Opinion

Are direct cash transfers feasible for welfare schemes? - NO

Madhura Swaminathan | Updated on: Mar 12, 2018

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India is not ready for a shift to cash transfers in the case of food, fuel and fertilisers for the following reasons.

First, while cash transfers can be universal in coverage, the international experience shows that cash transfers are the first step in narrow targeting of transfers and a move away from universal access to basic goods. Cash transfers succeeded in Mexico and Brazil because the excluded population was a tiny proportion of the total population, unlike in India where malnutrition persists on a mass scale. To illustrate, in 2009, the proportion of malnourished children, defined on the basis of weight for age, was less than 2 per cent in Mexico and 6 per cent in Brazil as compared to 46 per cent in India! Secondly, cash transfers are associated with immediate and steep reductions in the real value of the subsidy. Assume the government transfers Rs 500 per family per month from January 1 in lieu of 25 kg of rice, based on a market price of Rs 20 per kg of rice. Within a few months or even few weeks, with inflation and manipulation by local shops, the real value of the Rs 500 may fall to 10 kg of rice per month.

Double-digit inflation in prices of basic foods has been not infrequent in recent years, and cash transfers may aggravate local price rise. The shift to cash in the case of basic commodities like food and fuel implies no government control over actual quantities obtained by the beneficiary household. This problem does not apply to pure income transfers such as pensions or unemployment benefits.

Thirdly, cash transfers will be as effective as kind transfers only if there are no problems of supply. To put it differently, if cash is given in lieu of fertilisers, can the state ensure that appropriate fertilisers in adequate quantity and of suitable quality are available to cultivators?

Lastly, the closing down of the Public Distribution System, which is an integral part of the food production-procurement-storage-distribution system, will adversely affect production and procurement and destroy India’s self-reliance in respect of foodgrain. The shift from kind to cash transfers is the first step in dismantling India’s food policy framework. With the proposed introduction of cash transfers, the Government of India will be giving up its commitment to ensure minimal food and nutrition security.

Also read: >Are direct cash transfers feasible for welfare schemes? - YES

Published on November 30, 2012
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