CASH TRANSFERS

Cash transfers are transfer payments of money to eligible

peopleCash transfer programmes in developing countries is

constrained by three factors: financial resources, institutional capacity and ideology (Political/Dependency)

1.Means tested (Conditional)2.Universal (Direct)

1. We first analyse India’s Direct Benefits Transfers program.

2. Then we move on to discuss about two of the most successful conditional cash transfer schemes in developing countries: Brazil’s ‘Bolsa Familia’, and Mexico’s ‘Oportunidades’; and possibility of conditional schemes in India.We picked Brazil and Mexico because,

1. Proven results over a long period2. Close proximity of the two country’s economy and demographics to India

India – Direct Benefits Transfers

Overview• Direct Benefits Transfer aims to provide a one-

step transfer of benefits to the beneficiaries, identified through their AADHAR.

• Government will transfer cash benefits like scholarships, pensions, NREGA wages, etc. directly to the Bank or Post Office Accounts of identified beneficiaries under the Direct Benefits Transfer (DBT) programme

• Direct cash transfers are meant to plug leakages and ensure that the needy are adequately empowered to avail themselves of the benefits due to them

• Currently, food/PDS is kept out of the ambit, to facilitate Food Security Act.

Talk about Aadhar here

Why DBT?• To ensure the beneficiaries themselves get the

benefits.• Aims at better delivery, accurate targeting,

reducing pilferage and corruption.• Currently it costs the GoI Rs. 3.65 to transfer

Rs. 1 worth of benefits to the poor. Also to help reduce diversion and adulteration of Kerosene and LPG cylinders.

• Over 90 million households expected to benefit, largest program of any kind in the world

P.S.- Speak about benefits of DBT

Structure• For the rollout beginning on 1.1.2013, 43

districts in 16 States have been identified on the basis of Aadhar connectivity, for the first round of Direct Benefits Transfer under 26 selected schemes

• Initially beneficiaries will be able to withdraw from their own bank branches or ATMs or Business Correspondents (BCs) with handheld devices; wherever they exist. The system of micro-ATMs and multiple BCs will roll out subsequently with full inter-operability gradually.

• Beneficiaries can use their Aadhar to open bank accounts in preferred Kiranastores and use Micro-ATMs to withdraw.For example- Delhi Govt’s Saral money scheme

a.) Post-matric scholarship for SC students – 7 districts; 48,000 beneficiaries (Puducherry, Nawanshahr, Fatehgarh Sahib, Gurdaspur, Anantpur, East Godavari, Diu)

b.) Pre-matric scholarship for SC students – 1 district; 24,000 beneficiaries (East Godavari)

c.) Post-matric scholarship for OBC students – 6 districts; 105,000 (Anantpur, East Godavari, Daman, North Goa)

d.) Post-matric scholarship for ST students – 3 districts; 4,800 beneficiaries (Tumkur, Waynad, Harda)

e.) Indira Gandhi Matrutva Sahayata Yojana – 6 districts; 55,000 beneficiaries (Dharwar, Puducherry, NW Delhi, Diu, North Goa, Amaravati)

f.) Dhanalakshmi Scheme – 1 district; 8,000 beneficiaries (Fatehgarh Sahib)

g.) Stipend to trainees under the scheme of welfare of SC/ST job seekers through Coaching-cum- Guidance and Vocational Training – 10 States, 650 beneficiaries (Karnataka, Kerala, Haryana, Punjab, Delhi, MP, Rajasthan, AP, Maharashtra, Jharkhand)

COSTS• One of the primary aim of the GoI by

implementing DBT is to cut back its costs and burgeoning subsidy bill of Rs. 1,90,000 crores, through better targeting and plugging leakages.

• Rs. 3,20,000 crores- announced estimated annual payments.

• Initially, DBT will actually be a financial drag, with $1.2 billion in estimated net losses for the exchequer through March 2015, according to National Institute of Public Finance and Policy.

• The expected savings will come in the following six years and will total about $14.5 billion, or 15% of the budget deficit in the latest fiscal year.

• In terms of inflationary costs, eventually depends on GoI’s budgetary position.

• According to Kaushik Basu,’ the central government's DBT scheme would not have "any net effect" on inflation and that the scheme should be "indexed”(Currently un-indexed) adjust with inflation, so as to maintain purchasing power’

Current situation/Concerns

• Unique Identification Authority of India (UIDAI) has issued only 210 million Aadhaar numbers, less than 1/5th of India’s population. The penetration varies widely among States viz., above 50 per cent in Andhra Pradesh, Karnataka and a low of 5 per cent in UP.

