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Cashing in on schemes for poor
28 November 2012 , By Narendar Pani

Any political benefit the Congress hopes to reap in 2014 will come at
the cost of reducing the effectiveness of social welfare schemes
In getting its ministers to endorse the shift to cash transfers from
the AICC office in New Delhi, the Congress has highlighted the
political nature of the move. The party clearly expects cash transfers
to play the same role for it in 2014 that the National Rural
Employment Guarantee Act did in 2009. By pouring money directly into
the bank accounts of voters across the country, it expects to be paid
back with additional seats in the Lok Sabha. But the politics of cash
transfers is not the same as that of the MGNREGA. And even if there is
political gain for the Congress from this move, it will come at a
great social cost.

Then and now
The fundamental difference between the political economy of the NREGA
in 2009 and the cash transfers today is in the impact on inflation.
The NREGA was launched at a time when the macroeconomic goal was to
provide an impetus to the Indian economy at a time of a global
slowdown. The impetus took the form of raising the fiscal deficit
substantially, thereby providing the resources for the NREGA. Since
the economy needed the additional expenditure there was only a limited
immediate impact on inflation.

This is not the macroeconomic situation today. With inflationary
pressures remaining a concern there is need to be wary of any massive
transfer of cash to voters. The politicians in the Congress possibly
believe they have got this covered since they are simply changing the
way of delivering existing subsidies. As there is no additional
expenditure involved, they seem convinced there will be no
inflationary pressure from the move.

The economist in the Prime Minister must however know otherwise. He
will be sensitive to what economists call the multiplier effect.
Simply put, when cash is paid out to an individual she saves some of
it and spends the rest. What she spends becomes income to someone
else. The next person again saves some of this income and spends the
rest, thereby creating income for a third person, and so on. The
overall effect of putting cash into the economy is then several times
greater than the original infusion, the exact multiple depending on
the proportion of income that is spent.

In the case of a transfer of welfare in kind, there is little scope
for this multiplier to take effect. When a beneficiary receives food
from a ration shop her family consumes the food without creating
additional income for anyone else. The multiplier comes into play when
the supply of subsidised food from the ration shop is replaced by
cash. And if the government were to try to control the inflationary
pressures by curbing money supply it runs the risk of going to the
next elections with the economy slowing down. It is therefore no
surprise that the food subsidy and the fertilizer subsidy have been
kept out of the initial shift to cash transfers.

The 29 schemes that are to form the initial round of cash transfer
from January 1, 2013 focus primarily on reworking cash based welfare
schemes such as pensions and student loans. The apparent political
potential of this move, in the current system of patronage politics,
explains the glee in the AICC office when the shift to cash transfers
was endorsed. The entire transfer of the cash value of welfare schemes
will now be seen as coming from the Congress. The old process, in
which a local politician was the link between a scheme and its
beneficiaries, thus earning loyalty and building constituency, will no
longer be valid. This would not only hurt opposition parties but would
also weaken the grass root Congress worker, while strengthening the
party high command.

The social costs of this move are however quite evident when we
consider the precise mechanism through which the shift to cash
transfers is to take place. The beneficiaries are to be identified
using the unique identification of Aadhar. There may be those who
challenge the claims to perfection of the Aadhar process, but that
view is unlikely to overcome the widespread Indian belief that what is
technologically done must be perfect. Even if we grant Aadhar
perfection, though, we must keep in mind that it is only a system of
unique identification, nothing more. All that it does is to ensure
that once a person says she is X, she cannot later say she is Y.

Such a unique identification does not even guarantee that the person
is in fact an Indian. It is quite possible for a person from, say
Bangladesh, to cross our porous borders, go up to an Aadhar office and
get a card. Aadhar does not believe it is its business to guarantee
the nationality of the individual. With a convenient Indian address
she could then be eligible for direct cash transfers. This can make a
significant difference to the working of cash transfers in some
regions where borders are porous.

Overreliance on Aadhar
Moving away from the northeast there is an even greater challenge in
an overreliance on Aadhar. The proof that the person has once
identified herself as X tells us nothing about whether X is, in fact,
poor or eligible for the subsidy. The problem with ration cards today
is twofold: there are multiple cards issued to the same households,
and the Below Poverty Line cards have been issued to those who are not
poor. Aadhar could help solve the first problem, but not the second.
Even with Aadhar based identification, the non-poor can be classified
as poor.

What should cause greater concern is that there is little attention
being paid to the transaction costs of the poor and illiterate
accessing the bank accounts. In a study of the working of the Mahatma
Gandhi National Rural Employment Guarantee Scheme in Karnataka, it was
found that the poor did not always get their full wages. In the more
backward districts of the State, there was a significant difference
between the wages paid out according to the MGNREGA records and the
wages the workers said they received. And it is not difficult to
imagine how this could happen. The poor, especially if they are
illiterate, are dependent on bank officials to tell them whether the
money has been credited into their accounts. And if they seek the help
of others in the village that too can come at an economic, if not
social, cost.

Even in cases where the money reaches the right bank account and the
right person, there could still be leakages in terms of how that money
is spent. In some schemes this would not matter. A pension has served
its stated purpose the moment it reaches the beneficiary. But there
are other schemes such as student loans where a mechanism is still
needed to ensure that the money that is transferred to the bank
account is actually spent on education. When the cash transfer is from
a distant source and the expenditure to be made is local, monitoring
how the money is spent is no easy task. And if the money is not used
for the stated purpose, it is a leakage of another kind.

The experience of MGNREGA tells us that preventing this leakage could
cause greater pain to the beneficiaries. In some States by the time
the work done is measured and the payments are released, the workers
could end up waiting for months to be paid. In the case of cash
transfers too while the actual transfer of funds into bank accounts
may be instantaneous, the process of ensuring the money is spent on
the stated purpose could cause either leakages or substantial delays.

It is here that the gap between the political interests of the
Congress and the social interests of the country is the widest. If the
cash transfers are to be politically viable the government must
transfer the subsidies on time. And it would be in the Congress
party's interest for the cash to be transferred without worrying too
much about whether it is being spent on the stated purpose. If its
record is any guide, it would not mind transferring cash for a student
loan even if the money is spent on a school or college that is
unworthy of that expenditure.

Faced with a choice between a possible political benefit in 2014, and
a further reduction in the effectiveness of the social welfare
schemes, the Congress has made its choice public. And in a country
where we celebrate our economic growth even as over 40 per cent of our
children remain malnourished, it is a choice that is unlikely to cause
much consternation.

(The author is Professor, National Institute of Advanced Studies, Bangalore)





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