The Gist of Yojana: April 2013

The Gist of Yojana: April 2013


  • Cash Transfers and Social Security 
  • Direct Benefits Transfer: Panacea to remove Poverty and Inequality in India


The Government of India has announced the Direct Benefits Transfer initiative with the aim of ensuring the better and more timely delivery of benefits to the people. This marks a paradigm shift, where the State is explicitly taking responsibility to ensure that welfare scheme and basic entitlements reach the intended beneficiaries much more effectively than at present.

What Will DBT do?

The DBT programme aims that entitlements and benefits to people can be transferred directly to them through biometric-based Aadhaar-linked bank accounts, thus reducing several layers of intermediaries and delays in the system. The last-mile of the initiative is the most important - the system will allow actual disbursements to take place at the doorstep of the beneficiaries through a dense, interoperable network of business correspondents (BCs) using biometric micro ATM machines. Thus, the yardstick of success is not going to be that the money has reached a bank account, but that it has reached the hands of the intended beneficiary - a student a pensioner a widow, and elderly perrson, a disabled person, a poor family.


There are several dimensions to this. First, the link to Aadhaar and the use of biometrics ensures that the problems of “duplicates,” i.e., the same person getting the benefit more than once, and “ghosts,” i.e., a non-existent person getting the benefit, are addressed. Second, it makes it possible for money to reach the intended beneficiaries directly and one — time so, for example, pensions, which reach the beneficiary once every four to six months in many parts of India, can now reach her bank account on the first of every month. Third, a dense BC network on the ground with micro ATMs will allow payments to happen at peoples’ doorsteps, ensuring that the poor get the same level of service that the rich and middle-class in India get. Fourth, as it is a platform based on an open architecture, State governments can use this platform as much as the Central government. This is important, because this programme is viewed as a cooperative endeavour between the Centre and the States, and the States will have a critical role to play Fifth, the potential benefit to internal migrants who send remittances to their homes is huge. It is estimated that Rs.75,000 crore worth of within-country remittances are made in India every year - many of these are lifelines for their families. Seventy percent of these remittances are today channeled through informal (and illegal) channels which impose high costs on them. The Aadhaar-based micro ATM network can ensure that remittances take place instantly and at much lower cost to migrants.


Having said all this, it is admitted that there are numerous challenges of implementation that lie ahead. That is why it is proposed to move ahead only gradually and with caution. First, the programme proposes only a modest beginning in Phase I, covering around 34 central government schemes - largely scholarships, pensions, and other benefit payments - in only 43 (of the over 600) districts. It will be ensured that at least 80 percent residents in each district have an Aadhaar number and an Aadhaarlinked bank account before any payments are started.

Only based on the learning from this phase, would the programme be expanded. Second, a system of independent concurrent evaluation is being embedded, to ensure that we get objective feedback on the challenges of implementation. There already are useful lessons from five Aadhaar pilots in different parts of the country. Third, subsidies on food and fertilizer have not been included in the first phase, recognising that these are highly complex and require considerable thought. Some state governments seem to have varying views on this issue, with some supporting the linking of DBT with fertilizer and food (and other Public Distribution System commodities), while others oppose it. Such issues will best be left to the discretion of the States. Fourth, the issue of mobile connectivity, a major challenge in backward areas and essential for online authentication, is being addressed in parallel, by adding more mobile towers (especially in backward districts) and through the ambitious government programme of taking broadband internet connectivity to every panchayat within two years.

Fifth, the existing discredited BC model is going to be improved, with an open architecture model that would enable anyone - kirana shops, women’s self-help groups, primary agricultural cooperative societies, post offices, Accredited Social Health Activists and anganwadi workers, etc. - to become BCs. The business model for BCs is also being revamped to make it more lucrative. An interoperable BC network with micro ATMs is going to be put in place so that beneficiaries have access to banking at their doorstep, which will reduce the hassle and delays involved in dealing with bank branches. The post office network (a key payment channel, especially for pensions and Mahatma Gandhi National Rural Employment Guarantee Act payments) is also being reformed with the postal department committing to upgrading to a core banking solution (CBS) system across all its post offices within the next 18 months.

Cash Transfers and Social Security

The Design of a system of social security depends on the objectives it is meant to achieve. In the first place social security must provide a higher and more secure consumption base to the poor. It must also increase their capabilities. But that may not be all that social security is meant to achieve. One may have additional objectives, such as that of increasing the productivity of its recipients, or of smoothing the transitions that are part of a process of development.

