2014

Direct Cash Transfer

DCT Scheme in India | BRM Research Proposal

Table of Contents
1. 2. 3. 4. 5. 6. 7. 8. 9. Abstract.......................................................................................................................................... 2 Introduction ................................................................................................................................... 3 Problem Structuring ..................................................................................................................... 5 Stakeholder Analysis ................................................................................................................ 5 BOT Graph ................................................................................................................................ 7 Literature Review ......................................................................................................................... 8 Research Objective ..................................................................................................................... 11 Research Questions ..................................................................................................................... 11 Proposed Methodology ............................................................................................................... 12 Significance of Study................................................................................................................... 13 References ..................................................................................................................................... 14

Table of Figures
Figure 1: Stakeholder Chart...... 5 Figure 2: BOT Chart ........7

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DCT Scheme in India | BRM Research Proposal

1. ABSTRACT
In the 12th Five year plan, Government of India (GOI) has targeted 8.2% growth in five years (2012-2017) basis Direct Cash Transfer programme. As per the plan document, this cash transfer scheme will be a major step towards improving efficiency. The idea is to use it as an effective measure of reducing poverty in which government subsidies and other benefits are given directly to the poor in the form of cash rather than as subsidies. DCT has been successfully implemented in many Latin American countries in the past and it has emerged to be one of the major elements to reduce poverty. Brazil has the largest cash transfer programme to the poor in the world while in India the programme has been introduced in a limited way. This paper focusses to bring out various aspects of DCT, including its advantages, disadvantages and its scope in the Indian context. Keywords: Direct Cash Transfer, DCT, Poverty Reduction Programme

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DCT Scheme in India | BRM Research Proposal

2. INTRODUCTION
Every state aims at poverty elimination and inclusive growth for its own welfare. To achieve these socio-economic development goals governments have resorted to many welfare schemes and state sponsored programmes. Even though these schemes are aimed at benefiting the masses, there have been issues related to effectiveness and efficiency of these programmes. Corruption and leakages have made many schemes and programmes dysfunctional. Keeping in mind all these issues, governments are now focussing on Direct Cash Transfer to the poor. The rapid growth in Indian Economy that country has witnessed since economic reforms has further accelerated in the early 1990s. But the improvement in economic state of the nation has not been followed by the welfare of poor in the country. Poverty only dropped from 36% to 28% from 1993 to 2004. Few countries are as committed to reduce poverty as India. There are a range of subsidies and plethora of poverty reduction programmes. The largest permanent programme in this area is the targeted public distribution system (TPDS). TPDS aims at providing subsidised food to poor houses. In 2006-07, there were about 151 central sector schemes (also known as CSS) amounting to an annual expenditure of Rs 72000 crores. 90% of this amount (Rs 64000 crores) was allocated to 30 schemes which was increased to Rs 79000 crores in the next two years i.e. an increase of 23 per cent in two years. For food, fertiliser and fuel subsidies also there is similar amount allocated in the budget. When one adds up the amount allocated to all the CSS and the subsidies, it exceeds Rs 1,78,765 crores that is the states share of central tax revenue. The question is if such a huge expenditure is the best way of achieving the objectives and improving the welfare of Indias poor. There is little evidence of whether the existing CSS and principal subsidies are effective or not, but there is ample evidence that points towards wastage and ineffectiveness. It is a well-known fact that most of the resources fail to reach their intended beneficiaries and this reality is known
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DCT Scheme in India | BRM Research Proposal

to policy makers, non-government organisations and state functionaries. To overcome these fallacies it was proposed that the government should transfer cash directly to the intended beneficiaries rather than providing them with goods and services at subsidized rates through its agencies. In other words the mechanism is outright transfer of cash to the needy. The recipients of cash would use the funds to buy what they need at market prices. According to World Bank, there are two reasons to justify the introduction of conditions in the cash transfer scheme.

1.

The poor do not always behave as expected by the rational agents with perfect information.

2.

Transfers to good behaviour practices supports the cooperation of taxpayers and the more affluent members of the society in funding these programmes.

As we go further, we will see in details the benefits and limitations of such a scheme and the effectiveness of DCT to achieve the objectives set by the GOI.

