by Vivek Kaul
Take the case of the foodgrains distributed through the fair price shops that constitute the public distribution system. This system suffers massive leakages, with the grains not reaching those they are intended for. In fact, for households, cash, instead of foodgrains, would work better. For one, it would free them from the tyranny of the fair price shop owner supplying them with low quality grain. Cash would also create some competition in the system. With cash in hand, people can then decide where to buy their foodgrains from. In case the quality is bad, they can easily switch to another shop.
Another big advantage with cash transfers is that they are easy to monitor in comparison to the current way of doing things, in which goods are actually bought, transported and distributed. Furthermore, and more importantly, with cash in hand, people would have the option of buying other food items as well and could have a more nutritious diet in the process. Also, currently, migrant workers are not allowed to use their ration cards outside their place of residence. This would change, because they would be able to withdraw cash anywhere.957
One concern that is often raised against cash transfers instead of the government supplying foodgrains through the public distribution system is that the poor would spend the money on the consumption of alcohol and tobacco. Even in the current system of providing foodgrains, the government is not checking whether people are actually eating the subsidised foodgrains that they buy. They could easily be selling it and using the cash to buy other things.
In fact, as we saw in Chapter 12, this is not true. Nevertheless, the argument has a simplistic appeal to it, and that is why it is so powerful. In Chapter 12, we saw the case of SEWA carrying out a successful cash transfer programme for BPL families in West Delhi. A similar experiment was carried out by SEWA in the state of Madhya Pradesh.
Around 6,000 individuals (comprising both tribals and non-tribals) received small and unconditional cash transfers every month. An adult received Rs. 200 per month, whereas each child received Rs. 100 per month. After a year, the payments were increased to Rs. 300 and Rs. 150, respectively. In another part of the experiment, the tribals received Rs. 300 and Rs. 150, respectively, for the entire period of 12 months.958
The households which received the money essentially reported a “higher propensity to consume fresh vegetables and milk”. In fact, the tribal population which received cash “reported a substantial rise in the consumption of more nutritious food”. This included pulses, vegetables, eggs, fruits, fish as well as meat. No evidence of any increased consumption of alcohol was found.959
Another concern that is raised against giving cash directly is that it would lead to a reduction in labour supply. The assumption here is that, if you give people money, they won’t work. While that may or may not be true, one thing that there is enough evidence for is that higher incomes lead to people eating better. Their intake of proteins and micro-nutrients goes up. This boosts labour productivity significantly.960
While the SEWA experiment in Madhya Pradesh involved unconditional cash transfers, the government of Bihar has, since 2006, been running the Mukhyamantri Cycle Yojana (Chief Minister’s Bicycle Programme). Under this programme, girls studying in Standard IX in a government school were provided Rs. 2,000 cash to buy a bicycle. In 2009-2010, the scheme was extended to boys as well. The cash payment was increased to Rs. 2,500 in 2011-2012, which is where it has stayed since then. In 2012-2013, one condition was added: only students with 75 per cent or higher attendance would receive money from the government to buy a bicycle.961 Interestingly, this increased the enrolment of girls in secondary schools by 32 per cent.962
What is clear here is that the government of Bihar did not want to get involved in the hassle of procuring and distributing bicycles. One of the advantages of this was that the beneficiary was given the choice of buying the kind of bicycle that he or she wanted. Furthermore, if the government had decided to procure and distribute bicycles, the chances were that the corruption in the system would have gone up. Nevertheless, the question remains: Did the students who were given cash to buy bicycles actually do so? Or was the money spent on something else?