• GoI on a bank branches, micro-ATMs opening spree, uncertain whether accomplished in time.

• Banking system in rural areas is not ready to handle large volumes of small transfers. Banks are often far and overcrowded.

Infrastructural criticism

• GoI’s efficiency in defining, identifying and targeting beneficiaries. Avoiding ‘Denial by Design’

• Serious problem of transition, especially if there is a time lag in opening an account in a bank, to receive the cash transferred, as evident from Pilot projects and researches by Jean Dreze and other Development economists.

• Vulnerability to fluctuating market pricesCan be averaged out yearly based on forecasts. Cash subsidy should allow flexibility in the choice of commodity to the beneficiary. Inflation could easily erode the purchasing power of cash transfers. Even if some indexation does happen, small delays or gaps in price information could cause significant hardship for poor people.

Alternate uses of Cash transfer

• When the subsidy is given as cash directly, it may benefit adults and boys more due to biased social priorities in Indian society.

• The money may be used by the male adult of the family to fulfil his vices, instead of procuring necessities, defeating the entire purpose of empowerment.

• Need for financial literacy, and greater community participation.

• Limits to the program's ability to stamp out corruption. There is no reason a micro-ATM operator can't ask for a kickback when giving people their money, just as a postal worker might.

Results from Pilot projects

Kotkasim, Alwar- Kerosene experiment– Experiment is fraught with problems, and has led to a

virtual paralysis of the kerosene distribution system in Kotkasim.

– The population now has to pay the market price (now Rs 49.50/litre) and the subsidy (difference between the market price and the subsidized rate) is paid into their bank account, compared to the earlier rate of Rs. 15/litre. 

– The payment of subsidies is very erratic and untimely– Daily-wage earners, who cannot afford to make even one

trip. One trip to the bank would mean a day’s work gone, a day’s wages (Rs 150-300) lost. Households being made to pay Rs. 500 for a ‘zero-balance account’

– Dramatic 70% reduction in Kerosene consumption attributed to unaffordability of kerosene at market price, instead of the official story of eliminated Black Market.

Jharkhand – Pension schemes/MGNREGS– Early trials of cash transfers, head-start in the

rollout. – Cash obtained at a much faster speed– Fraudulent and ghost beneficiaries busted– Glitches in technology were on display in

Tigra- villagers unable to withdraw cash from mini-ATM.

– In Ramgarh villages, only 9,000 people have biometric ID against the claimed figure of 43,801.

Mysore- LPG experiment– Phase I - Targeted delivery of LPG

cylinders using Aadhaar– Phase II – Subsidies delivered in Banks– First phase completed without any

glitches: Reduced black marketing significantly, waiting period for delivery from 7 days to 2 days.

– Next phase underway – opening over 200,000 bank accounts.

The way forward for DBT

There are ambiguous opinions about the DBT.1. The UID and DBT provides a platform amenable

to technological innovations to resolve the numerous pinpricks that affect service delivery.

2. Help the GoI to rein in fiscal deficit, and in turn, its positive feedback effects.

3. Some positives from pilot projects for pensions/scholarship transfers(Tripura). Activists support DCTs when it pertains to providing social security pensions, scholarships, and maternity entitlements—in other words, schemes where the benefit is in the nature of cash to begin with.

oHowever, the low penetration of UID and banks in rural areas is a roadblock for the scheme.

oGiven the failures of Pilot projects, the express timeline of DBT in food grains, kerosene, and fertilizers, is being fought to tooth and nail.– The hurried manner in which the well-

intentioned move to pay NREGA wages through bank accounts almost killed the entire programme due to delays in payments.

– Reason: Either people did not have bank accounts or the branches were far away. Something similar is happening with DBTs again.

o Two empirical studies, by Jean Dreze and Reetika Khera and the other by the Delhi-based Rozi Roti Adhikar Abhiyan, indicate that the poor people indeed prefer food grains over cash transfer directly in their bank accounts. Emphasize reformed PDS model in Chattisgarh and Andhra Pradesh– Even if India had the infrastructure

to pay through banks, it may still not be advisable to replace subsidised food grains by cash because while the market price of articles goes up instantaneously, the increased subsidy can happen only with a lag

The Government of India remains optimistic, it will overcome the teething troubles of DCTs and transition to a new order of welfare policy implementation unlike any seen in the world’s history. That, only time will tell.

