Cash is no cure-all

Cash transfers seem to be the latest fad. With elections looming, the Prime Minister's National Committee on Direct Cash Transfers has been tasked with an ambitious mandate to provide vision and direction to enable direct cash transfers of subsidies under various government schemes and programmes to individuals to enhance efficiency. Certain activists warn against an ill-considered and hasty transition from food to cash. Others believe directly transferring the subsidy amount to citizens can offer beneficiaries more choice and allow the state to sidestep poor supply side management practices plaguing the public distribution of goods and services that result in leakage. Cash transfers have increasingly become synonymous with ideological contestation on the role of the state, making the debate on feasibility shriller.

Like most medicine, cash transfers are a cure, but not a cure-all. It helps to clarify which maladies can be solved by cash transfers, which cannot — and identify those cases where the side effects of introducing cash could be worse than the disease.

Over the years, studies of the PDS show that some states manage supply of in-kind transfers fairly well, while in a large number of cases, the pipeline connecting citizens to ration supplies is prone to leakage and corruption. Money at the top, spent by state treasuries for the distribution system, produces little food or fuel for PDS beneficiaries at the bottom. Such findings, in combination with fiscal stress, have bolstered the characterisation of the current delivery of in-kind transfers as inefficient. However, we need to consider three key issues when thinking of

using cash transfers as an antidote to inefficiencies within the public distribution channel.

First, if the only inefficiency within any public distribution system was that the costs of moving materials and getting the public sector to produce or procure goods and services were much higher relative to the overall gain, transparent and direct cash transfers would be a complete and comprehensive solution. The development of technologies such as biometrics and centralised fund-flow management systems have created new pipelines through which cash can flow cheaply and accurately to recipients.

Second, the efficiency of cash transfers has to be measured against larger programme goals. For decades, economists have shown that the direct delivery of money is more efficient than the transfer of physical materials, if our sole purpose is to transfer purchasing power. However, if programmes are not just intended to transfer the ability to purchase, then moving to a system of cash transfers is not efficient if the status quo of other objectives, such as nutrition or disease prevention, remains unchanged. For example, in a Honduran maternal and child health programme, it cost 1.03 lempiras to deliver 1 lempira of an income transfer in the form of a cash-like coupon, while it cost 5.69 lempiras to deliver the same income transfer in the form of food. However, the pure cash transfer had no effect on either children's calorie consumption or on the use of the health centres, while the food transfer increased both. Also, in Kenya, giving cash alone did not result in consumers buying bednets that prevented malaria. Much of the new behavioural economics is about using "nudges" to promote programme objectives. But such nudges need not be cash alone. In Rajasthan, experimental evidence shows how providing small food transfers such as lentils can improve the coverage of immunisation amongst resource poor families.

Part of the government's objective of moving commodities in PDS, for instance, is to stabilise and "thicken" food and fuel markets so that consumers, and not just beneficiaries, are protected against price fluctuations and uncompetitive markets with few suppliers. While it may be the case that PDS doesn't do this particularly well or that this purpose is no longer needed in parts of the country, market-making and regulation is a public purpose that needs to figure into the "efficiency" discussion.

That said, even moving money is not so easy in India. A financial inclusion survey conducted by a World Bank team found that only 35 per cent of Indians had accounts in formal financial institutions. This number dwindles to 21 per cent amongst the poorest quintile. These estimates are lower than the 50 per cent global average and the 41 per cent in developing countries. Recent assessments on social pensions — an existing cash transfer — highlight that opening bank accounts is tough for the poorest without policy and administrative support, even in urban areas such as the state of Delhi. The experience with rural social pensions shows that even cash transfers require fairly sophisticated financial delivery mechanisms, accounting and implementation capability, which is often lacking. Because the temptation to loot cash may be the same or greater, directing and tracking payments to individual beneficiaries require doing simple things such as digitising programme records. Doing such simple things has so far proved difficult in high profile cash-for-work schemes such as NREGS. The government's own data indicates that a handful of states, such as Karnataka, Rajasthan, Himachal Pradesh, Orissa and Gujarat, have fully electronically updated the muster roll for workers. It is worth remembering that Mexico and Brazil, where conditional cash transfers famously replaced pre-existing in-kind transfers, are richer economies with greater administrative capability.

Finally, in a world with budgetary constraints that require capping the number of benefit recipients, moving from in-kind to cash transfers doesn't help with other administrative inefficiencies in beneficiary identification and implementation of the eligibility determination protocols. If the problem is that people who are eligible find it hard to procure paperwork to prove their citizenship and poverty to make claims on state resources, while those who are ineligible nevertheless manage to get benefits, it is hard to see how moving to cash helps. In cash-for-work schemes, a work requirement is costly to implement (as money has to be spent on inputs and works) but in spite of this, it can be efficient if it induces self-selection targeting, whereby only those truly in need show up. Evidence from many locales, like the Indonesian programme during the financial crisis, shows that a work requirement does identify those who have had negative shocks better than any eligibility scheme.

The difficulty with cash-for-eligibility schemes is that everyone would like to be eligible (present company not excluded). If universal transfers are deemed too expensive, one way the move to targeted cash transfers through banking networks could help the eligibility determination process would be if fund flows, assets and financial activities of citizens applying for schemes could be traced to allow state governments to credibly distinguish between the rich and poor. However, this requires the effective implementation of parallel policy reforms to tackle state surveillance and increase incentives for all citizens to report and hold assets in financial institutions.

Cash transfers are terrific at what cash transfers are terrific at — a pure and direct transfer of purchasing power. If the goal of transferring resources to citizens is simply to attain a socially desirable distribution of money and ability to buy things, cash works very well. However, if the idea is to tackle market failures and attain a socially desirable form of behaviour, where administrators allocate benefits to the poorest and the poorest are able to use the subsidy amounts for good nutrition and health outcomes, the idea of cash as a cure-all is problematic. Much of the current discussion on cash transfers is focused on what the state ought to do, without enough consideration of what the Indian state is capable of doing. Proponents of a cash-based approach assume the state has better ability to supply cash than the supply of physical goods. However, cash transfers leave many of the hard problems in implementing social programmes in India just as hard, if not harder.

Bhattacharya is a researcher with Accountability Initiative, Delhi. Pritchett is professor of the practice of international development at Harvard Kennedy School (on leave), US

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