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An economic policy for Kejriwal's Aam Aadmi Party

Economy Nov 28, 2012

Cash transfers: Congress will face a last-mile problem

By R Jagannathan

If any proof were needed that the Congress sees the direct cash transfers scheme as little more than a monetary inducement to the voter, the statements of Finance Minister P Chidambaram and Rural Development Minister Jairam Ramesh should dispel misgivings.

While the FM called the scheme a "game-changer" for the UPA and pointed out that the idea was mentioned in the 2009 Congress election manifesto, Jairam Ramesh was even blunter when he affirmed - as if anyone needed convincing - that "the Congress is a political party, not an NGO," reports The Hindu. Ramesh also announced the slogan - Aapka paisa, aapka haath - the last being both a reference to the Congress party's election symbol and an inadvertent admission that the people's money has not been reaching them so far.

Another pointer: the glum faces in Sonia Gandhi's National Advisory Council (NAC) also tell the same story. Most of them are only weak advocates of cash transfers, and the fact that Sonia is backing cash transfers suggests that when it comes to elections, the NAC can lump it.

Something to smile about: Ramesh and Chidambaram at the Congress press conference yesterday. PTI

However, while nobody should grudge political parties their right to vote-winning manoeuvres, the real issues relate to the speed with which the party hopes to roll out cash transfers, and also whether it will be able to conquer the last mile problem - ensure seamless delivery of cash to the intended recipients - or even allow the government to save money by eliminating fraud and leakages.

The main touted benefits of the scheme - which is to be mediated by the Aadhaar Unique ID - are the following:

#1: It will give the benefits directly to only the intended beneficiaries. Bogus claimants will be automatically eliminated. (Probably)

#2: It will drastically reduce corruption and middlemen and touts. (Doubtful)

#3: It will improve systemic efficiencies. (Sure)

#4: It will help reduce the subsidy bill because of the elimination of the above wastages. (Unlikely in the short run)

Take the last one first, which is what gives Chidambaram hope for his budget. If the system delivers 100 percent of the benefits to the intended beneficiaries, all it means is that the subsidies will go to the right persons. If this really happens, more people will be motivated to claim the benefits, since the earlier system had a way of deterring claimants. So how will the subsidy bill come down?

The only situation in which subsidies will come down is if there were 40 bogus claimants earlier for every 100, and they are all weeded out. But if the increased efficiency of the new system causes more genuine claimants to surface, the cost reduction will happen only slowly.

But consider the transitional losses the system will face in shifting to cash transfers. In the current non-cash based system of government welfare schemes, there are more than 10 million workers involved - mostly women - reports The Times of India. They are not government employees, but they provide services at the village level, for a small honorarium, by cooking food for mid-day meals, running self-help groups, teaching new farming techniques, attending to small ailments, or implementing the NREGA scheme. If cash replaces the existing scheme, they would have no incomes coming. They could well choose to add themselves as beneficiaries of welfare schemes, bloating the bills.

More importantly, if subsidies like food and fertiliser shift to cash - which is not planned for the moment - the entire infrastructure relating to public distribution, food procurement, and movement of grains will become redundant, with its own contractionary economic consequences. There will be costs related to the abandonment of such activities, too - and the bill will come to the government.

This is not an argument against cash transfers, but merely a counter-point to the assumption that subsidy costs will come down.

Over time, if executed well, cash transfers may be a good thing - especially for schemes where the primary idea is to deliver cash to beneficiaries, like NREGA wages or old age pensions - but the Congress' unseemly dash for cash militates against such a possibility. The party wants to cover 51 districts by 1 January, 18 states by 1 April 2013, and the whole country by the end of next year - in time for the general elections.

But this apart, there are other things the Congress should worry about if it is not to end up with egg on its face. For example, corruption happens at many stages in the pipeline of cash from exchequer to final recipient, and some of these stages will remain in place even after Aadhaar. Moreover, the government is yet to lick the last-mile problem.

Let's start at the recipient's end. How is the beneficiary in the village expected to get cash? First, he will have to start a bank account with some branch, even if it is not located anywhere near his village. The bank will, in turn, use a Business Correspondent - often a private party - to make the rounds of villages to distribute the cash after verifying the ID of the recipient through Aadhaar or some other means. For this he will use what is called a micro ATM - which does not actually disburse cash, but merely authenticates the ID of the recipient. So the cash will actually be doled out by a person - who may have the power to delay payments and thus extract speed money.

Now look at how Business Correspondents (BCs) are chosen. The finance ministry has, in its wisdom, arm-twisted public sector banks to create 20 clusters and appoint a common BC for each cluster based on the lowest cost bid. For example, if Maharashtra is one cluster, parties seeking to become BCs for all public sector banks will bid for handling the cash business.

But this is where things start to smell fishy. In August, many bids for BCs were cancelled for being too low. According to an Economic Times report at that time, the BC industry, which was earlier claiming that any margin below 2 percent was not viable, suddenly made bids as low as 0.02 percent (Vakrangee, for Delhi and Rajasthan cluster). This means Vakrangee was willing to handle Rs 100 of cash for the poor for a payment of just 2 paise.

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by R Jagannathan

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