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Budget 2011: Direct cash transfer instead of subsidy by 2012

Poverty levels are said to have dropped dramatically in countries that provide direct cash instead of subsidies to the poor. Will such a system work in India?

The plan to go in for direct cash transfer instead of subsidies to the poor, by next year, as announced in India’s 2011-12 budget, has been successful in countries like Brazil and Mexico.

A number of schemes in India like the public distribution system (PDS) that provides grain and select food items as well as cooking fuel and fertiliser at subsidised rates to poor families have been criticised because their implementation is so poor that a large amount of the subsidised commodities are diverted into the black market while the intended beneficiaries receive very little.

Mexico, Brazil and several other countries pay needy families a fixed amount every month which they use to buy the required food and fuel. In some cases, the cash transfer is conditional on sending children to school. Under Brazil’s Bolsa Familia (family grant) programme, the equivalent of Rs 590 is paid outright to every poor family on the condition that at least one child under 15 years attends a school. If the child is still at school at age 16, the payment rises to Rs 860. Families in extreme poverty get Rs 1,800 a month, with no conditions.

Since 2006, when the scheme was introduced, the poverty rate has fallen from 22% to 7% and incomes of the poor are said to have risen seven times.

Likewise, Mexico’s Oportunidades programme pays mothers Rs 5,570 per month to keep their children healthy and in school. It is said to cover one-third of the population.

South Africa, one of the world’s biggest spenders on the poor, allocates $9 billion, or 3.5% of its GDP, to providing a pension to 85% of its older people, plus $27 in monthly cash benefit to 55% of its children. Studies show that South African children born after the benefits became available are significantly taller, on average, than children who were born before.

Leaks in India’s social programmes are well-known, whether it is pensions or the rural employment guarantee scheme or the PDS. A World Bank study showed that in just one state -- Karnataka -- leakage in the public distribution system was 64%, while it was considerably less, 17%, in pensions for the elderly, widows and the disabled where money is handed directly to the beneficiary.

Critics of the scheme point to some reasons why it may not work in India at the moment. For one thing, it needs a good governance system with a sound and large database. In Brazil, payments are made though a debit card, and every transaction is recoded in an electronic database. India needs to first re-work its numbers on poverty. The methodology for counting the poor -- currently pegged at 450 million -- has been controversial. It is estimated that half of the subsidies reach people it should not. The unique identification system, which could provide the database, is just getting off to a start.

Harsh Mandar, who heads the food security group of the National Advisory Council that has been the driver of several social programmes in the recent past, points out that the PDS has not just the objective of feeding the poor but also of procuring grain and stabilising prices. Direct cash transfer cannot achieve the latter two objectives.

Economist Jayati Ghosh argues that cash transfers should not replace the public provision of essential goods and services but rather supplement them. The current tendency, she says, is to see this as “a further excuse for the reduction of publicly provided services, and replace them with the administratively easier option of doling out money”.

An influential book on the subject, Just Give Money to the Poor: The Development Revolution from the Global South, makes a strong case for governments giving aid to their poor (rather than using donor countries or agencies) and allowing the poor to use it as they see fit. ‘The key is to trust poor people and directly give them cash -- not vouchers or projects or temporary welfare, but money they can invest and use and be sure of. Cash transfers are a key part of the ladder that equips people to climb out of the poverty trap’.    

But the book also cautions, as do many Indian development experts, that this is no silver bullet and that what will make the crucial difference is for governments to tackle discrimination and invest in health, education and infrastructure.

Analysing the cash transfer option, Samar Halarnkar makes an important point in his article in The Hindustan Times: ‘India must see cash transfers as development grants that invest in youth and stimulate growth instead of only being safety nets.’

To do that, the government must first set in place the infrastructure of development. ‘That means spending more: social sector outlays have fallen from 2.06% of GDP in 2010-11 to 1.96% in 2011-12. If you pay the poor to buy food, educate children and improve their health, you must build more warehouses, schools and clinics than the present budget allows. As for the quality of governance, the government is worryingly silent,’ he writes.  

The notion that welfare schemes only make people lazy has been losing ground particularly since the top-down, market-driven economy has not been able to lift people out of poverty. Moreover, in the wake of the economic meltdown in the West even countries and people strongly opposed to welfare policies, such as the United States, is using them: the bailout of banks, the jobs-creating stimulus bill, expansion of food stamp programmes and unemployment benefits are all forms of cash transfers to the needy.

Source: The Hindustan Times, March 3, 2011
             The Hindu, March 3, 2011            
              www.alternet.org, March 2011 http://www.alternet.org/story/?page=3, March 2011