INTRODUCTION• Like many other developing countries Mexico has struggled to alleviate

poverty and reduce income inequality.• In the mid-90s, 30% of the general population, and in excess of 50% of the

rural population, lived in extreme poverty. Currently, approx. 25 million Mexicans live in extreme poverty conditions.

• In 2002, the per-capita income of Mexico was $6,879.37 and only 18% of the population earned equal to or more than that implying income inequality.

• After the economic crisis of 1990s, reforms started taking place but still, the southern states have remained forgotten leading to great regional disparity.

• Basic amenities like education, health service etc are sorely lacking leading to high illiteracy rates, unemployment and lower life expectancy. Insufficient infrastructure contributes to skewed development too.

• The political system of Mexico has mostly been seen to favor the elite at the cost of the welfare of the rest of the population.

Poverty Reduction: OPORTUNIDADES PROGRAM

1997

1999

2002

Introduction by the Federal Government of

PROGRESA

PROGRESA covers 2.6 million rural families

PROGRESA evolves into OPPORTUNIDADES

Opportunidades (Opportunities) is a government social assistance program in Mexico. It is designed to target extreme poverty by providing cash payments to families in exchange for regular school attendance, health clinic visits, and nutritional support. It’s key features are:1. Conditional Cash Transfer2. Rights holders are mothers3. Cash payments made directly to families.4. A system of evaluation and statistical controls to ensure effectiveness5. Rigorous and cost-effective targeting based on socioeconomic factors.6. Mainly focuses on three major aspects of social well-being:

Education Health Nutrition

2010

OPPORTUNIDADES covers 5.5 million

families

IMPLEMENTATION1. Education – Monetary educational grants to participating families

for each child under 22 years of age who is enrolled in school between the third grade of primary and the third grade of high school. These grants are slightly higher for girls than boys after a certain level.

2. Health - The health component provides basic health care for all members of the family, with a particular emphasis on preventive health care. This service is provided by government public health institutions.

3. Nutrition - The nutrition component includes a fixed monetary transfer, equal to about $15.50 (155 pesos) monthly, for improved food consumption, as well as nutritional supplements for children between the ages of four months and two years, malnourished children aged 2 to 4 years, and pregnant and lactating women.

4. Targeting – A “poverty map” was developed to find the poorest families most in need of assistance and these families were then ranked accordingly. The quality of Mexico’s marginality index was also improved.

IMPACT & ANALYSIS

EDUCATION• Children more likely to enroll in

school.• Dropout of students decreased by

23%.• High school enrolment increased

by 85% in rural areas.

HEALTH• Increased preventive and curative health visits of beneficiary families. • Maternal deaths and infant mortality declined by 11% and 2% respectively.

NUTRITION• Decline is serious anemic cases.• 20% reduction of sick days for children in rural areas.• Reduction in stunting in urban areas.

QUALITATIVE• Elimination of education gap between men and women.• Consumption of proteins, fruits and vegetables has increased significantly.• Development of personal capabilities by helping domestic groups obtain credit.

PRESENT AND FUTURE POVERTY

• By the end of 2005, around 24 million people or 23.8% of Mexico’s population benefited from the program.

• Small reduction in poverty headcount ratio (10%) but a larger reduction in poverty gap (30%) and poverty gap squared (45%).

• One percent reduction in terms of food-based poverty line at the national level. In the rural areas, the poverty impact has been two or three times greater.

• By the end of the first year, average consumption levels had increased by 13% leading to 7.8% increase in the median calorie intake per person.

• The size of the gap between household income and poverty threshold has decreased significantly. National poverty rate decreased by 5.1% in 2005.

Fig: Poverty headcount ratio at national poverty line (% of population)

CONCLUSION The impact of Oportunidades shows that conditional cash transfer programs of this nature can be an effective feasible instrument in both reducing current poverty as well as improving the future of children through increased investment in their health and education.

Human capital investment is relevant to tackling the intergenerational transmission mechanisms of persistent deprivation.

It adopts a multidimensional approach to poverty which is in clear contrast to food aid in-kind subsidies that dominated antipoverty interventions in the past.

Much effort has been made to establish an image of Progresa-Oportunidades as existing independently of the president and party politics, to heighten chances it would survive transfers of power in the executive branch. 