A primary survey carried out across 36 villages spread across six districts during the period between September and October 2012 threw up some very interesting results. Almost 98 per cent of the beneficiaries reported purchasing a bicycle using the money received under the scheme. Nearly 97.2 per cent reported buying a new bicycle. This is a very good example showing that the argument ‘Give people cash and they will drink it away’ doesn’t really hold. Furthermore, 93.3 per cent of the beneficiaries reported receiving the correct amount of money. For the beneficiaries who received less, the average difference from the entitled amount was Rs. 441. And most of this happened during 2011-2012, when the payment was raised from Rs. 2,000 to Rs. 2,500. We saw a similar example in the case of the MGNREGS in Odisha, wherein, when the per-day payments went up, almost the entire incremental amount was siphoned off.963 A similar thing seems to have happened in Bihar as well.
Hence, the scheme had very little leakage, so to say. Despite this, the survey revealed that only 45 per cent of the beneficiaries preferred receiving cash to kind. This meant that the majority of the beneficiaries wanted the bicycle rather than the cash to buy the bicycle. There were several reasons for this.964
The scheme requires that, after a bicycle has been purchased, the receipt issued by the bicycle store needs to be submitted. The survey found that around 30 per cent of the beneficiaries had to submit the receipt before buying the bicycle. This basically meant that the beneficiaries either had to buy the bicycle out of their own funds or provide a fake receipt. Given this, it is not surprising that such beneficiaries would have preferred the government directly providing a bicycle rather than some money to buy it. The beneficiaries who had to submit a receipt before buying a bicycle were 20 percentage points less likely to prefer cash in comparison to those who had to submit the receipt after buying the bicycle.965
Also, 98 per cent of the beneficiaries had to add to the Rs. 2,500 that the government had provided to buy a bicycle. On an average, the beneficiaries spent an extra Rs. 979 to buy a bicycle. This basically meant that the government wasn’t providing enough money to buy a bicycle, even though it left the choice of the bicycle to the beneficiaries. And this inadequacy of the cash transfer could be another reason why a major set of beneficiaries preferred bicycles over cash to buy those bicycles.966
Given that the Rs. 2,500 provided by the government wasn’t enough to buy a bicycle, the beneficiaries (or rather, their parents and guardians)had to spend money to buy the bicycle. The survey showed that 72 per cent used their own money, whereas 25 per cent had to borrow money to buy a bicycle. Hence, the beneficiaries who had to borrow money were 16 percentage points less likely to prefer cash over kind than households using their own savings.967
Then there was the issue of how far away the beneficiaries lived from a bicycle shop. Beneficiaries who lived in villages that were at a distance from a bicycle shop preferred a bicycle rather than cash to buy it.
There are largely two points here. One is that cash transfers lead to better utilisation of the money that is being spent. At the same time, the government also needs to take into account whether the goods that are to be bought using the cash are readily available. As Maitreesh Ghatak, Chinmaya Kumar and Sandip Mitra write in ‘Cash Versus Kind—Understanding the Preferences of the Bicycle Programme Beneficiaries in Bihar’: “In areas where market access is not easy, cash transfers are not going to be very effective.”968
The point being that cash transfer programmes alone cannot work. The government needs to work towards delivering public goods. As Devesh Kapur writes in ‘The Shift to Cash Transfers: Running Better but on the Wrong Road?’, if people use the money they get through cash transfers to buy goods and services from the open market, “state actions in improving market infrastructure, be it access to roads or rural supply chains” would help poor buyers get access to more
competitive markets and, in the process, better value for their money.969
To put it in simple English, if the government is giving people cash to buy a product, then that product should be available in and around where the people live.
Other than access to a market, there is another important issue that needs to be discussed here. When the government decides to resort to cash transfers, what does it need to be able to do? It needs to identify the beneficiaries and transfer money to them. In turn, beneficiaries should be able to withdraw the money and spend it.
As mentioned earlier, under the Jan Dhan Yojana, the government has managed to get people to open bank accounts at a very fast pace. Despite this, the penetration of the basic savings account in most states remains low. As per the Economic Survey of 2015-2016, it is at 46 per cent across the nation as a whole. Only in two states, namely, Madhya Pradesh and Chhattisgarh, is the penetration greater than 75 per cent. As the Survey states: “Comparing the reach of Jan Dhan with that of Aadhaar suggests that the unbanked are more likely to constrain the spread [of cash transfers] than the unidentified.”
