INDIA: The Government Is Planning To Start Giving Cash Directly To Its Poorest Citizens Starting In January In A Bid To Reduce Massive Corruption. The Project Would Affect At Least 720 Million People.

The Wall Street Journal

India to Launch World’s Biggest Cash-to-the-Poor Program

written by Rajesh Roy and Romit Guha

Wednesday November 28, 2012

India is planning to start giving cash directly to its poorest citizens starting in January, in a bid to reduce massive corruption that prevents subsidized goods and welfare benefits from reaching those who need them.

The project would affect at least 720 million people – a population almost the size of the whole of Europe – making this the world’s biggest program of giving money directly to the poor. The program is open to families who live below or just above the government-set poverty line.

The government expects to transfer up to 40,000 rupees ($720) a year to each poor household, according to a government official.

Cash handouts would replace the money the government currently spends on subsidies on goods like fuel, fertilizer and food, which would be abolished. Critics say only a fraction of subsidized goods reach the poor as corruption and bureaucratic inefficiencies lead to wastage.

Government spending on welfare programs – ranging from subsidized fertilizers to guaranteed employment for rural dwellers – will remain overall unchanged at roughly 4 trillion rupees ($71.9 billion) a year.

With elections due in 2014, Prime Minister Manmohan Singh’s government is looking for a way to make its large welfare programs more targeted. “Direct cash transfers, which are now becoming possible through the innovative use of technology and the spread of modern banking across the country, open the doors for eliminating waste, cutting down leakages and targeting beneficiaries better,” Mr. Singh said earlier this week after meeting with ministers and bureaucrats who are part of a panel set up to develop and implement the cash transfer program.

India plans to launch the ambitious program from Jan. 1, 2013, to cover 18 states by April and the whole country by December.

To start with, only subsidies and benefits related to 29 welfare programs such as scholarships and healthcare, will be covered. These will be gradually expanded to cover subsidies on food, fertilizer and cooking gas. In some cases, like subsidized cooking gas, the cash transfers intended for that purpose will only be given to households that use it.

Some development economists say giving poor people cash rather than subsidized services cuts down corruption as there’s no opportunity for bureaucrats or businessmen to pad contracts to deliver food or other services.

Because if the poor get the money directly, they can decide how best to spend it, which means its more effective than a government functionary deciding what they need. Analysts say that if the program is successful, more cash in the hands of people could lead to a higher demand for goods, thus spurring manufacturing and eventually boosting economic growth. Government officials say it shouldn’t be inflationary.

Several countries have introduced conditional cash transfers to the poor. One of the most successful cash transfer programs has been Brazil’s Bolsa Família, which has contributed significantly to the drop in poverty in the country in the 2000s. Other countries that have implemented similar schemes include the Philippines, Turkey, Chile, Mexico, Indonesia and South Africa.

A senior official from the Prime Minister’s office told India Real Time that the roll out of direct cash subsidy will not lead to any additional burden on the government’s exchequer. “We are already bearing subsidies on welfare schemes be it for food, fertilizer, education or oil. Through the new way of cash transfer, we will eliminate middlemen, check leakages and ensure the actual beneficiaries are benefited,” he said.

The cash transfer will be enabled through Aadhaar, a numerical biometric identification that is currently being given to everyone in the country. The ID plan – officially called the Unique Identity Authority of India project– will help people access services like banking and benefits. Aadhaar card holding families who qualify for the cash transfers will get funds directly into their bank accounts.

The government expects that better targeting of beneficiaries will help prevent money intended for subsidies from being wasted.

“We expect considerable savings to the exchequer with the roll out of direct cash transfer as the Aadhaar-enabled system will put to an end any duplication and falsification,” Finance Minister P. Chidambaram told reporters Tuesday. He didn’t specify how much the government hopes to save through this program.

The country is grappling with a wide budget deficit as revenue falters amid a global and local economic slowdown but expenditure, especially on subsidies related to fuel, food and fertilizer, remain high. New Delhi aims to restrict subsidies to under 2% of the gross domestic product in the fiscal year through March, down from 2.16% in 2011-12. The government’s intention is to keep subsidies under 1.75% of GDP in the next three years.

However, possible hurdles to the success of the program could come from the lack of penetration of Aadhaar cards, bank accounts and even bank branches. An estimated 300 million people [So you have an idea of how that looks, there are 314 million people in the United States. (emphasis mine)] in the country of 1.2 billion have no official identification documents, according to UIDAI. This prevents them from opening bank accounts or getting work. Only 210 million people have Aadhaar cards, while many poor families don’t even have bank accounts. The government has plans to guarantee simple bank accounts to the poor.