Memo to Sonia Gandhi : Cash transfer may not get you a win in 2014


English: Sonia Gandhi, Indian politician, pres...

 

by R Jagannathan May 30, 2013, First Post
#Cash transfers #DCT #Espirito Santo #HowThisWorks #Politics #Sonia Gandhi #Subsidies
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The Congress party has set great store by the direct cash transfers (DCT) scheme, which it has relabelled as direct benefits transfer (DBT), and which it further hopes will result in a direct votes transfer (DVT) scheme and a game-changer in the next elections.
The Rs 64,000-thousand-crore question is: Will it work? Will it deliver the benefits as envisaged? And, more importantly from the Congress party’s point of view, will it deliver the votes?
The short answers are: maybe not, maybe not, and a definite no to the above three questions, in that order.
Memo to Sonia: get reforms going, get growth going.
DCT’s rollout has been patchy so far and the linkage between bank accounts and Aadhaar number seeding is still not 100 percent even in the 43 districts that were the initial targets for small schemes such as scholarships, pensions, et al.
The chances of high success in the big-ticket game-changer schemes like MGNREGA, LPG subsidies and ultimately food and fertiliser subsidies are very limited till 2014. Voters may at best get a glimpse of the promise of the scheme, but any glitches may also get magnified. One could neutralise the other.
The chances of garnering votes is thus limited, since DCT needs at least three to four years to implement properly on a national scale – but this is precisely where the Congress seems to be in too much of a hurry, and hence not paying enough attention to detail.
These are the broad conclusions of a detailed research report on DCT by Espirito Santo Securities (ESS) which discussed the issue with policy-makers, economists, and did some pilot studies where the scheme is being implemented (especially East Godavari district in Andhra).
This is ESS’s conclusion based on early results for DCT even in the first 43 districts where bank penetration and Aadhaar enrolments were supposed to have been very good. The report says only Rs 22 crore has been disbursed using the Aadhaar payments bridge, while more than twice that amount (Rs 57 crore) was paid out using traditional methods. DCT was less than a third of the total amounts disbursed.
If this is the outcome in districts with the best bank-Aadhaar penetration and that too for schemes that anyway involve only cash – scholarships and pensions – and where there is little fraud, one wonders how it will work for the more massive MGNREGA and LPG subsidy schemes that are being targeted for rollout in 121 districts by 1 July and 1 October this year, respectively. The complete national rollout is scheduled for 1 April 2014 – a tell-tale indication of where the election time-table could lie as far as the Congress leadership is concerned.
The Espirito Santo research is certainly not negative on DCT – and nobody beyond Sonia Gandhi’s National Advisory Council (NAC) has serious doubts that it can only be an improvement over the way welfare schemes are implemented right now, with lots of leakages, ghost beneficiaries, and excessive corruption. Estimates of savings for the exchequer range from a minimum of Rs 33,000 crore (according to the PMO) to a wildly optimistic Rs 1,10,000 crore of savings, according to a study by the National Institute of Public Finance and Policy.
The upper-end expectations are clearly pie-in-the-sky given our record of poor implementation of almost any scheme.
In the case of DCT, in particular, the problems lie in the short-term political expectations embedded in the scheme, which raise concerns about whether they will be implemented well enough and with long-term benefits in mind. Just as MGNREGA and farm loan waivers were implemented without great thought being given to scheme design and reviews, DCT too falls into the same basic cracks.
MGNREGA is facing hurdles in its seventh year of implementation, and the outlays on the scheme have been cut from peak levels just before the 2009 elections due to supply side problems (supply side means providing work for those who demand it). The farm loan waivers scheme has been negatively commented upon by the Comptroller and Auditor General (CAG).
Will it be the same story with DCT in 2014? These are Espirito Santo’s conclusions:
#1: Full rollout before 2014 is “extremely unlikely.” The best guess is that “the bulk of the savings will come only after the complete roll-out which may take two to three years.”
#2: Most experts are cautiously positive on DCT, but they dispute the quantum of benefits the government is expecting from it, since few believe that corruption will be eliminated.
#3: ESS does not see “DCT as addressing the near-term fiscal problem. It has to be accompanied by further cuts to subsidies, among other things.”
Conclusion: DCT will not be a game-changer by 2014. ESS says: “We estimate that the impact of DCT will be substantial only post 2015-16, unless the scheme dies down due to lack of political will post the 2014 elections.”
The larger point is this, as Firstpost pointed out earlier. Even in 2009, the Congress party only fooled itself when it thought MGNREGA was a game-changer, when the real thing that delivered it a convincing victory was fast-paced growth from 2003-2008. That, unfortunately, is not the case now.
Memo to Sonia: get reforms going, get growth going. DCT is a direct transfer of benefits to the next government in any case.

 

 

 

 

