Is India ready for the cash transfer scheme?

Is India ready for the cash transfer scheme?

Summary: The Indian government has finally announced its ambitious direct cash transfer scheme, but both banks and the regulator have a lot of work to do before the benefits start trickling down to the rural poor.


On Tuesday, the government revealed the outline of its ambitious direct cash transfer scheme which Finance Minister P Chidambaram termed a big political game-changer.

The opposition parties called it the government's move to bribe voters ahead of the 2014 general elections. But even if it is an election ploy, this is one scheme that holds the potential to increase financial inclusion and bring transparency into the Indian subsidy system.

The scheme would be launched in 51 districts in its first leg, being kicked off on Jan. 1, 2013. The first phase of the launch will involve 16 states.

Under the cash transfer scheme, families with Aadhaar card (a 12-digit individual identification number) entitled to subsidies, pension, scholarships, etc, will get money directly in their bank accounts. For this, they need to give their Aadhaar card number to the service provider, for instance, the gas agency and the bank.

Forty-two schemes of the government, including those from the health ministry, would be part of this scheme. The scheme should also eliminate falsification and duplication with regard to subsidies. The Indian government provides INR 3.2 trillion (US$57.7 billion) in subsidies every year.

But as of today, the decks don't seem to be clear for a smooth take-off of the cash transfer scheme. First, only around 210 million (out of a population of 1.2 billion) people in India have been registered under Aadhaar. Second, most below the poverty line families (toward whom most subsidy schemes are targeted) don't have bank accounts. And a large chunk of villages in India don't even have bank branches.

While the Unique Identification Authority of India (UIDAI)--which issues the Aadhar cards on behalf of the Indian government--has invited applications from approved commercial banks deploying microATMs to enable Aadhaar-based payments, it is still not clear whether these ATMs will be operational within the next month.

Insofar as the 51 districts are concerned, Chidambaram expects Aadhaar penetration to be above 80 percent by December 2013. But it's still not known whether these districts have banks and ATMs.

At present, beneficiaries of various schemes have to pay intermediaries before they get any money from the government. The minister said that with the cash transfer scheme, beneficiaries would not have to pay any money to get the benefits. Banks would be the distribution point for cash subsidy initially.

The government plans to inform the district collectors about the program. The US$57.7 billion cash transfer scheme will be launched in stages and cover the entire country by the end of 2013.

Two days back, the prime minister Manmohan Singh mentioned that the success of the direct transfer system depends on the Aadhaar platform and financial inclusion. He mentioned that the banking system may have to integrate the post office network, especially in rural areas.

"I would expect the finance ministry and the UIDAI to work in close coordination to achieve a collective goal," Singh said in a statement. Until a few months back, both Nandan Nilekani (the UIDAI chairman) and Chidambaram had been at loggerheads over the collection of biometrics data for Aadhaar and the National Population Register--a comprehensive identity database to be maintained by the ministry of home affairs.

One only hopes those differences don't come in the way of the cash transfer scheme.


Topics: Banking, Government, India

Swati Prasad

About Swati Prasad

Swati Prasad is a New Delhi-based freelance journalist who spent much of the mid-1990s and 2000s covering brick-and-mortar industries for some of India's leading publications. Seven years back when she took to freelancing, India was at the peak of its "outsourcing hub" glory and the world of Indian IT, telecom and Internet fascinated her. A self-proclaimed technophobic, Swati loves to report on anything that's remotely alien to her--be it cloud computing, telecom, BPOs, social media, e-government or software and hardware, and also how high-tech sectors impact the Indian economy.

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  • Transparency ??

    Poor people will use it for liquor (Desi Daru, Khambha) instantly. People won't buy anything and will get cash subsidies for those things. That's actually bribing and waste of Tax Payers' money. It's a bone yet to be thrown by Congress. Same is MNREGA. People get monthly money, so people don't work at all, how ridiculous it is. Forget the technical challenges, the thought itself is to corrupt people.
    • Maybe, but...

      The poor may use the money to buy liquor, right. The bureaucrats did not? On the other hand, there are plenty examples of cash transfer programs that work and the poor use money more wisely than bureaucrats and politicians.