The dogmatic insistence on wholesale substitution of existing schemes by direct cash transfers will limit the states role in the provision of essential goods and services.
AAPKA HAATH AAPKE PAAS, AAPKA PAISA SARKAR KE haath (Your hands with you, your money in governments hands). So goes a spoof of Union Rural Development Minister Jairam Rameshs marketing slogan for the direct cash transfer (DCT) scheme: Aapka paisa, aapke haath (Your money, in your hands). The reality is not too far from the spoof. Historically, India has had an abysmal record in reducing poverty and instituting a universal social security system. If this immense deficit is to be addressed seriously, the decisive involvement of the state is imperative. But the dogmas of neoliberalism, dressed up as sound finance and efficient delivery of services, will further debilitate the states capacity to act in favour of the poor. The design of the DCT scheme represents the embrace of one such dogma.
With the announcement of the DCT scheme, the United Progressive Alliance (UPA) government has taken a decisive step in its neoliberal policy programme. Covertly and overtly, the scheme will set the pace for a series of measures aimed at, and based on, limiting the states role in the provision of goods and services. In its current form, the scheme could also irreversibly damage Indias efforts to put in place a comprehensive social security system.
According to the Prime Ministers Office (PMO), the DCT scheme will improve targeting, control expenditure and facilitate reforms. Currently, only direct benefits such as pensions and scholarships will be transferred into bank accounts. However, the full import of the scheme cannot be understood by considering the transfer of direct benefits alone. As Union Budget 2012-13 has emphasised, the intent is to expand the DCT scheme to subsidies in fertilizer, liquid petroleum gas (LPG) and kerosene. Soon after, the scheme will also cover subsidies in food, that is, the public distribution system (PDS). Thus, the entire gamut of direct and indirect benefits will be transformed into direct cash payments to the beneficiaries.
The DCT scheme can be confidently characterised as part of the neoliberal policy framework on three grounds. First, in the governments world view, cash transfers will substitute for a range of goods and services currently provided in kind. This will allow the government to withdraw from direct provision of those goods and services. Such withdrawal is the hallmark of neoliberal policy. Secondly, the DCT scheme is integrally linked to the Aadhaar project. According to the Prime Minister, the two central objectives of Aadhaar are to target subsidies effectively and reduce our fiscal deficit. Both these objectives are cornerstones of neoliberal policy. Thirdly, much of the cash transfer will take place not through bank branches but through the rather dubious banking correspondents (BC). The BC model stems from a policy-induced hesitancy of public banks to open more rural bank branches. The intent is to promote a private sector in rural banking, whose profits will be mainly determined by government commissions.
Changing the game (or, withdrawing the state)For the UPA government, the DCT scheme is an instrument to qualitatively restructure the social role of the Indian statefrom a direct provider to an indirect provider of goods and services. The government will, from now on, only partially finance the open market purchase of social services by the poor. It is this policy shift that is showcased as nothing less than magical and a game changer.
With the DCT scheme, the government wishes to end the public and subsidised supply of food, fertilizers, LPG cylinders and kerosene. Instead, these subsidies are to be monetised and transferred to the beneficiarys bank account. Thus, the claim goes, corruption and leakage in the supply chains of subsidised goods can be eliminated. The theoretical ground for this strategy was laid in Chapter 2 of Economic Survey 2009-10: A common mistake is to suppose that a subsidy scheme has to be coupled with price control. This is typically a slippery slope. Hence, prices are best left to the market. If we want to ensure that poor consumers are not exposed to the vagaries of the market, the best way to intervene is to help the poor directly instead of trying to control prices.
To illustrate the implications, let us examine the case of the PDS. The alternative suggested by the Economic Survey is: (i) The subsidy should be handed over directly to the households, instead of giving it to the PDS storekeeper in the form of cheap grain and then have him deliver it to the needy households and (ii) the household should be given the freedom to choose which store it buys the food from. In other words, the DCT scheme implies a total dismantling of the PDS. There are at least five reasons why such a shift could be considered dangerous.
First, the PDS in India is a product of the national food policy that emerged in the 1960s and tried to address the interests of consumers and producers. It was an integrated system of food procurement and distribution. Any dismantling of the PDS would also mean an end to foodgrain procurement, which forms an important institutional support to Indias peasantry.
Secondly, cash transfers are highly prone to inflation-led devaluation. Economists have long argued that after the cash transfers, the purchasing power of the recipient increases, leading to a rise in the average market price of food. If cash transfer is made to below poverty line households, their purchasing power will go up, average food prices will rise, and the real incomes of the non-BPL population will fall. As the majority of non-BPL households are not non-poor, the outcome will be highly regressive. Even if we give cash to all households, the outcome is unlikely to be different. The average purchasing power of the population will initially go up, food prices will rise (thanks to the absence of the PDS and a DCT-induced increase in demand) and average real incomes will fall, thereby eroding initial gains for the poor.
Thirdly, money is fungible. For any household, a cash transfer would by no means ensure an equivalent quantity of food purchase or calorie intake as under the PDS.
Fourthly, cash transfers are less self-selecting than transfers in kind. Self-selection implies a reduction in errors of inclusion, as richer households voluntarily withdraw from accessing the provision. However, everyone loves cash. Thus, the incentive to self-select declines significantly with cash transfers. Result: a rise in fiscal costs and no attendant rise in welfare gains.