Just transferring money into the accounts of people is not good enough. In rural areas, there is the problem of last-mile connectivity. It’s not possible for banks to have a branch in every village. Hence, they operate through banking correspondents (BCs) who take care of the last mile. They go to every village, and beneficiaries can withdraw the money which has been deposited into their accounts.
The problem is that India doesn’t have as many BCs as are needed to solve the problem of the last mile. As the Economic Survey points out: “It is important to benchmark India’s preparedness against a country where last-mile financial inclusion is considered good—like Kenya. The Kenyan BC-to-population ratio is 1:172. By contrast, India’s average is 1:6,630, which is less than 3 per cent of the Kenyan level. Kenya is more sparsely populated than India, so perhaps India needs fewer BCs. Yet… the spatial density of BCs in India is 17 per cent of the Kenyan level.”
Hence, India currently has one banking correspondent per 6,630 individuals. If cash transfer programmes are to take off, this number needs to go up in the days to come. The other option is for the country to use mobile payment technology more aggressively, given that the penetration of mobile phones is higher than that of bank accounts. Only in two states, namely, Bihar and Assam, is the penetration less than 60 per cent, where it is at 54 per cent and 56 per cent, respectively. Furthermore, there are 1.4 million (14 lakh) agents or service posts that service nearly 101 crore mobile customers across India. This works out to a ratio of 1:720, which is significantly better than the ratio of banking correspondents to the total number of citizens.970
Of course, any successful initiative in the mobile payments space would involve Big Government having to cooperate with the private sector.
The larger point here is that, despite cash transfers being a superior form of delivering value to its citizens, large parts of the country currently do not have the necessary infrastructure in place. In fact, in a letter written by the government of Odisha to the Ministry of Consumer Affairs, Food and Public Distribution, it was pointed out that, for more than 50 per cent of the state’s population, the nearest bank was 10-15 kilometres away.971
Only 38.4 per cent of the country’s 1.1 lakh bank branches are in rural areas. The penetration of post offices in rural areas is a lot better. Of the 1.5 lakh post offices in the country, a majority of them are in rural areas. A post office serves, on an average, an area of 21.2 square kilometres and a population of 7,175 people. Furthermore, those against cash transfers say that the state of mobile connectivity across the country isn’t very reliable to be able to move on to mobile payments.972
In fact, as per the Economic Survey of 2015-2016, the urban parts of states like Chhattisgarh and Madhya Pradesh show a preparedness score of about 70 per cent when it comes to moving to a cash transfer system (or what the government calls a direct benefit transfer). In comparison, other states, like Bihar and Maharashtra, show a preparedness score of around 25 per cent. In rural India, the average preparedness score is around 3 per cent, with the maximum being 5 per cent in the state of Haryana.973
What this tells us is that the cash transfer system will have to be introduced gradually across the country, starting with the urban areas in states which are ready for it. This might eventually turn out to be the right thing to do, given that a slow launch would give the government adequate time and experience to correct its mistakes as it goes along.
Meanwhile, what can the government do in order to benefit from the technology infrastructure that is already in place? The Economic Survey talks about the weirdly named BAPU (Biometrically Authenticated Physical Uptake). As the Survey points out: “Beneficiaries verify their identities through scanning their thumbprint on a POS [i.e., point of sale] machine while buying the subsidised product—say, kerosene, at the PDS shop. This is being successfully attempted [in the] Krishna district in Andhra Pradesh, with significant leakage reductions.”
The preparation of states for BAPU is much more than for a total cash transfer system. The average preparedness is low, at 12 per cent. But, in some states, like Andhra Pradesh (96 per cent), Chhattisgarh (42 per cent) and Madhya Pradesh (27 per cent), with some push, the states could be well prepared for BAPU in the future.974 This goes with the idea that, if cash transfers are difficult to implement, then it makes sense to do the next best thing, i.e., to ensure that the leakage in the distribution of subsidised goods comes down.975
Furthermore, in an ideal world, a successful cash transfer programme would mean the end of the procurement, transportation and distribution of subsidised goods. So, in the Indian context, this would mean that the state could stop acquiring the massive amount of rice and wheat that it does from farmers directly through the Food Corporation of India and other state procurement agencies.
