Current General Studies Magazine: "General Studies - II (Development Based Article)" September 2014

Current General Studies Magazine (September 2014)

General Studies - II (Development Based Article)

The first step towards welfare reform

The Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), a make-work scheme that was the pet project of Congress president Sonia Gandhi, was considered by many in the Indian Right as the epitome of wasteful populism. Indeed, there could be very little said in defence of any such government programme that promises to “empower” the poor by doling out unearned benefits. But now with a “right-wing” prime minister in office, the erstwhile critics in the Right have gone mute even as Narendra Modi launched a big bang welfare programme .

The financial inclusion programme, named Pradhan Mantri Jan Dhan Yojana (PMJDY), kicked off with 1.5 crore bank accounts opened on the very first day. Each account holder is covered by life insurance worth Rs.30,000, accident insurance worth Rs.1,00,000, provided a debit card and allowed to overdraw up to Rs.5,000. All that without any due diligence or a single penny paid in as premium!

The Prime Minister proudly proclaimed, “Never before had insurance companies issued 15 million accident insurance policies in a single day. Never before in economic history were 15 million bank accounts opened on a single day.” Indeed. It does not take much to see that insurance companies and banks do not possess the privilege of taxing productive citizens to splurge on populist measures.

Now despite the launch of such a big bang welfare programme, quite ironically, the primary belief among the mute supporters of the “financial inclusion” programme seems to be that direct benefits transfer would cut down welfare expenditure by plugging leakages from the system. Nothing could be farther from the truth. Notwithstanding the many delusions of the Indian Right, statesmen of all kinds pursue only those policies that serve the purpose of aggrandizement of their own political power and stature.

Democratic politics as a system is tuned to pander to populist interests, which leads to competition among politicians to increasingly splurge on populism. Thus, every five years the size of welfare doled out to voters rises progressively. While this may not always hold true in the short term, the trend since the early 20th century, when democracies began to spring up, points to increasing plunder of productive citizens. This has happened despite rising living standards that should have decreased welfare spending.

Some states have shown clear evidence of politicians actively competing to increase spending each term to stand a step ahead of the promises of others. This has meant not just an increase in the size of doles, but also new measures to make welfare delivery more efficient—such that benefits are actually received by the targeted groups rather than the corrupt bureaucracy that is tasked with the job. Thus, it is the desire of political parties to fully reap the political benefits of their welfare programmes by reining in leakages that has culminated in support for direct benefits transfer.

Direct benefits transfer, in other words, is a mechanism evolved to keep up with political competition in spending more on targeted groups receiving benefits. So, banking on technological advances—that were adopted not to reduce spending but to pander more effectively to populist demands—to cut down welfare expenditure would be no less than folly.

The previous government’s Aadhaar programme was supposed to prevent leakages to help the Congress keep pace in the game of competitive populism. The party was voted out of power before the scheme could be implemented on a large scale. Today, PMJDY is nothing more than Modi’s own attempt at efficient delivery of welfare to please voters. This trend of competitive populism can only mess up the state of public finance, which is already nothing to write home about.

The Direct Benefits Transfer (DBT) scheme first found mention in the 2011-12 Union Budget speech, by the then Finance Minister, Pranab Mukherjee who had stated that the government plans to move towards direct transfer of cash subsidy for kerosene, Liquefied Petroleum Gas (LPG), and fertilizers. A task force headed by Nandan Nilekani was set up to work out the modalities of operationalising Direct Cash Transfer for these items. Later this task force submitted its report in February 2012.

The Government launched Direct Cash Transfer scheme on 1 January 2013 to transfer cash into bank accounts of beneficiaries across 20 districts in the country. The scheme has now been rechristened as Direct Benefits Transfer (DBT) and curtailed beneficiary districts to 20. It covers 7 welfare schemes instead of 20. At least two lakh beneficiaries are expected to benefit from DBT scheme immediately. Food, fertilisers, and fuel have been kept out of its purview for the present.

The National Food Security Bill, 2011, pending in Parliament, includes cash transfer and food coupons as possible alternative mechanisms to the Public Distribution System.

But it should be borne in mind that DBT is just been launched. There would be several lessons on the way as scheme expands and progress and is implemented in the entire country before 2014.

