottom and diffused upward and outward suggests that kinks in program administration could be smoothed out at smaller scales and the resultant successes could then be scaled up.  Of course, the evolution of Brazil’s cash transfer program is not the only path for implementation, but India’s top-down, rushed approach provides little space for weaknesses to be identified and rectified at the local level so that the most effective modalities of the program can be scaled nationally.

The Government’s ambitions of establishing a cash transfer system at the proposed size and scope should not be taken lightly.  As the saying goes, however, the devil is in the details.  To this end, the Government has not adequately considered the unintended welfare consequences of switching to cash and the complexities of implementing such a system on the impossibly rushed timeline and with the administrative capability that currently exists.  The point is not that migrating to a cash transfer system is necessarily a bad idea.  Rather, doing so in a measured way, with structured pilot testing that produces feedback that can inform a gradual expansion, could increase the likelihood that the cash transfer improves the functioning of the welfare system and thus works in favor of poor households across India.  The Government’s approach thus far indicates that India may not be able to capture the benefits that an effective cash transfer system has to offer.

[Cover Image Attribution: By L. Shyamal (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons]