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Economy Oct 22, 2012

Cash transfer scheme’s success hinges on plugging the leaks

By Venky Vembu

Con artists ripping off foreigners by selling them the Taj Mahal mark an implausible, oh-so-20th-century scam. Today's scamsters have raised their game - and are deploying post-modern technological channels that the government is unveiling - such as, for instance, the unique ID Aadhaar card, through which it plans to make direct cash transfers to target subsidies directly at end-users. And, as always happens, in this instance the crooks are one step ahead of the authorities.

A few months ago, the Bangalore police busted a fake unique ID (UID) racket after they seized thousands of fake UIDs with official Aadhaar logos, and arrested five persons who had been issuing them.Anecdotal evidence from other such scams elsewhere suggested that these con artists also have a distinctive sense of humour. From Anantapur district in Andhra Pradesh, there was a report some months ago that an Aadhaar card had been issued in the name of "Mr Kothimeer (Coriander), son of Mr Palav (Biryana), in Mamidikaya Vuru (Raw mango village)."

Instances like these illustrate the importance of getting the service delivery mechanism exactly right if the direct cash transfer programme late last week, under which the subsidy component - on everything from foodgrains distributed under the PDS to LPG - and payments under government-run schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme (NREGA) will be linked to the UID, is to achieve the desired result.

Can the UID cards be used to plug leaks in the system? AFP

There is, for instance, compelling evidence form a number of countries to establish that cash transfers can reduce inequality and the depth of severity of poverty, according to a DFID study. "Indicatively, in Brazil a combination of cash transfer programmes accounted for 28 percent of the total fall in the Gini index (a summary measure of inequality) between 1995 and 2004," it noted.

The underlying economic theory suggests that providing cash benefits theoretically dominates the provision of assistance in kind - because it enables individuals to spend the money in a way that maximises their utility. But, as scholars from Australia's Monash University discovered,the potential for mistargeting and leakage of funds away from deserving recipients poses a considerable downside risk, particularly in developing countries.

"Without the detailed, verifiable and legally enforceable data bases that form part of the tax and welfare systems in industrialised nations, accurate targeting of such transfers in developing nations is very difficult," they said.

Illustratively, the scholars studied the experience of the Bantuan Langsung Tunai (BLT) program in Indonesia, which aimed to compensate poor households for a sudden and large increase in fuel costs that resulted from the removal of fuel subsidies.

Their findings reveal that the programmed was dragged down by poor targeting: nearly $500 million was funnelled into ineligible households, which in turn gave rise to social unrest as protestors - those were eligible to receive payments but did not - burnt down and stoned village heads' offices. Such experiences "reduced the level of trust within the community, had a deleterious effect on social capital, and led to an increase in anti-social, and in some cases criminal, behaviour," they noted.

The World Bank, which enthusiastically backs such direct cash transfer programmes, has additionally been pitching for adding a layer of conditionality in order for governments to secure social welfare objectives. Conditional cash transfers make payments to poor households on the condition that those households invest in the human capital of their children in certain pre-specified ways.

These 'conditions' could take the form of 'health and nutrition conditions' - which would require periodic helath check-ups or growth monitoring for children less than five years of age, perinatal care for mothers, and attendance by mothers at periodic health information talks. Similarly, 'education conditions' could include school enrollment and a minimum school attendance of 80 percent education - and perhaps even some measure of performance.

Most such Conditional Cash Transfer (CCT) programmes transfer the money to the mother of the household - or, occasionally, to the student. In most cases, CCT programmes have two clear objectives: to provide poor households with a minimum consumption floor, and second, by making transfers conditional, to encourage accumulation of human capital and to break the cycle where poverty is transmitted across generations.

One logistical hurdle that has been pointed out in targeting direct cash transfers to the rural poor is the fact that large sections of that population remain "unbanked" - that is, they don't have bank accounts into which the cash transfer can directly be made. But as Ajit Ranade points out, "micro ATMs'' - small devices that establish identity through fingerprints or retinal scans (which are secured from UID cardholders) and allow them to withdraw cash - even if they don't have bank accounts.

The DFID study observed that while cash transfers had contributed to gains in access to health and education services, as measured by increases in school enrollment (particularly for girls) and use of health services, they had had less success in improving final outcomes in health and education.

"Cash transfers can help the poor overcome demand-side (that is, cost) barriers to schooling or healthcare, but they cannot resolve supply-side problems with service delivery (for example, teacher performance or the training of public health professionals)."

It has therefore been recommended that cash transfers need to be complemented by ongoing sectoral strategies to improve service quality.

But as Firstpost had noted earlier, even though the aim of the cash transfer progamme in the long term is noble, it could, in a pre-election year, could become a form of legalised bribery of the voter.

And, as the instances of fake UIDs establish, the system needs to be made leak-proof if it is to achieve the objective of ensuring subsidies are better targeted at end-users, without interlopers and con artists walking away with the money.

It will need more than noble intentions for the direct cash transfer programme to succeed: it will need an immaculate service delivery mechanism. In its rush to showcase a programmatic success, the government should not end up enriching the fake "coriander" of the world.

by Venky Vembu

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