#India – Counting the costs of direct cash transfers


Madan Sabnavis  April 22, 2013  BS
The government urgently needs to consider 5 ‘Ss’ before it launches itself into this commitment
As a rule, the government likes creating new structures without fully understanding their implications and then disbanding them once criticism inundates the newspaper columns. A lot of time and money is invested in creating these structures and, often, these costs could be higher than the cost they are trying to lower to begin with. The direct cash transfer (DCT) scheme runs a similar risk, since our enthusiasm levels are currently high, and we could go off the track unless certain preconditions are addressed.
It is generally felt that DCTs are a more efficient system than, say, physical subsidies. This does hold when conditions are ideal and back-end structures are in place. Otherwise, there could be contradictions that will make the DCT scheme unsuccessful.
DCTs come into play for two kinds of transfers. The first is where a new structure is created for transferring cash-for-cash transactions. This holds for, say, salaries, pensions and scholarships and so on. The existing scheme has various departments sending cheques to the recipients, who, in turn, deposit them in their own accounts. The second pertains to cash-for-kind transfers. Here, instead of providing the good to the household, a cash transfer of an equivalent amount takes place and can be used to buy the product.
The concept of DCT is based on the much-publicised Aadhaar project where a unique identity (UID) has been provided to people. Since every UID has an account linked to the person, such a transaction would be automatic provided the disbursing authority is linked with the banking systems. Given the volumes involved, this would be a logistical challenge. The advantage for cash-for-cash transactions is efficiency and reduction of leakages provided the identification process is robust. Prima facie, there is nothing amiss here.
When it comes to cash-for-kind transactions, the situation is different because we have to give up the existing structures since substitution takes place. There are essentially five “Ss” that have to be tackled before bringing about any change in the transfer system.
The first is “structures”. We have an elaborate procurement system for food grain that is motivated by, one, procurement for distribution and, two, creation of a buffer. The procurement policy is an open-ended one where farmers can sell a fair average quality to the Food Corporation of India (FCI) at a predetermined price. The idea here is to protect the farmer’s income. Have we thought of what will happen to this policy or FCI (an institution set up for this purpose) when we provide cash transfers, and FCI will then have to address only the issue of buffer stocks?
Second, “systems” have been created for distribution – the public distribution system (PDS). If we have a “conditional cash transfer” in which money given has to be used to buy grain from fair price shops, then the status quo would be preserved – along with the current inefficiencies. However, if it is not a conditional transfer system, then new issues emerge. There are around 500,000 fair price shops across the country that on an average employ one million workers. By introducing cash transfers and disbanding PDS, there will be an issue of unemployment, since it will be hard for these people to reinvent their stores that are mostly located in rural areas. Today, when there is opposition to foreign direct investment in retail, we are talking of the local kirana shops. There will be a lot of noise when we think of displacing these one million workers. Do we have a solution here?
Third, “selection” is an important consideration for a successful DCT scheme. The problem with PDS, besides the ubiquitous leakages, is adverse selection. A lot of people who are not poor take in these entitlements. This becomes acute as we move to kerosene and liquefied petroleum gas. The new scheme on UID is no different from the existing policy of self-declaration; since no proof of income is asked for it runs the risk of adverse selection. In fact, there are a large number of people holding on to the coloured ration cards and not drawing rations. In the new dispensation of the scheme, this could mean free money for them. Do we have a way of screening households or else will we be back to also helping those who do not require assistance?
Fourth, the government is talking aggressively of food “security” with an ambitious target of covering two-thirds of the population. Clearly, there is a major contradiction here. If we are to provide cash transfers, then how do we reach the food grain to the needy, which requires PDS?
Fifth, there has been debate on the food “subsidy” burden. The subsidy is the difference between the economic cost and the issue price for wheat and rice. The economic cost varies between Rs 17 and Rs 24 a kg, and the issue price is around Rs 5 to Rs 8 a kg. This is when the food grain is sold at a fixed price. Now, once the people are paid cash, they have to buy food grain on their own from the market. Based on government data, the price of wheat and rice varies from Rs 15 to Rs 35 a kg in different parts of the country. Two practical problems arise here. The cash to be paid in lieu of subsidy will be substantially higher than the present subsidy amount. Second, with inflation being variable, fixing the prices and, hence, subsidy level across states will be difficult, and one can see a lot of politics coming in the way of arguing for higher levels of allocations.
To make the DCT scheme effective, we need to fix these five “Ss” first or else we would be running conflicting parallel systems. We also need to evaluate the exact benefits of the cash-for-cash transfers before embarking on the more onerous cash-for-kind transfers. Besides, the cash-for-cash transfers alter the mode of payments without addressing the issue of selection. It is, therefore, advisable that we move one step at a time and not get carried away.
The author is Chief Economist, CARE ratings. These views are personal

 

 

“Aadhaar” of Direct Cash Transfer is more of assumptions, less of ground-level realities #UID #MUSTREAD


14 DEC, 2012,

The government announced that from January 2013, 51 districts of the country would be subjected to Aadhaar- based direct cash transfers (DCT). We need some basic answers before we get to term the initiative as a game-changer.<br />

The government announced that from January 2013, 51 districts of the country would be subjected to Aadhaar– based direct cash transfers (DCT). We need some basic answers before we get to term the initiative as a game-changer.
Quick-fix solutions?: The latest fix is through the new improved micro ATM architecture where BCs sort out the last mile. Technology provides a fix on authentication and transaction recording. This assumes that the physical connectivity between the branch and the customer through the intervention of a human being fixes the issue.But the cash has to be delivered physically. With 1,50,000 post offices, and postmen visiting all the habitations regularly, with an instrument of money order, we have not been able to sort out the problem of transferring the cash from the coffers to the beneficiaries.

The finance ministry has not convincingly established the business case for a BC. Do we have an idea how a BC would do it better? The answer would be in commissions and incentives. Agreed.

But where is the business case to the banking institutions if these costs are loaded? Does it work at scale?

Too much is loaded on to a single intervention, involving commercial institutions, without a strong business case.

The approach of the government is worrisome. It may be a part of the measures in the run up to the 2014 election is the simplicity with which the solutions are offered. That the entire country can take a single solution; that the solution can be offered through the banking system; that the only impending problem was establishing identity; and that Aadhaar will sort out issues much more than identity and fix leakages and petty corruption.

The commercial sector would have looked at this through the lens of segmentation, test marketing and local strategies. The government believes in standardisation and scale.

Even if Aadhaar number is subjected to multiple pilots in several locations, it is difficult to imagine how these pilots have informed this aggressive rollout of cash. This space is getting to be interesting and we need to watch for more action.

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