Direct Cash Transfer - A Remedy To Leakages And Subsidies

Posted in Finance Articles, Total Reads: 662 , Published on 01 September 2015
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Newton second law of thermodynamics says that heat flows from hot to old body easily. If we try to reverse the phenomena, there will be wastage and losses of energy. This can be easily correlated with the subsidies distributed in various forms and the wastage that occurs. The proper utilization and empowerment of poor people are the important factors to reduce wastage.


Subsidies are the form of financial assistance for an individual, group or an industry. It can be attributed to a political buzzword or can be confined to a political decision. Subsidies need to be looked on 3 major factors: Desirability, Effectiveness and side effects.



Image: pixabay


Subsidies are important to include major chunk of masses contributing to country’s development. The major question is how India should grant subsidies. It can restrict to its ineffective older model of Public Distribution system (PDS). It can also make a paradigm shift to cash transfers, the successful model imposed by countries such as US, Brazil and Mexico.US heavily subsidize farmers by making direct payment to farmers by paying them extra money per unit produced. The latter looks a feasible option as it can make the necessary change we are looking from decades to empower the poor people.


Let us first look at food, the basic necessity to live and which has a broad consensus on the subsidies to be given. The government in its Food security act, 2013 promised to give rice at Rs 3, wheat at Rs 2 and coarse grains at Rs 1. Under the provisions of the bill, the beneficiaries of PDS are entitled to 5 Kgs per person per month at above mentioned prices. It looks feasible as at certain low prices people can afford food, avert their hunger and be nourished.


The alarming statistics claims that despite highly subsidizing food there are 270 million chronicle hungry people in India. Over 200 million Indians sleep hungry every night. India has a largest stock of grains in the world besides China. The government spends RS 750 billion per year almost 1% of GDP, yet 21% of population (21 million people) remain under nourished. The shocking figures restrict us to the inefficiencies of PDS. The basic issues being the leakage and diversion of food grains, bogus BPL cards, denial of supplies to the poorest of the poor. You will be amazed to know that the poorest 40 % avails only 25% of the benefits.


If we try to see being in the shoes of a government, if subsidies are really justifying or it is just increasing the fiscal deficit. Food Corporation of India cost of procurement, storage and transport of wheat and rice is Rs 952 and Rs 1254 per quintal for the benefits of only Rs 354 and Rs 482 per quintal for wheat and rice respectively. The 80 % of subsidies are going into administrative costs. It can be briefly concise as cost of transferring Rs 1 to the poor is Rs 6.68.


The above mentioned figures ask for a change in the system. It can be done through cash transfers by directly giving it to the beneficiaries. It is a more efficient system with fewer costs, relative minimal leakages and the beneficiary can decide on the optimal usage of cash. The biggest question now arise is that are we prepared for a change.


The biggest challenge was that every person included in the scheme to have a bank account. Government on 15th august 2014 started with PM Jan Dhan Yojna to bring financial inclusion in the system by registering every individual of India with bank account. Till January we have reached a target of opening 11.6 crore new bank accounts in the past 5 months give a certain boost for a change. The next mammoth task is to target the necessary audience by banishing the well off people from this scheme. It is quite a difficult task as majority of people in unorganized sectors. Government can certainly look for good centre state relations to target people perfectly by monitoring the people provided with the benefits. The next challenge is of bogus and duplicate BPL cards for proper identification of people. Aadhar cards with a technology used for capture of retina scan and finger prints can certainly be a solution to this problem. The next big challenge need to overcome is very less percentage of ATMs in the rural areas relative to % of people under this scheme in rural areas.


The above mentioned challenges can be overcome with due course of time by studying the loopholes and certainly implementing in the future. There can be a few more disadvantages which may prove this scheme as sham. Through cash transfers the end use of cash cannot be monitored. It can be used for illicit means like buying of liquor, gambling and using for other luxury items. In future it can also create a dependency and disincentive to employment. People can rely on welfare measures provided by the government. It can also be used as electoral bribes by making more promises for buying votes.


We can certainly monitor the above mentioned problems by creating different form of subsidies in different commodities. We can make a mix of both Direct and conditional cash transfer under this scheme. For food or fertilizer subsidies we can directly transfer the cash to the respective bank accounts. It entirely depends on the beneficiary to optimally use the resource to best of its use. For education and healthcare we can decide with certain list of institutions and provide vouchers for use instead of directly transferring the money. Even health cards can be given with conditions of regular checkup every 6 months otherwise cards will be confiscated.


In my opinion looking at a broader perspective, cash transfers are a challenge and a need of healthy future. It will certainly be challenging and will have some loopholes which have to be overshadowed working on it looking at the inclusion it can bring in a longer run.


This article has been authored by Mayank Bhatia from IIM Kashipur



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