Dash for cash: Why Congress must look before its leaps

Now that the cash transfer scheme of the UPA has scared the daylights out of the BJP - the latter has complained to the Election Commission about it - it is sure signal to the Congress that it is on to a good thing. It will seek to speed up the process in order to reap electoral dividends before the warts emerge.

As a story to tell voters, “Aapka paisa, aapke haath” looks like a winner till the electorate finds out the downside. This is why the Congress party will speed up its implementation in 2013 so that there is the voter impression is positive.

This is why suddenly all inter-ministerial wrangles are being suppressed in favour of a quick rollout. The problems will be fixed later. In short, shoot first and ask questions later is the political attitude.

Today’s Economic Times informs us that of the two competing systems for delivering cash to poor beneficiaries, the government is close to abandoning the Department of Financial Services’ move to appoint Business Correspondents to dispense money in favour of using the rather misnamed micro-ATMs.

Micro-ATMs are not small cash vending machines, but more like ID confirmation systems. Business Correspondents (BCs) are intermediaries appointed by banks to handle the last mile payments to beneficiaries in villages and unbanked centres.

[caption id=“attachment_541917” align=“alignleft” width=“380”] PTI[/caption]

Regardless of whether you use BCs or micro-ATMs based on the Aadhaar Unique ID, the fact remains that final payments to the beneficiary will be done by human beings. Nothing wrong in this, but several problems will lurk under the surface.

The mere fact that the government has gone ahead and announced the scheme without even deciding how it is going to be implemented is a signal that the driving force is politics, not economics.

Here are some of the problems that need to be anticipated and fixed before the cash transfer scheme is operationalised all over the country.

One, if money is going to be disbursed by people moving around with cash boxes, the first issue thing to emphasise is the safety and law and order aspect. Those carrying micro-ATMs will be inviting targets for thugs.

Two, since the idea is to enable people receiving subsidies in kind to buy from the market with cash, timely payments are vital. How will poor people buy kerosene or cooking gas at market prices if their cash does not come in every month, or at least once every two months? This means whoever is entrusted with the task of doling it out will have to be replenished frequently and must also be available in villages at predetermined times.

Three, how is inflation going to be accounted for in subsidies? The Left is already seeing a plot in cash transfers. If the prices of cooking gas go up, will the cash payments also rise in tandem? If the answer is yes, how is the government going to rein in its subsidies?

Four, the real costs may be higher than the direct costs. Nandan Nilekani, Chairman of the Unique ID Authority of India, says that the cost of each micro-ATM (at Rs 15,0000 each) would be Rs 1,500 crore for a 10-million network. Add the 3 percent margin to be given those dispensing the cash, and the total cost of making cash transfers of Rs 3,00,000 crore would be around Rs 5,332 crore, reports The Economic Times.

But this leaves out an important element: the cost of the money, the cost of providing protection, and the cost of delays. This brings us to the fifth issue.

Five, a cash-based subsidy scheme means payments being made throughout the year. There will be no lean period for schemes involving year-round payments (LPG, kerosene and food subsidies), and there will be lumpy payments for subsidies targeted at, say, farmers - like fertilisers. They need this money before sowing seasons. This means governments - which currently have lean revenues in the first half of the financial year, and thus tend to release their subsidies towards the latter half, will have to borrow more in the first half of the year, raising financing costs. The banking system will thus have to be more nimble and proactive to manage these cash movements consistently.

Six, the key to popular satisfaction with the scheme depends on timely payments. The political risks of a backlash are greater if in a bad fiscal situation the government delays payments. One can presume that in the run-up to the next election, to avoid any disaffection the government will pull out all the stops to make sure money reaches the beneficiary, never mind the costs. This will store problems for the future, when the bills have to be paid by the exchequer. The only right way to implement the scheme is to anticipate and fix the last-mile problems in advance through extensive field trials and research.

Seven, there is no way subsidies can be cut without creating a permanent system to identify, add and subtract beneficiaries according to clear norms. The current idea is that all existing beneficiaries will be automatically enrolled for cash transfers, and since Aadhaar will eliminate duplicate and fraudulent beneficiaries, the costs will come down.

But the political problem is this. The current list may also be excluding many legitimate beneficiaries - and if they are excluded, as the cash benefits start flowing to others, the scheme could face headwinds. Remember, UPA won the 2004 elections merely by making those excluded from the ‘India Shining’ story angry. The same could happen with cash transfers if the criteria for inclusion and exclusion is not made clear upfront.

Eight, the cash transfer scheme shifts the whole basis of subsidy payments from a B2B model to B2C - from companies and businesses to ordinary citizens. For example, fuel subsidies are currently paid to oil companies (there are just three of them), fertiliser subsidies to fertiliser companies (there are just about a dozen important ones), and food subsidies to the Food Corporation of India. But cash transfers are intended to make payments to crores of people. The scope for a mess-up has just risen multi-fold.

Nine, the biggest drawback of cash transfer is macro-economic. When cash reaches beneficiaries in large amounts, the first impact is on prices. As prices rise, political pressures to inflation-index the benefits will rise - as they did with NREGA. Cash transfers are thus a double-edged sword. They boost demand, but unless the supply side is stimulated, the net results will be inflation, which will push up demands for more subsidies.

There is a strong case for cash transfers since it both makes the system more efficient and eliminates leakages. But it is not a panacea.

The Congress may have a positive story for the voter, but it should also look closely at the larger implications of cash transfers before it commits itself to large-scale rollouts in such short a time.

Good politics should not result in bad economics. If the Congress’ intention is to win in 2014, and if it does indeed win, it should remember that it will have to clean up the economic mess afterwards.

It should look before it leaps.