transfers are the latest fad of the international development
industry, as the preferred strategy for poverty reduction.
And now Indian policy makers are busy catching up. The
idea was mooted in the Government's Economic Survey
for 2010-11, and the Finance Minister made an explicit
announcement in his Budget Speech for replacing some
subsidies on goods with cash transfers.
So what exactly is this strategy all about? In the recent
international experience, cash transfers can be conditional
(subject to the households meeting certain demands)
or unconditional; targeted (given only to households
or individuals meeting particular criteria) or universal.
But essentially they amount to just what they sound
like – the transfer of money to people by governments,
rather than the provision of goods and services.
The basic idea sounds so simple and easy that a toddler
could think of it: Why are people poor? Because they
have no money. So let's give them money - then they
won't be poor anymore!
The proponents of cash transfers tend to present this
as a radically new idea, but it actually has a long
history. Kautilya's Arthasastra specifies a system of
taxation payments from the rich in order to enable transfer
payments to the poor, including not only financial assistance
during calamities but welfare payments to the chronically
indigent and those unable to earn their own livelihood.
Islamic rulers in the Middle Ages were required to follow
the tenets of zakat, using state revenues to provide
income transfers for the poor, the elderly, orphans,
widows and the disabled. Other historical examples abound.
The purpose of cash transfer schemes is to provide poor
people with money and give them the freedom to choose
what to do with it. Of course, this then generates other
choices that have to be made: Who gets the transfers?
How much do they get? If they are universal, that usually
spreads the money around rather thinly, so they account
for very little. But if they are targeted, then the
familiar problems of targeting (unfair exclusion, unjustified
inclusion, large administration costs, possibilities
of leakage) all become significant.
If they are to be effective at all, cash transfers have
to be assured, relatively easy to deliver and monitor
and large enough to affect household income. But that
also means that they have to be reasonably significant
chunks of public spending. And this begs the question
of what expenditures they are replacing.
Several of the more well-known recent ''success stories''
involve targeting and conditions on recipients that
range from light to onerous. Brazil's Bolsa Familia
is a grant provided to families with less than a threshold
monthly income, with the requirement of attendance at
government clinics and 85 per cent school attendance.
The Oportunidades programme in Mexico is a highly conditional
cash transfer system based on a complex system of eligibility
(age, gender and level of education of each family member,
electricity and tap water, household assets) and requiring
family members, especially mothers, to meet various
time-intensive conditions like attending meetings and
providing ''voluntary'' community labour.
There is no doubt that progressive redistributive transfers
are desirable. Indeed, redistribution is a major, even
critical element of any fiscal system of taxation and
public expenditure. Minimum income schemes for the destitute,
pension payments for the elderly, child support grants,
unemployment benefits and other forms of social protection
are obviously desirable in themselves and constitute
requirements for any civilised society, even the poorest
one. They also contribute in the short term to more
effective demand and therefore have positive multiplier
effects, and in the long term to healthier, better educated
and more secure populations.
So the question then is not whether or not to oppose
cash transfers in general, but rather what specific
importance to give them in an overall strategy of development
and poverty reduction. Cash transfers cannot and should
not replace the public provision of essential goods
and services, but rather supplement them. However, the
current tendency 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.
In many countries, the argument has become one of encouraging
governments to give the poor cash transfers that will
allow them to access whatever goods and services they
want that are generated by private markets, rather than
struggling to ensure public provision.
Such a position completely misses the point. In Brazil,
for example, Bolsa Familia can be based on minimum school
attendance only because there are enough public (and
free) schools of reasonable quality that children of
poor households can attend, which in turn means prior
and continuing public investment in quality schooling
and teacher education. Similarly, providing small amounts
of cash to allow people to visit local private quacks
will hardly compensate for the absence of a reasonably
well-funded public health system that provides access
to preventive and curative services. Cash transfers
are less effective in periods of rising prices of essential
goods. And so on.
This is important, because ultimately social and economic
policies are all about choices, and this is most starkly
evident in the allocations of public expenditure. Governments
typically do not have the luxury of being able to ensure
enough spending to provide good quality public services
and provide cash transfers that are large enough to
be at all meaningful. In most developing countries,
the choices to be made are not only about having good
quality schools versus transfers that incentivise parents
to send their children to school but even more basic
choices: road or health clinic; electricity or piped
water; schools or higher education institutions; one
airport or many railway stations; this region or that
It is evident that the agenda of the UPA government
is to bring in cash transfers to replace public distribution
of various essential items, including food. To begin
with, Finance Minister Pranab Mukherjee has proposed
that the existing system of subsidies for kerosene and
fertilisers be done away with and replaced by direct
cash transfers to chosen beneficiaries.
In his speech, he said ''The Government provides subsidies,
notably on fuel and food grains, to enable the common
man to have access to these basic necessities at affordable
prices. A significant proportion of subsidised fuel
does not reach the targeted beneficiaries and there
is large scale diversion of subsidised kerosene oil.
.. To ensure greater efficiency, cost effectiveness
and better delivery for both kerosene and fertilisers,
the Government will move towards direct transfer of
cash subsidy to people living below poverty line in
a phased manner.''
There are two immediate problems that are evident in
this approach. First, what ensures that the amount of
the transfer will be sufficient to fully compensate
for any price increases in the newly deregulated markets
of these goods? Second, how will the government ensure
that the cash transfer actually goes to those who were
intended to be the beneficiaries of the subsidised kerosene
The second problem is well known in India, where all
public delivery systems have some element of leakage
and diversion. How much simpler and easier it will be
to divert cash than goods that have to be stored and
The government seems to be under the delusion that a
technological fix (such as a Unique Identity number
provided to all residents) will somehow eliminate all
the potential problems of targeting. But determining
who is actually poor and which farmers deserve the cash
subsidy are socio-economic decisions that are affected
by a complex set of political and social forces as well
as power relations. Technology simply cannot address
those, they require very different responses.
In India, where much of this basic part of the development
project still remains woefully incomplete, the urge
to adopt this latest international development fashion
involves several risks. In the case of choice between
direct public provision of some essential goods (like
food and fuel) and cash transfers to consumers instead,
the most immediate threat is that the rising prices
in these deregulated markets will make such goods unaffordable
for those who need them the most.
Posing the problem in this way is also misleading, because
it completely leaves out the feasible and much more
just alternative of universal provision of some essential
items, which would ensure better access and create public
pressure for greater accountability in public delivery.