In addition, there may be certain boundary conditions that need to be met. For instance, following Rawls’ difference principle, one may argue that justice requires that a policy change benefit the least advantaged, or, in the manner restated by Guy Standing, ‘A policy or institutional change is just only if it improves the security and work prospects of the least secure groups in society,’ (Standing, 2012: 19). A fiscal requirement could be that of choosing the least cost method of delivery of a certain level and coverage of social security. In order to have a concrete focus, we look at the issue of providing social security from the viewpoint of an important group of workers migrants. We argue that migrants require a portable social security system. In the matter of universality, cash transfer may not be more effective than provision in kind. But in the matter of portability, cash transfer would certainly be more effective than supply of subsidized commodities. Cash transfer would also allow recipients to meet their changing priorities, which may vary from time to time, while provision in kind would be rather more inflexible and even have costs. We do not discuss the relative costs of cash transfer and direct provision of subsidized commodities, but it is not difficult to argue that the former is somewhat cheaper than the latter. .

Context of Social Security

The objectives and conditions of social security must be placed in the context of the nature of the contemporary Indian economy and the transitions that it is undergoing. The example of Bihar can be taken in this regard. To summarize some points about the Bihar economy: it has one of the lowest per capita incomes of any state in India and there is a low proportion of household consumption that is due to social security transfers, just about 3 percent (Reddy et al, 2012). According to a recent study by the Institute for Human Development (IHD), migration from Bihar is very high, with over half of households surveyed by IHD having at least one migrant worker, and migrants accounting for about one-fourth of the total labour force.

Thus, a key aspect of the Bihar economy, one that is important from the point of view of designing a social security system is that of migration. If migrant workers are unable to secure the benefits of social security transfers in their destination locations, then that would be a manner of injustice. Another feature of the Bihar economy worth noting is that harvesting wages are often paid in kind, as a share of the grain harvested (Rodgers et al, 2012).

These features of Bihar must also be placed in the context of the Indian economy, both of its structure and the changes that are occurring. Two features of the Indian economy are important in discussing the role of social security. First, is that the economy has a very large unorganized or informal sector.

This large informal sector means that social insurance, usually related to formal sector employment, can have only a very limited role. Social security, provided through state measures then becomes important for the vast majority of workers and their households.

The second point to be considered is that the Indian economy is undergoing transition. Within the large informal sector there is still transition from farm to non-farm jobs and from rural to urban jobs. The transitions are not as fast as one might desire but they are occurring. And one must ask the question: does the absence of social security and its poor design promote or inhibit such transitions? This question follows from the objective we have stated above - that the social security system should aid in promoting the transitions underway in the Indian economy.

One of the characteristics of market-centered development, is that it is very substantially different from that of peasant or other forms of economy preceding it. It often involves the separation of (small) producers from the means of production and the formation of a class of wage labourers. Additionally, those who remain small producers are subject to the vicissitudes of market fluctuations. Even small investments, say, in livestock or irrigation, carry with them risks in the market economy. There is inevitably turmoil associated with market-based development and the growth of production and income that accompanies it. Social security should help in protecting basic consumption levels, while workers and their households cope with risks.

In addition there is the process of old livelihoods being destroyed and new jobs being created. Some of these destruction of livelihoods can be quite large when they occur in the context of large industrial- cum-mining projects. But, even in a fast-growing economy with plenty of new jobs being created, there is inevitably a lag between destruction of livelihoods and creation of jobs. What can help people adjust to or accept this form of creative destruction is the existence of a social protection mechanism, which provides a minimum of assured income and consumption levels.

What Can We Expect form Direct Benefit Transfers?

Late Last October, the Prime Minister constituted a high-powered National Committee on Direct Cash Transfers (DCT), with eleven Cabinet Ministers, two Ministers of State with independent charge, the Deputy Chairman Planning Commission, the Chairman UIDAI and Cabinet Secretary, with the Principal Secretary to the PM as the convenor. In about two weeks, the executive committee decided that DCTs would commence in 51 districts from 1 January 2013) When 2013 rolled around, this was scaled down to twenty districts in the initial phase and a limited number (seven) of programs. In the first instance, the plan is to “transfer cash benefits like scholarships, pensions, NREGA wages, etc. directly to the Bank or Post Office Accounts of identified beneficiaries”.