This is something that hasn’t been discussed at all when it comes to the impacts of the cash transfer system. Would politicians be ready for something like this? What would be the impact on food inflation? Does the open market for rice and wheat work well enough? What would happen to the five lakh fair price shops across the length and breadth of the country? Would the government shut down the Food Corporation of India, or would it scale down its operations? Or would the government continue to buy rice and wheat and then sell it in the open market? What about the buffer stock of rice and wheat? There are way too many questions that need to be answered in this case and which, I guess, are beyond the scope of this book.
One thing that I can say for sure is that I haven’t heard economists who recommend the cash transfer system discussing these very important questions. While India is nowhere near a successful cash transfer system (in fact, we have barely started), it is surprising to see that nobody is really discussing these pertinent issues.
It also needs to be mentioned here that a cash transfer system waiting for the banking infrastructure to catch up is not the best way of going about things. Consider the fact that, in Colombia, given the reliance of cash transfers on the banking system, the programme was restricted to areas which had the necessary banking infrastructure.976
Brazil got around this problem by setting up special delivery mechanisms in areas which had limited infrastructure. People living in remote areas of the country without access to a bank can collect payments at other service points, which include post offices as well.
In the end, all this will not solve the basic problem with India as it has evolved. Typically, in low-income countries, more resources are spent on public goods than social protection (which is what subsidies basically are). It is only after basic public services, like roads, primary education, sanitation, drinking water, drainage systems, etc., are in place that countries turn towards an “ambitious expansion of the welfare state”.977 As Indira Rajaraman has pointed out, the “entitlement state in Europe came well after governments had delivered on their core role as providers of public goods”.97
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The question is: Can a welfare state be built on a weak foundation of public goods?979 From the evidence that we have seen in this book, the answer is no. The larger point being that the Indian government is present in many areas where we do not need it but absent in those areas where we do really need it.
Also, it needs to be pointed out here that politicians love subsidies because it gives them more visibility. Trying to build public goods or services is a long-drawn affair which might go unnoticed by the electorate.980 But if a leader decides to waive bank loans to farmers, the impact of that is instantaneous. This has become especially important over the past few decades, with the rise of multi-party democracy in India.
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Let’s now talk about black money. As mentioned in Chapter 9, the Income Declaration Scheme (IDS) for declaring domestic black money was open between June and September 2016.
The scheme which ended on September 30, 2016 led to the declaration of Rs. 65,250 crore of black money.
The declarations will be taxed at an effective rate of 45 per cent (30 per cent income tax, 7.5 per cent surcharge and 7.5 per cent penalty), and hence, are likely to net the government Rs. 29,363 crore. Half of this amount would have to be paid by March 31, 2017. The remaining amount has to be paid by September 30, 2017.
The IDS was declared to be a huge success. The government press release announcing the black money declarations said that there had been “a tremendous response from the general public, especially in the last two months”.
The media, as usual, went on an overdrive, highlighting the success of the scheme. One of the comparisons that have been made is with the Voluntary Disclosure of Income Scheme (VDIS) of 1997, the last black money declaration scheme offered by the government.
The October 2, 2016, Mumbai edition of The Times of India ran a graphic around this on its front-page. This graphic essentially said that the amount collected under the Income Declaration Scheme of 2016 has been 3 times that under the VDIS of 1997. The logic for this is very straightforward. The total amount of black money declared under the 1997 VDIS was around Rs. 33,000 crore. The tax collected on this had amounted to around Rs. 10,000 crore. The tax which the government expects to collect under the IDS is nearly three times, at Rs. 29,363 crore.