The Pursuit of Cash Transfer Nirvana Ignores Inconvenient Evidence

"Fantasy is like jam. . . . You have to spread it on a solid piece of bread. If not, it remains a shapeless thing . . . out of which you can't make anything." - Italo Calvino

Learned economists and policy-makers are meeting at Vigyan Bhawan today to discuss the unfolding "revolution of social welfare policy" led by the JAM (Jan Dhan, Aadhaar, Mobile) trinity. I was initially invited to address this Economics Conclave, but the Finance Ministry informed me at the last minute that my presence was not required after all. I take this opportunity to share my views with the public rather than behind closed doors.

In case you have not heard of it, the said revolution was announced in the New York Times on July 22, 2015 by Chief Economic Advisor Arvind Subramanian and his colleague Siddharth George. It involves a straight jump "from a bank-less society to a cashless one", on the back of the JAM trinity. Using this infrastructure, the authors propose "rolling all subsidies into a single lump-sum cash transfer to households" - nothing less. The same vision is outlined in the Finance Ministry's latest Economic Survey which modestly concludes that "Nirvana today seems within reach".

Touching as this faith may seem, a single-minded focus on high-tech cash transfers as a foundation for social policy in India is fraught with dangers.

First, the required infrastructure is not in place and is unlikely to be ready any time soon. Recent experiments with high-tech cash transfers in Jharkhand, Rajasthan, Delhi, Puducherry and elsewhere have been quietly wound up after sobering results. Andhra Pradesh has fared a little better, but even there, the main lesson of recent experience is the need to adopt appropriate technologies in a gradual manner rather than plot a revolution.

Second, the process of putting a new infrastructure in place can be extremely disruptive. So-called "teething problems" often translate into massive hardships for the underprivileged. The hasty, top-down transition to bank payments of wages under the National Rural Employment Guarantee Act (a valuable arrangement in principle) is a prime example - the entire programme is yet to recover from the disruption that accompanied this and subsequent redesigns of the payment system. Even the relatively successful experiment with biometric smartcards in Andhra Pradesh would have led to disaster had orders making smartcards compulsory not been subverted - and that was baby technology by JAM standards.

Third, even with the required infrastructure in place, there is no reason to privilege cash transfers as a tool of social policy. In-kind transfers and public services, too, are extremely important. Midday meals, bicycles for schoolchildren and free medicines are some examples. The public distribution system, too, is now an invaluable source of economic security for millions of vulnerable families. It is far from obvious that cash transfers would do better, especially in the poorer states.

Last but not least, the JAM vision raises some troubling questions of political economy. For instance, a transition to cash transfers could easily be used by the government as an opportunity to dilute people's entitlements, e.g. by imposing conditionalities, restricting eligibility, or going slow on the indexation of cash transfers to the price level. It could also become a stepping stone towards state withdrawal from many essential services. Indeed, some influential economists are advocating precisely that.

All this is without bringing up fundamental issues of privacy and civil liberties associated with Aadhaar, an integral part of the JAM vision.

"Brazil spends a full 25% of GDP on the social sector (health, education and social security), of which less than 0.5 per cent goes to cash support; by contrast social spending in India is just 6% of GDP"

Reference is often made to the international experience with cash transfers, such as the Bolsa Família programme in Brazil. As it happens, Brazil spends a full 25% of GDP on the social sector (health, education and social security), of which less than 0.5 per cent goes to Bolsa Família. Brazil provides a wide range of services and facilities to its citizens (including universal health care) aside from income support. This is a general pattern in Latin America, not confined to Brazil. In India, by contrast, social spending is around 6% of GDP. Public expenditure on health is among the lowest in the world, as a proportion of GDP. The international experience provides little support for the idea that social policy should be based on "rolling all subsidies into a single lump-sum cash transfer to households".

None of this is to deny that some cash transfers are useful. Social security pensions, scholarships for schoolchildren and maternity entitlements are some examples. Incidentally, the Central government is quietly undermining these useful schemes even as it swears by cash transfers. The right of women to maternity entitlements under the National Food Security Act (Rs 6,000 per child) has been studiously ignored for more than two years. The Centre's contribution to old-age pensions has remained at a measly Rs 200 per month (yes) since 2006, and this year, for the first time, even this token amount is proving difficult to pay due to budget cuts. There is some homework to do before getting on with the revolution.

This piece was first published in The Wire