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DCT Scheme in India | BRM Research Proposal

3. PROBLEM STRUCTURING
Stakeholder Analysis
The various stakeholders associated with Direct Cash Transfer Schemes are listed below. Indian Central Government

NonGovernment Organizations

Poor and Needy People

Banks

Direct Cash Transfer

Moneylenders & Microcredit Institutions

Political Parties

State Government

Figure 1: Stakeholder Chart Indian Central Government It is the onus of the Indian Central Government to meet the objective of poverty alleviation and to mitigate the loopholes while doing the same. Thus government is one of the major stakeholder of the DCT scheme. Poor and needy people The end beneficiaries of this scheme, i.e. the poor and the needy people are the most important stakeholders as the success/failure of this scheme has a direct impact on them. Taxpayers It is the taxpayers money which is being utilised in such schemes and that makes taxpaying population of this country a major stakeholder of DCT scheme. Government and other bodies responsible for implementation of DCT scheme are

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DCT Scheme in India | BRM Research Proposal

answerable to the taxpayers, to assure them that the money they pay as various taxes is being used for the right purposes. Moneylenders and Microcredit Institutions Cash would relieve financial constraints faced by the poor who turn to money lenders and microcredit institutions when they need cash otherwise. Poor people are faced by higher interest rates for the loans that they take. Thus the success of DCT will be harmful for Moneylenders and Microcredit Institutions as the poor will not be dependent on them anymore. Non-government Organizations Non-government Organizations, like central and the state government is a facilitator of the DCT scheme to the poor. NGOs act as incharge of monthly monitoring and links between the governments and the end beneficiaries. Banks The most important criterion for DCT to work properly is the working of proper bank network system. But India is mostly an unbanked country with only 40% of the population having bank accounts. If DCT is implemented strongly, it will lead to improvement in bank networks of the country. Political Parties since poor form the largest vote bank of the country, political parties keep on introducing schemes for welfare of the poor. Success/failure of these programmes are crucial for the parties to remain in power. State Government State government does the work of distributing the cash and funds to the panchayats. The success of this scheme largely depends on cooperation from all three tiers of Panchayati Raj system (Village Panchayat, Panchyat Samiti and Zila Parishad) as well as the state governments.

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DCT Scheme in India | BRM Research Proposal

BOT GRAPH
Money supply to local governments Misuse of money by the beneficiaries

Moneylenders business
Administration & transaction costs Corruption & Leakages

Figure 2: BOT Chart The BOT chart above shows that the money lost due to leakages and corruption reduces after implementation of DCT. Also, there is reduction in the business of money lenders and micro finance institutions due to less demand of money from the poors side. Under DCT, local governments are given more autonomy and there is an increase in the amount of money available with the local bodies. However, due to easy cash available with the poor, there is increased misuse of money by them.

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DCT Scheme in India | BRM Research Proposal

4. LITERATURE REVIEW
Cash transfers have become the latest trend in the international development schemes and are being seen as the solution to the problem of poverty. In the recent past, cash transfers have been conditional or unconditional; targeted or universal. But in the end they all aim at doing the same thing providing money to people rather than the provision of goods and services. According to Hanlon et al (2010), the idea of cash transfers is a revolution of development started in the South and it bypasses donors, governments and nongovernment organisations to empower poor people and enables them to make their own decisions. This idea claims to be a novel one, but in reality it has a long history. In Kautilyas Arthashashtra a system which enabled transfer of money from the rich to the poor was specified. It was achieved through a system of taxation payments. As per Hamid (2003) Islamic rulers were required to follow the tenet of Zakat, using state revenues to enable income transfers to the poor, orphans, widows and the disabled. The transfer of cash to the needy not only enables them to make their own choices independently but it also leads to healthier, better educated and more balanced and secure populations in the long term. But the decisions of identifying the worthy beneficiaries and who should get the money so that it is utilized as intended play a major role in ensuring the success of this scheme. Jayati Ghosh (JNU, Delhi) argues that Cash transfers cant and shant replace the provision of goods and services, but rather should be seen as a way to supplement them. However, the current tendency is to see them as an alternative to reduce services available to the public. The point which is missed by the governments is that success have been achieved in nations where cash transfers have come as additions to the public delivery systems. Case in point, the success in increasing enrolments and attendance
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DCT Scheme in India | BRM Research Proposal