This Direct Benefit Transfer (DBT) “will not be a substitute for delivery of public services” and in particular, they “will not replace food with cash under the Public Distribution System”. This reflects a measured approach to the issue by the government. It is therefore useful to focus on two broad issues, viz. (a) the kinds of problems can DBTs be expected to address and (b) the design of the pilots, from a learning point of view.

Measuring Success of DBTs

When can DBTs to be successful? In his opening remarks to the National Development Council (NDC), the Prime Minister stated that the “common complaint against government programmes is that they suffer from leakages, corruption, delays and poor targeting [and the] Central Government is taking a major step to deal with this problem by shifting several beneficiary oriented schemes to a direct transfer mode, using the Aadhaar platform,” Can DBTs really address all these problems?

Direct Benefits Transfer: Panacea to remove Poverty and Inequality in India

India’s Growth story since economic reforms initiated in 1991 reveals a direct structural shift from primary to the tertiary sector. This shift deviates from well established linear and structural growth/development models that highlight growth path from primary to secondary and then to tertiary sector. The unusual structural shift to a highly productive skilled tertiary sector leaves the majority of the unskilled and semi-skilled labour force with the primary sector in India. This has wider implications on employment, standard of living, poverty, inequality and the overall well being of the majority. The growth story so far has been charcterised as job-less and non-inclusive with structural imbalances, unemployment, inequality and distress of low-income households in the Indian economy. Today primary sector contributes only about 15 percent of GDP but absorbs around 55 percent of the total labour force resulting in huge unemployment and disguised unemployment with low and uncertain income creating high inequality and incidence of poverty in India. Though India’s overall growth and also per capita income growth story has been spectacular compared to the pre-reforms period, the employment has not been as responsive to the rise in per capita income. Absorbing unskilled and semi-skilled workers in India without manufacturing sector growth or improving human capital through education, health, etc looks difficult.

These issues are time consuming but there are efforts being made to resolve them. To solve the problem of poverty and inequality in the Indian economy, the government has been trying to address these issues by extending the existing welfare schemes and initiating grand social programmes such as national rural employment programme, mid day meals, right to education etc. Further government is also planning to implement right to food programme which will entitle families living below poverty line to get food at subsidized rates. All these welfare schemes along fertilizer subsidy have been increasing steadily leading to a major fiscal burden on the economy. The major objective of these welfare programmes is to provide basic and essential goods and services to the poor.

However, India has long been dogged by corruption in provision of basic goods and services to the poor. The subsidies meant for the poorer sections constitute around 2 percent of the GDP which is a huge amount but the actual money reaching the poor is negligible. For example, it’s an established fact supported by evidence both by World Bank and planning commission that a little more than 50 percent of food under public distribution system (PDS) is not reaching the targeted beneficiaries. In this context, for quite some time, the policy makers have been mulling over the idea of Direct Benefit Transfers (DBT) particularly since 2005.

The objective of the DBT is to improve efficiency in delivery of welfare subsidy directly to the beneficiary thereby reducing the increasing subsidy burden on the economy. The subsidy regime in India so far has been criticized on the ground that the administrative cost of subsidy delivery is high and characterised by substantial leakages and corruption. Finally, the government initially planned to implement DBT in 51 districts from January 1st 2013 covering 20 welfare schemes to start with. However, it has been implemented in 20 districts covering only seven schemes to begin with due to lack of appropriate infrastructure to implement DBT. The seven schemes include student’s scholarships, stipends, Indira Maturtva Yojana and the Dhanalaxmi schemes. Though major subsidies like food fertilizer have been kept out of DBT for the time being, it would cover other welfare schemes in the near future. The intention is to directly give cash benefit to poor rather than giving subsidy to reduce leakages and thereby helping the beneficiaries to rise above the poverty line. Those who wish to avail the facility will need either the Unique Identity card (UID) or an Aadhar card, and money will be directly transferred to their bank account. The scheme has been lauded as a game changer in public policy or governance in India as it would mean value for money when it comes to delivering welfare money directly to targeted beneficiaries. When the DBT will cover more number of schemes and majority districts across states in future, it is presumed that the subsidy burden will be less due to better targeting and lack of corruption. Money in hands of poor people will enable them to buy from markets and may widen their choices of goods and services. It is also argued that the money flowing to rural areas will create its own market and economic activities. Though initially the administrative cost would be huge in putting together the proper infrastructure required for DBT to be effective, the experiences of cash transfer schemes in Brazil and Mexico reveal that the cost would substantially decline in subsequent periods. The best part of DBT would be less corruption as there is hardly any insolvent of middlemen m the process.

Click Here to Download Free e-Book