The inclusion of rigorous impact evaluation protocols has meant that governments can test and improve program’s effectiveness, while strengthening their legitimacy across different political actors.

Bolsa Familia• Launched on Oct. 20, 2003 by President Luiz Inacio Lula da Silva

• Unified 4 major programmes: Bolsa Escola, Fome Zero, Bolsa Alimentação and Vale Gás.

• Aims to: i) alleviate the income deprivation of poor households ii) break the intergenerational transmission of poverty.

CONDITIONS

• Provides monthly transfer to poor households with children upto 15 years of age and/or a pregnant woman, and a monthly transfer to extremely poor households regardless of their composition.

• Government has rapidly expanded coverage of the BFP. Program covered 11.1 million families as of June 2006.

•

Operational aspect of Bolsa Familia

• Federally funded and jointly managed by the federal and municipal governments.

• Budgets for the program for each municipality are determined by the federal government, based on estimates of the number of poor families.

• Applications of families, eligibility verification, and final decisions on enrolment are managed by the municipality, conditional on the budget determined by the federal government

Impacts• Reduced income inequality.

Noteworthy impact on reducing poverty. Among extremely poor households, transfers represent a sizeable portion of their total income.

• Expenditures on food, education, child health and child clothing increased.

• Increased school attendance and decreased drop-out rates but also led to more children falling behind in school.

• Positive impacts on reducing wasting and stunting in infants.

• No impact on levels of vaccination of children.• Positive impact on adult labour force

participation. Impact being greater for women.• Significant proportion of Brazil's poor

population gained access to financial services. • Approximately 600 thousand children, were

still only working and not attending schools.

STATISTICS• Covers over 11 million families and costs close to

0.4% of the country’s GDP.• Basic Benefit is a payment of R$60.00 for families

with monthly per capita (p.c.) income below R$70.00.

• In addition, there is the Variable Benefit, according to which families with monthly per capita income below R$140.00 receive R$22.00 per child under age 15 (up to the maximum of 3 payments).

• Maximum benefit value in Bolsa Família is R$200.00 per family, which applies to families with monthly per capita income below R$70.00, 3 children under age 15, and 2 adolescents aged between 16 and 17.

Drawbacks• High level of unmet demand. Still does not

cover around 3.4 million eligible homes.

• The basic social services offered are insufficient to meet the needs of beneficiary families.

• Imbalance between rural and urban benefits with the programme having a rural bias.

Lessons for India

While a broad case can be made for a cash transfer system in India, in the existing situation

of an incomplete transition to a multi-level structure of government, with insufficient clarity

on inter-governmental relations, especially among the elected representatives, and an

overarching set of civil services fighting for turf at union and state levels, it will be difficult for

India to design suitable cash transfer and related programmes.

Brazil’s experience shows that cash transfers, when implemented properly are at best a

necessary condition for poverty alleviation. Supply-side constraints have to be removed if

the increased purchasing power is not to lead to unbridled inflation that will hurt the poor badly. India’s investment in health, for example, is so low that it cannot handle more demands being

made on the system. Creating such demand without measures to meet it would be

irresponsible indeed.

Mexico model in India? India’s biggest hurdles is simply figuring out how to distinguish its 1.2 billion citizens. Mexico, with a

relatively much lower population, obviously had an easier task when it comes to identification and

targeting.

Also, majority of the rural populace isn’t integrated with the financial and banking system, thus

making transfers difficult. Today, just about one-third of the population has bank accounts and changing

this scenario would require a lot of effort and expense.

In Mexico, cash transfers have completely replaced food and in-kind subsidies. The same would lead

to massive social exclusion in India as the transfer money would be squandered away by men, the main

recipients of the program.

Misuse of the program for political power is very likely in India. Already a significant number of early

enrollees live in states controlled by the Congress party. In the case of Oportunidades, several steps

were taken to ensure transparency and accountability like prohibition from signing up new beneficiaries

within six months of national elections.

The main argument against the chances of success of this program in India is that the infrastructural

base in the country is very poor. Lack of schools and hospitals lead to expensive private education and

healthcare and thus increase the burden on the poor despite the transfers.

Bibliography

1.The Hindu2.Times of India

3.Economic and Political Weekly4.Businessline

5.Wall Street Journal6.Businessthisweek7.Economics Time

8.Business Standard9.Wikipedia

10.The Economist