Why A Hasty Approach May Derail the Direct Cash Transfer Scheme Completely

The UPA government has announced the Direct Cash Transfer (DCT) scheme, with an eye on the elections. As expected, the opposition has cried foul,  terming it “bribe” to the voters.

That is politics. And not really the topic of discussion here. In fact, this piece is not even about the economics of it. Economists agree that it is more efficient to pass on the benefits to the deserving directly through cash transfer than indirectly through subsidies. In any case, the government has been talking about it for quite some time. The Budget Speech in the last two years have referred to it explicitly. Many studies internationally have shown that they have, by and large, had a positive effect.

The points that I raise here are not about the politics or economics of DCT but the implementation hurdles that remain. Because even with this limited rollout, it could be the world’s biggest such project. Rushing in to implement may create problems that could shake off people’s confidence on the scheme. This could lead the opponents to project it as a faulty idea per se.

So, here are some of the issues.

1. What about those without the bank accounts? India has less than 25% of people in rural areas, who have access to bank accounts. How will they get the benefit? Does it mean that some of them—those who have bank accounts—will get it and others will not get it? That will be as anarchical as it could be. And the backlash could be severe.

2. How will subsidies and DCT co-exist, even if for a limited period? The government says that the scheme will be fiscal-neutral as it will replace subsidies. Practically, how will that happen, especially in fuel (kerosene), food, and fertilizers? Till all the people are in a position to get the benefit of DCT (today, those who do not have Aadhaar or bank account will not be able to get it), the government cannot touch the public distribution system. Which means it cannot effectively cut  subsidies. So, the mechanism has to be in the point of contact (ration stores and the like) to ensure that some beneficiaries do not avail both the benefits, which is next to impossible, as of now. So, the government will continue to run both for the foreseeable future. And surely, it will not be fiscal neutral.

3. What are the alternate channels of supplies? While it is good to say, on paper, that by getting the money directly, the beneficiaries, can opt to buy the products from anywhere, no one is clear what is that anywhere. In many areas, no alternative supply and distribution channel exists. So, how will cash help them?

4. How do you ensure that the money is spent on those products and services for which is intended? How does the government ensure that the money is spent on the products and services that intends to subsidize? In some countries, these subsidies are conditional and are given to women. There is no such plan in India. So, in many families, where men spend a lot of earnings on alcohol and such things,  more cash means more money to get drunk. The possibility is very real in India.

The issues raised here are not meant to argue against the implementation of DCT.

But the fact remains that changing the entire subsidy regime requires a lot of thought and preparation. The government started on the right note by appointing a task force to suggest the ways and means of implementing this.

The task force, headed by Nandan Nilekani, Chairman, UIDAI, submitted a detailed report, recommending creation of what it called a Core Subsidy Management System (CSMS) to implement the new subsidy regime.  The task force foresaw the gap that exists in the payment system reach and recommended this

Since it may take a while for the payment systems in the country to gear up for direct transfer of subsidies, an intermediate step may be considered where the subsidy difference is transferred to wholesalers/retailers in the first phase, and only later on to customers.

But the government has disregarded it and has announced DCT right away. Also, there is no news on where the rollout of CSMS has reached.

With all its good intentions, the government will have only itself to blame, if the whole idea backfires.

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Filed under Digital Economy, Inclusive India, Indian Economy, New Governance, Policy & Regulation, Uncategorized

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