In India, study finds cash transfers benefit the poor

DELHI -- A new study indicates that it maybe better to offer cash instead of subsidies to millions of poor in India.
Written by Betwa Sharma, Correspondent on

DELHI -- India is home to one-third of the world's 1.2 billion people who live on less than $1.25 a day, a recent World Bank study finds.

In the past decade, the government has devised social welfare programs like the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), the world's largest employment guarantee program, to lift people out of poverty. India’s Public Distribution System (PDS), a massive network of shops across the country, provide millions of poor people basic essentials like wheat, rice, sugar and kerosene oil at subsidized prices.

But in recent years, a new strategy has been proposed: having the government directly transfer cash into bank accounts of poor people instead of subsidies. The direct cash benefit scheme has been ideologically, academically and politically divisive. Last month, however, a trade union called SEWA Bharat injected evidence from a new study to challenge the oft-repeated criticism of this scheme.

Supporters say that of direct cash benefits - on a conditional or unconditional basis - will allow the flow of money to dent the cycle of poverty and debt, and it will also reduce corruption by cutting down the layers of intermediaries involved in the public distribution system.

Critics strongly argue against cash transfers replacing the vast reach of the public distribution system. They say that India’s banking infrastructure is too weak to support cash transfers, and they also argue that beneficiaries will waste the cash on alcohol or non-essential goods, transfers will cause inflation, and situations will be created where people are less inclined to work for a living.

SEWA Bharat, a trade union of self-employed women, in partnership with UNICEF conducted the study in 22 villages of Madhya Pradesh in central India from June 2011 to June 2012. An estimated 6,000 people in these villages received cash transfers funded by UNICEF during this period.

The study, which started transferring 200 rupees ($4) for adults and 100 rupees ($2) for children, found that beneficiaries primarily spent on schooling, health, food and nutrition, as well as housing and construction.

Guy Standing, professor of development studies at the School of Oriental and African Studies in London, who led the SEWA-UNICEF study, said that cash transfers had a “capacity of having a transformative effect on local communities, household and individuals” by “unlocking constraints” to development.

Standing said that this survey, which is more comprehensive than any recently conducted study, found that the majority of people preferred cash transfers to food subsidies. “Those people who have experience of receiving cash actually become more prone to support cash,” he said. “This is important because there aren’t many figures out there on people's preferences.”

Standing said that cash transfers was leading to people “diversifying” their diets from the staples like rice and wheat, which is available in ration shops at subsidized costs, to fruits and vegetables, fish and meat. Most significantly, Standing pointed out that malnutrition among children, especially girls, had reduced in those villages where cash transfers had been introduced for the study.

The cash transfers scheme remains highly contested in India. And, for the time being, it is only being tested in 20 districts to provide pensions to elderly and disabled people, and in the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS).

The Indian government is also introducing cash transfers to replace subsidies on gas cylinders, which is used for cooking -- starting with 10 districts in the country.

The study strongly refutes concerns about cash being wasted on alcohol or non-essential goods by beneficiaries. Renana Jhabvala, national coordinator of SEWA Bharat, said that this survey highlighted that people are the best judge of their own needs, and these needs vary by region, gender and income level.

“Sometimes they do need food but sometimes they don’t. They would rather spend money on medicine,” she said, pointing out that when the study started in June, the majority of beneficiaries spent it on schools.

Jhabvala said that cash transfers lessened the reliance on loans for medical treatment in hospitals, one of the main sources of running up debts in rural communities, and that many women who previously used home remedies had opted to go to hospitals.

Lise Grande, head of the United Nations Development Program in India, said that since the Millennium Development Goals were adopted in 2005, 45 countries have introduced guaranteed cash transfer programs, which include 110 million families around the world.

Grande said that rich countries also use cash transfers, with OECD nations spending as much as 12 percent of their GDP on it. The state of Alaska, for instance, unconditionally transfers $3,000 to every resident in the state. “The programs are not charity and they are not safety nets,” she said. “In almost all countries that they are operational, they are seen as a right.”

In the Indian context, however, a major concern about cash transfers is the lack of bank connectivity in the countryside. Jhabvala says that opening bank accounts was difficult but not impossible. At the end of the trial year, she said, 98.4 percent of the beneficiaries had bank accounts and 21 percent of them were saving money as well –- many in financial institutions like banks instead of at home.

Jairam Ramesh, minister for rural development, who attended a public workshop on the study in Delhi, last month, underlined the need to create “business correspondents,” who will travel to remote villages to ensure that beneficiaries get the money at their doorsteps.

Ramesh, however, acknowledged the problem of poor banking facilities, and suggested revitalizing the already existing widespread post office network for cash transfers.

On a more controversial aspect of the scheme, the SEWA-UNICEF study recommends unconditional cash transfers over conditional ones. Conditional cash transfers require the beneficiary to perform some positive task, for instance, immunization of their children, before receiving the cash.

Jhabvala, however, argues that imposing conditions leads to corruption, and conditions are difficult to fulfill since basic services are still inaccessible to millions in the countryside. The social activist points out that many in the villages can’t get the immunization or prove that they have already had it because it is hard to find a health worker who will carry out the procedure or issue the required certification.

Montek Singh Ahluwalia, deputy chairman of the Planning Commission of India, said that the SEWA-UNICEF study confirmed that cash transfers were not spent unwisely, but it did not make a case yet for moving away from the public distribution system or for unconditional cash transfers.

“This is more controversial,” said Ahluwalia, an economist, suggesting that “very minor types of conditionalities” like vaccination and inoculation should be kept. “Once you got the cash transfers in place, I don’t see what’s wrong with using that as an additional incentive,” he said.

On an issue, which continues to be so fiercely contested, Ahluwalia said that the SEWA study forced those involved to “climb the ladder of rationality and look at each issue on merit and that is a big achievement.”

Photo: Thumbnail -Dinesh Cyanman/Flickr. Top - Curtis Perry/Flickr

This post was originally published on Smartplanet.com

Editorial standards