Thursday, November 29, 2012

Cash transfers instead of subsidies

India is embarking on a major revamp of its social security system - replacing subsidised food, fertiliser, fuel, etc etc with direct cash transfers to the bank accounts of the "poor". Is this good or bad ?

The current system involves heavily subsidised foodgrain, fertilisers, fuel, etc being made available to ration card holders through the public distribution system. This suffers from a whole host of problems. Bribery, corruption, pilferage, etc ensure that only a fraction of the stuff ends up in the hands of the targeted people.  In some areas like fuel, cooking gas cylinders are widely misused and the diesel subsidy lands into the pockets of rich car owners. The waste is so incredible that something ought to be done.

The solution proposed is to eliminate all subsidies progressively and instead simply transfer cash by electronic transfers to bank accounts of the target population. Initially it will cover various anti poverty schemes, then extend to cooking gas and kerosene and only finally to food and fertiliser. The Aadhar scheme is intended to enable foolproof identification. This way middlemen and cheats are largely eliminated. The poor use this money to buy their requirements from normal shops selling products at market prices.

The scheme has lots of advantages. Firstly corruption will go down, although it will not be eliminated. The middlemen taking cuts will be put largely out of business. The country's subsidy bill will drastically fall - as the waste will significantly reduce. The entire rotten public distribution system can be disbanded (although it works quite well in states like Tamil Nadu and Chattisgarh).  Today's technology can ensure that fraud and stealing can be drastically reduced.

However, my worry is that once cash reaches the intended family, what will they use it on. The problem is that their buying behaviour is not predictable or controllable. Undoubtedly many men will use this money to drink . Families will use this money for atrocious causes such as dowry, or  to show status. The brilliant book, Poor Economics, draws on extensive research to prove how their decisions might not seem rational. Research shows, even with present incomes, the poor could spend 30% more on food, if they cut out liquor and tobacco.  When they buy food, the choices are not based on calories or nutrition, but on taste and style. On the medical front, they shun expenditure on low cost preventive measures like mosquito nets or chlorine tablets, even when provided free, and instead go to the local quack for a costly useless injection.

Of course, it is not for me, or anybody else, to prescribe what any individual wishes to spend money on. But I certainly have a problem if my tax rupees  go to fund drinking liquor.

Cash transfers have worked in some other countries, notably the Bolsa Familia in Brazil. But this is a conditional transfer scheme - they get a small amount of money ($12 a month) if  the children stay in school, mothers attend pre natal care, etc etc. India plans to give some $70 a month or so as a straight dole.

On balance cash transfers appears a good thing, but it is not an altogether perfect solution and needs to be implemented with care (not gunghoism). It is wise to recall how Kamaraj in the 1960s raised the literacy levels in Tamil Nadu. With great insight he introduced the mid day meal scheme. Families sent children to school so that they could have a square meal. I doubt the move would have been that effective if he had instead given cash for them to buy a meal.