Will cash transfers work in India?

nemployed educated Indian women stand in a queue to register themselves at the Employment Exchange Office in Allahabad, India. Image copyright AP
Image caption The poor prefer food to cash, studies have found

There's a sense of political triumphalism over the government's ambitious plan for cash transfers to the poor in lieu of entitlements and subsidies.

Money meant for recipients of 29 welfare programmes - mainly related to scholarships and pensions - will be transferred to bank accounts linked to their unique identification numbers in 51 districts spread over 16 states from next January.

If all goes well, the scheme will cover the entire country by the end of 2013.

Senior government ministers are calling this a "pioneering and path-breaking reform", even a game-changer in a country beset with appalling levels of corruption in public services. A vote-grabbing slogan - Aapka paisa, aapke haath (your money, in your hands) - has been quickly coined around the scheme. Remember, general elections are barely 18 months away.

Clearly, the government, hobbled by allegations of financial scandals, a slowing economy and an environment of highly partisan politics, believes that cash transfers will help bolster its sagging political fortunes.

But the jury is still out on whether cash transfer will work in India the way it has done in many countries.

Over 30 countries, notably in Latin America, dole out conditional cash transfers - payments to the poor that meet certain conditions, like health care and education. Such transfers typically cut transaction costs, plug leakages, curb corruption, help migrant workers and are easier to monitor.

But, as economist Jean Dreze eloquently argues, cash transfers should never replace public services by forcing the poor to buy health and education from private providers.

Cash transfers have been successful in Latin America, he says, because they are "seen as a complement, not a substitute, for public provision of health, education and other basic services". In other words, the incentives work because the state spends and delivers public services efficiently. Dr Dreze cites the example of Brazil where almost half of all health expenses is paid by the government (compared to barely a quarter by India), and where basic health services like immunisation and ante-natal care at birth are almost universal.

Even the World Bank believes cash transfers are not a panacea. They work well, the Bank says, when the "supply of health and education services is extensive and of reasonable quality".

Sadly, none of this can be said of India.

Public services are badly planned (there is still no consensus, for example, on who comprise the very poor and who should be subsidised), leaky and notorious for corruption. Successive governments have shown little enthusiasm to reform what has become a highly unresponsive and sluggish state. The country's booming middle-class have virtually seceded from public services - they avoid government hospitals and public transport, hire private security and run private generators for their electricity - and the poor bear the brunt of the miserable services. In large swathes of the country, the state has simply withered away.

In truth, the government has made a cautious start with cash payouts for pensions and scholarships. The real challenge will come when cash transfers will be made for food and fertiliser. "Food is a complex issue and fertiliser is more complex than food," Finance Minister P Chidambaram concedes. "They are not being put into the system now as there are many issues that need to be addressed."

Cash transfers, especially in lieu of cheap food or fuel distributed through a vast network of public distribution shops, can lead to misuse by family members and result in higher food prices in the market. They can also put immense pressure on India's patchy banking system which is not very friendly to the poor and will struggle to cope with the rush of claimants. Only 222 million people have enrolled into a biometric identity scheme which helps them with the identification number. Also, the poor, studies have shown, still prefer food over cash.

Cash transfers, as analyst Pratap Bhanu Mehta says, can never be a substitute for governance. They will actually, he believes, require a "more sophisticated governance". In India, that sounds like an oxymoron.