Finally, as reports on the DCT schemes pilot project in Rajasthan showed, only three months of transfer arrived at the bank accounts even after one year of implementation. Typically, faced with such delays, beneficiaries are left with two options: forgo purchase or borrow informally. If the latter option is made, the interest outgo constitutes an equivalent devaluation of the transfer. Even if purchases are financed by dis-saving, the opportunity costs will constitute an equivalent devaluation of the transfer. The poor could be worse off in every scenario. Most of the above arguments for food and kerosene in the PDS will hold true also for LPG cylinders and fertilizers. Everywhere, the outcomes will be regressive; the costs of access to social services will increasingly be beyond the reach of the poor.
Technological platform (or, an Aadhaar-disabled platform)
According to the Prime Minister, the twin pillars for the success of [DCT] are the Aadhaar Platform and Financial Inclusion. Without Aadhaar, it is argued, bank accounts can neither be architecturally linked up nor can identity be accurately fixed. However, such touching faith in Aadhaar reveals blithe neglect and inattention to some basic questions on the project that remain unanswered ( Frontline, Cover Story, December 12, 2011).
First, basing the DCT scheme on a project whose legitimacy has not yet been affirmed by Parliament is a travesty of democratic principles. In November 2011, the Standing Committee on Finance (SCoF) had unequivocally rejected the National Identification Authority of India Bill, 2010. The SCoF criticised the government for beginning Aadhaar enrolment without Parliaments approval. It questioned the reliability of the enrolment process followed by the Unique Identification Authority of India (UIDAI). It insisted that a national data protection law be passed before the project was initiated. It disapproved of the hasty implementation of the project without any feasibility study. It rejected the faith placed on biometrics by the projects proponents. According to the SCoF, the project was full of uncertainty in technology.
Secondly, experience has shown that fingerprint authentication is fraught with problems of inaccuracy. The Reserve Bank of India (RBI) remains unconvinced of the reliability of biometric technology in banking. It has refused to accept the Aadhaar number as proof of address for opening bank accounts and repeatedly affirmed that while opening accounts based on Aadhaar also, banks must satisfy themselves about the current address of the customer by obtaining required proof of the same. In an August 2012 speech, Governor D. Subbarao referred to Aadhaar-based biometric authentication in online transactions and noted that the robustness of this technology is as yet unproven.
Yet, the government has approved the use of Aadhaar biometrics for the distribution of old-age pensions. In fact, according to the proof-of-concept studies of the UIDAI, persons aged above 60 showed highest rejection rates during authentication. The study also noted, using a small sample of 35,000+ residents, that single finger-first attempt authentication was possible for only 93.5 per cent of the sample. For 6.5 per cent of the sample (7.8 crore residents, when applied to 120 crore) single finger-first attempt authentication was not possible.
Pilot studies on Aadhaar-enabled LPG delivery also show disastrous results. The rate of success in biometric authentication in the UIDAIs Mysore pilot study was only 67 per cent. A report in The Hindu (September 18, 2012) cited oil company sources in noting that the proposal to authenticate identity at every transaction was withdrawn because there were problems with authenticating fingerprints.
Despite parliamentary rejection and proven technological uncertainties, Aadhaar has been pushed hard as the Prime Ministers pet project. For the Prime Minister, Aadhaar is nothing but an opportunity to target subsidies effectively so as to reduce our fiscal deficit. Neoliberal austerity for the poor, it would appear, has a new ally.
The BC Model (or, a bank commission model)Opening bank accounts is not sufficient for DCT. Account holders also need to withdraw the cash transferred. In India, only about 36,000 inhabited areas, out of 600,000 in all, have a bank branch. Under the regime of financial liberalisation after 1991, the successful post-1969 model of opening new rural branches is considered passe. The preferred option is to encourage branchless banking by recruiting BCs in rural areas. According to the government, cash transfers can be withdrawn in rural areas through BCs, who would use Aadhaar-enabled biometric devices or mobile phones to authenticate beneficiaries. The BCs will be paid a percentage by way of commission for every transaction. To make the model attractive, the RBI in 2010 permitted the appointment of for-profit companies as BCs.
Experience has proven that the BC model is a major failure. Jairam Ramesh recently admitted this fact. First, those who became BCs were mainly village headmen, moneylenders and fertilizer dealers. This mirrored and reaffirmed power relations and hegemonies in villages. According to an Economic Times report from Punjab, 75 per cent of BC agents are village sarpanchs or their kin.
Secondly, corruption is a hallmark of the BC model. In March 2011, an internal circular of the State Bank of India noted that the BCs were found to indulge in malpractices, such as asking for unauthorised money, over and above the banks approved rates of charges from the customers. The circular noted that gullible customers were being exploited, posing serious risk to the banks reputation. According to bank unions, BCs regularly extract Rs.100 for every account opened and Rs.150 for every gold loan advanced. In October 2012, Economic Times reported that the Finance Ministry was investigating BCs demanding thousands of rupees in deposits from account holders.
Finally, the BC model is an expensive one. Observers have linked the models failure with the low levels of commission paid by banks. In other words, banks need to substantially raise BC commissions to keep the model viable. An Economic Times editorial says, The [BC] model has flopped, because the BCs are too few, get paid too little and are seldom there when people need them. Only time will tell if the new open architecture of the government, where anyone is allowed to become a BC, will succeed or further compound the problems.
The arguments in this article are not against DCTs per se. Given Indias level of poverty, DCTs can certainly complement the states provision of goods and services. Rather, it is the dogmatic insistence on wholesale substitution of existing schemes in food, fertilizer and energy with direct cash transfer that is dubious and will prove counterproductive. Peoples discontent is gathering momentum, and the UPAs game changer will likely end up a spoiler.
R. Ramakumar is with the Tata Institute of Social Sciences, Mumbai.
COMMents
SHARE