Sunday, March 13, 2011


The recent budget has seen the announcement of moving towards the system of direct cash transfer instead of a subsidy based support system. The proposal to move towards the Direct Cash Transfer mode is the single most radical change in the budget. Post Budget it has emerged as the most important topic of discussion among analysts. The moot question is will this system signal a change where benefits of governance will actually reach the poor? To answer this question we must go back to the genesis of the direct cash transfer system. During the late 1990’s champions of neoliberlaism began to advocate the system of direct cash transfer which meant giving money to the poor. The system has been successfully implemented in various forms in countries like Brazil, Venezuela etc

Historically the demand for replacing the subsidy based system is based on the fact that the Indian PDS (Public Distribution System) has suffered from myriad problems. Leakage, inefficient reach and logistical failure have gripped the PDS system for so long that it has become an utter failure in the present context. For the last few years there have been repeated demands for a change in the PDS delivery mechanism yet no solutions could be reached. Barring the success of Tamil Nadu, PDS has remained largely failure in India. Thus the ground was prepared for a new way of reaching out to the poor and direct cash transfer seems to be the preferred route taken by the Finance Minister.

To discuss the viability of the DCT we must first understand how the government plans to introduce this system. The Nandan Nikhleni lead UID will start rolling out Aadhar numbers by 2012.Each Indian citizen will be allotted a unique 12 digit UID number. The next step will be linking up individual bank accounts to the UID numbers allotted. In the third step the money will be directly transferred to the bank accounts. This seems to be the broad outline of the DCT mode envisaged today. However this delivery mechanism must be critically analysed. Opponents of the plan argue that in a largely backward country like India especially in the rural areas and inhospitable areas the system of Banking with the poor and UID numbers will be impossible. While their fears cannot be discounted yet there is no reason why this can’t be implemented. 

The RBI has already rolled out the ‘Lead Bank’ scheme to introduce baking in unbanked areas. The RBI governor has already stated Financial Inclusion as one of the prime goals of RBI. The DCT scheme will be a mere extension of this goal. The lead bank scheme is already being implemented by various banks across the country. Apart from this the banks can introduce the concept of banking correspondent and mobile banking. The Banking Correspondent model is a very simple model where the bank employee goes from house to house and completes transactions. The person will just need to sign in and receive the required amount. In the same way money can be deposited in their accounts and all this will be credited to their account represented by their UID number. The DCT system will give banks a new impetus to aggressively take forward the cause of rural banking since it will give them a chance to increase their own business. Apart from this mobile banking is another way in which banking can be done with the poor. Mobile banking has been successfully implemented in countries like Nigeria and there is no reason why this can’t be implemented in India. A third way in which this can be achieved is by linking the DCT model with existing infrastructure like the CSC (Common Service Centres), E-kiosks etc. These institutions can serve as extension of the bank financial services acting in lieu of actual physical presence of banks. All this will require stronger grassroot participation which can be brought about by greater integration of the gram Panchayats and Block level committees. As it is seen generally in rural areas the role of women in governance is crucial. The government can also appoint ‘women committees’ in each village which will work in tandem with the Panchayats to overlook the whole system. They can act as the civil society watchdog of the system. In the urban areas the Banks already have efficient machinery. Institutional delivery will not be a major issue among the urban poor.

A second major doubt opponents of the system have is that the money reaching the poor will not be properly utilized. This is an extreme assumption since repeated sociological surveys have shown that the idea of finance is strong among the poorer population as well. Yet a proper mechanism can be in place to check the utilisation of the funds. Once again the women committees in rural areas can play a crucial role in ensuring the proper utilisation of funds in each household. For the urban areas implementation officials can be appointed who can ensure efficient delivery of the system in their notified areas. Since the money is directly transferred to the poor there will no instance of corruption in delivery level. Women in the rural areas have known to come forward against social evils like illicit liquor drinking time and again. As such there is little doubt about their capability to ensure that the funds received are utilized in a proper manner. Awareness activities in this regard must be carried out through the medium of media and other innovative forms like street plays etc.

The third major challenge is the identification of the poor. The recent debate between the Rangarajan Committee and the NAC puts this debate wide open. The definition of the poor is an important point in this regard. The government must carefully evaluate and ensure that not only the targeted but the needy are not excluded. While Universal targeting maybe a large task for the Government yet the Government must make a determined effort to include the Saxena Committee recommendations and Tendulkar Committee findings while defining the poor. The Saxena group made the following proposals: 1) any census of the poor should be preceded by identifying people who deserve to be excluded automatically. Examples are families that own cars, mechanized farm equipment or large farming plots; 2) identifying communities that should be included automatically, like Musahars, the homeless and primitive tribal groups; 3) ranking all other families on a scale of one to ten on various parameters. Points would be given for being a landless agricultural labourer, a member of a backward caste, a Muslim or a casual worker. In the present context the Saxena Committee method of ranking while defining the poor can indeed serve as a guide while identifying the poor. The BPL cards which have so long been a tool of corruption in the PDS must be done away with and the new system must be implemented in its place.

Another major charge that is leveled against DCT will be that it will give rise to inflation since there will be an increase in liquidity. While the relation between inflation and direct cash transfer can’t be denied yet the debate should be looked in the larger context. Inflation will not merely be caused by DCT inflation itself is a complex concept. To combat this, the government must take proper measures, including reforming the delivery mechanism of the supply side. Generally in India inflation stems from the faults of supply side rather than international crude oil prices or genuine market pressures. Thus if proper measures are taken then the government will be able to offset any and all effects of inflation caused by DCT.

The whole system of DCT however must not absolve the government of its responsibilities towards the social sector. In this regard the private sector can be encouraged to ensure development of the nation. For example the private sector generally refuses to implement social sector schemes like building hospital schools etc for fear of little or no returns. This stems from the fact that the poor people are financially discredited. The introduction of DTC poises to change all that, the DCT will ensure assured returns which will act as a motivating factor for the private sector. For example the students will be given study coupons which will take care of their fees and expenses. This will ensure that on the availability side the schools will compete among themselves to ensure better facilities to the students. The private sector too will join in since there will be assured returns. This model will undoubtedly be replicated in other social institutions like hospitals etc. Instead of mulling over a mandatory 2% CSR tax on the private sector through innovative schemes like DTC the government must make the social sector investment friendly and attractive. In this manner if DCT is implemented properly will give impetus to the social sector. Apart from this DCT have other advantages. For example the schools can be integrated with the UID database to ensure attendance of the students. The student coupons issued will be based on their attendance in schools. Thus it will also ensure that the problems like absenteeism of students can be effectively curbed. Thus DCT if properly implemented will give a range of advantages which will work towards strengthening the social sector. In the end DCT poises to give the poor “choices” in terms of what they want and this will be a true landmark in achieving the lofty goal of balanced development in the 21st century.