How does the Scheme Work?

The money is directly transferred into bank accounts of beneficiaries having Aadhar cards. The Aadhaar number is a unique identification number that every resident of India (regardless of citizenship) is entitled to get after he/she furnishes demographic and biometric information.

LPG and kerosene subsidies, pension payments, scholarships and employment guarantee scheme payments as well as benefits under other government welfare programmes will be made directly to beneficiaries. The money can then be used to buy services from the market.

Already on a pilot basis Electronic Benefit Transfer has begun in Andhra Pradesh, Chhattisgarh, Punjab, Rajasthan, Tamil Nadu, West Bengal, Karnataka, Puducherry and Sikkim. The Government claims the results are encouraging.

Under the DBT each and every beneficiary has to establish his identity and eligibility many times by producing multiple documents for verification. The verification of such documents is done by multiple authorities.

Interestingly an Aadhaar enabled bank account can be used by the beneficiary to receive multiple welfare payments as opposed to the one scheme, one bank approach, followed by a number of state governments.

A Game Changer

Government believes that the Direct Cash Transfer or Direct Benefits Transfer is likely to be a game-changer in more than one way.

The Centre releases as much as Rs 2, 00,000 crore as subsidies under various schemes for the targeted sections across the country. Therefore it is within its right to devise methods to reach beneficiaries the way it wants.
Firstly, the Direct Benefits Transfer (DBT) scheme is aimed at cutting the bloated subsidy bill of Rs.1, 64,000 crore. India’s budget deficit was 5.8 per cent of gross domestic product in the financial year ending 2012 March.

Secondly, unlike other welfare scheme launched so far by the Centre, DBT helps in timely and quick transfer to intended beneficiaries.

Thirdly, the transfer of direct cash into account of targeted beneficiary is a winning proposition for the recipients as it aims to eliminate middlemen in various government sponsored welfare schemes and subsidized food, fuel and fertiliser schemes. Take for instance, it's estimated that public coffers can be richer by several crore yearly just by switching to cash handouts for LPG and kerosene, a proposed move that would also curb diversion of subsidised cylinders for commercial use and diesel adulteration with inexpensive kerosene. Bringing all subsidies under DBT's ambit can be the major fiscal game-changer the economy needs very much.

Fourthly, the Direct Benefits Transfer scheme is likely to be simple and error free. On the basis of Aadhar cards money is deposited in beneficiaries’ accounts.

Fifthly indirect transfers are more prone to leakages than direct cash transfers. So, that is why the Central Government has put in a mechanism of direct cash transfer. According to Planning Commission the Public Distribution System has become so inefficient that 58 per cent of the subsidized grains do not reach targeted beneficiaries while one-third of it siphoned from the system.

Sixthly, the Aadhar based DBT helps eliminate duplicate cards and cards for non-existent persons or ghost beneficiaries often found in schemes such as the PDS and MNREGS.

Seventhly, with the actual transfer of cash taking place with the help of micro automated teller machines (ATMs) it would infuse financial inclusion on a greater scale in rural India. Quoting a World Bank Study the Reserve Bank of India last year in its annual report has said, in India only 35 per cent have formal accounts versus an average of 41 per cent in developing economies. With the implementation of DBT, it could fuel financial inclusion.

Eighthly, aided by Aadhar technology Direct Benefits Transfer will not be a mere welfare scheme but also the world's largest experiment in administrative reform. It will revolutionise the delivery of welfare measures in world’s populous democracy.

DBT: Not a Magic Wand

Can Direct Benefits Transfer Scheme act like magic wand? Probably it cannot solve all the problems by India’s poor and improve country human resources index.

It will have problems with banks, post offices and online connectivity. These have to be resolved. But there is no point in throwing the baby with bath water attitude and abandon DBT altogether.

DBT in ultimate analysis aims at poverty elimination, inclusive growth and delivering better welfare measures. No doubt rampant corruption, inefficiencies and leakages have made many welfare schemes dysfunctional.

Direct Benefits Transfer to the poor aims to mitigate these many malaises.

Considering these benefits, India would be in right direction to implement cash transfer though there would be many lessons to be learnt and hurdles to cross.

(Courtesy- Livemint and PIB)