Cash is no cure-all

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.

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