in the schools of Brazil would not have been possible without the aid of educational policies that were in place to ensure improvement in the performance of the students in the schools. In the Indian context, this idea has recently caught attention of the policy makers. It has been argued to replace the PDS scheme for basic food items should be replaced with a system of cash transfers or coupons. There are, however, two problems evident in this approach: a) how does the government ensure that the amount transferred is sufficient to compensate for the increase in prices for the competitive markets of goods? b) How will the government make sure that the cash is being transferred to the intended beneficiaries? When it comes to choosing between direct provision of some goods (such as food and fuel) and cash transfer to consumers, the most immediate threat is the risk of rising prices in the competitive markets of these goods which would make these goods unaffordable for those who need them the most. Thus, in the real life scenario when inflation is high and value of money is eroded fast, theses cash transfers are inadequate to cover the price rises. This may be reason why poor prefer public provision of goods and services. Ahmed et al (2009) suggests that the poorest households prefer only food while the beneficiaries who are relatively better off prefer only cash. Another point to be understood here is the power structure within households as well as social constructions of gender behaviour can determine how money is spent, which is sometimes not desired or expected. It has been argued that handing over the money to the women will solve this problem, but it is not necessarily true. Especially in the case of food transfers, women and girls are guilty of voluntarily denying to accept the food. So the problem of cash transfers being used for other forms of expenditures still exist. Another issue is with targeted cash transfer. First of all, there are transaction costs with targeted cash transfers as compared with universal cash transfers. Secondly, the
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DCT Scheme in India | BRM Research Proposal

identification of beneficiaries, or poor can be erroneous. Type 1 error: when there is unjustified exclusion of those who are genuinely poor. Type 2 error: when there is unwarranted inclusion of the non-poor. Both types of errors exist in the cash transfer system. Identification of poor and the needy is also tricky. Households can fall in and out of poverty because of ever-changing material circumstances. In the same way, they can go from being food secure to become food insecure in a short period. Monitoring each and every household to assess the reasons as to why they have become poor or non-poor is practically impossible. Exclusion and inclusion errors exist in the TPDS scheme also but they are expected to be lesser in the proposed CT system. The criteria to determine the worthy beneficiaries of the CT system are: a) SC/ST household, b) Male household head casual labourer, and c) No literate adult household member. It is believed that one household can fake one criteria but not all three. There criterion also minimize the error of exclusion. When the primary concern is to avoid exclusion errors, inclusion errors are tolerable. The main advantages of CT are: Two-thirds of the households are covered The transfers to the beneficiaries is huge as compared to TDPS Risk of large exclusion errors is limited Scope of fraud and corruption is diminished Poverty lines absent Overall budget same as the current level of TDPS

The main disadvantages of CT are: Objections against introducing digitised UIDs it could be exploited by the authorities to register unworthy people for CT scheme.
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DCT Scheme in India | BRM Research Proposal

Those who are left out will have no access to many public services. Exclusion errors can still occur. In times of inflation, the money transferred to the poor may not be sufficient to buy them food grains.

There is high possibility of misuse of money in the form of consumption of alcohol and tobacco.

Although there are many benefits of the DCT scheme, there are many indirect effects. Providing unconditional cash might lead to reduced labour supply. On the other hand, higher incomes will lead to improved diet quality, especially the intake of proteins and micronutrients, which will boost labour productivity significantly. Another concern is that food prices will increase due to increase in demand. Procurement of marketed grains at low prices might help to mitigate this issue. Just implementing the CT system is unlikely to lift poor households out of poverty, although it will be helpful as at least a part of cash will be invested by the recipients. The long term solution to the problem of poverty is to enhance labour productivity of the working poor which would increase their income levels.

5. RESEARCH OBJECTIVE
To study the benefits and limitations of the current and the proposed poverty alleviation methods in India in order to identify the areas of improvements.

6. RESEARCH QUESTIONS
1. What are the various mechanisms being employed by various developing countries to combat poverty?

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DCT Scheme in India | BRM Research Proposal

2. Based on the success stories of other nations, can such systems be implemented in India? 3. What are the various difficulties faced by the authorities in identifying the beneficiaries of such programmes? 4. Are there sufficient benefits of CT system to ignore the limitations of this scheme? 5. How practical is implementing such a system in the Indian context?

7. PROPOSED METHODOLOGY
The methodology is aimed at addressing the above mentioned research questions. The data required for this study will be collected from various sources such as newspapers, research papers, GOI reports and the like. Various stakeholders involved in DCT system need to be interviewed to identify their concerns. Discussions of focus groups can be conducted to identify the loopholes of the current system and to develop methods to overcome these faults. Many hypotheses can be formed in order to see the relationship between factors that affect this issue. Few of them could be: Cash transfer method is a sustainable method of poverty alleviation. Policies stated by government are conducive for cash transfer scheme. Poor are benefitted more in CT as compare to TPDS.

These hypotheses can be accepted or rejected basis confidence interval.

8. SIGNIFICANCE & LIMITATIONS OF THE STUDY

DCT Scheme in India | BRM Research Proposal

be a better system in place. One such system is Direct Transfer of Cash to the poor and giving them the autonomy to make their own decisions in that they can use the money to buy what they want. However, the limitations remain in the form of identifying the worthy beneficiaries, possibility of misuse of money, identification of the appropriate receiver of the money (women or men in the family) and the like.

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9. REFERENCES
1. Chaudhury, Nazmul, J Hammer, M Kremer, K Muralidharan and F Halsey Rogers (2006):
Missing in Action: Teacher and Health Worker Absence in Developing Countries, The Journal of Economic Perspectives, Vol 20, No 1, Winter

2. Gangopadhyay, Shubhashis, Bharat Ramaswami and Wilima Wadhwa (2005): Reducing

3. Jalan, Jyotsna and Rinku Murgai (2006): An Effective Targeting Shortcut? Analysis of
the BPL Scheme in Reaching the Poor, World Bank, New Delhi, mimeo.

4. Skoufias, Emmanuel and Vincenzo di Maro (2006): Conditional Cash Transfers, Adult
Work Incentives, and Poverty, World Bank Policy Research Working Paper No 3973.

5. Basu, Kaushik (2010): The Economics of Foodgrain Management in India, Ministry of

6. Gangopadhyay, Shubhashis, Bharat Ramaswami and Wilima Wadhwa (2005): Reducing

7. Guhan, S (1994): Social Security Options for Developing Countries, International

8. Hamid, Shadi (2003): An Islamic Alternative? Equality, Redistributive Justice, and the
Welfare State in the Caliphate of Umar, Renaissance: Monthly Islamic Journal, Vol 13:8.

9. Sen, Raj Kumar and Ratan Lal Basu, ed. (2006): Economics in Arthasastra (New Delhi:
Deep and Deep Publications).

10. Ahluwalia, Deepak (1993): Public Distribution of Food in India: Coverage, Targeting
and Leakages, Food Policy, 18(1): 33-54.

11. Basu, Kaushik (2011): Indias Foodgrain Policy: An Economic Theory Perspective,
Economic & Political Weekly, 46(5): 37-46. 14 | P a g e IIM Kozhikode

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12. Jha, Shikha (1992): Consumer Subsidies in India: Is Targeting Effective?, Development
and Change, 23(4): 101-28.

13. Kapur, Devesh, Partha Mukhopadhyay and Arvind Subramanian (2008): The Case for
Direct Cash Transfers to the Poor, Economic & Political Weekly, Vol 43 (15): 37-43, 12 April.

14. Kapur, Devesh, Partha Mukhopadhyay and Arvind Subramanian (2008): More on Direct
Cash Transfers, Economic & Political Weekly, 43 (47): 85-87, 22 November

15. Lindert, K, E Skoufias and J Shapiro (2006): Redistributing Income to the Rich and
Poor: Public Cash Transfers in Latin America and the Caribbean, Social Protection Working Paper No 0605, World Bank, Washington DC.

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