Direct Cash Transfers (Concluded)

(I am not often drawn into writing about matters of government policy or, indeed, into lapsing into the esoterica of my working days. Having worked for a long while in the area of fertilizer subsidies and having been considered something of an expert on those policies, I am somewhat obsessed about this area – even unto typing this with my left hand!)

What I find difficult to understand is this insistence on directly transferring cash. You need all beneficiaries to have a specific bank account; you need a monitoring system for ensuring that they do use the subsidy for the intended purposes and you need a mechanism for penalizing such defaults and for reversing such penalties.

How would the monitoring mechanism work? Does the dealer maintain a physical record of transactions which is periodically audited? Or do these records get entered into a database by some authority and defaults identified by filters set in the system? Or does the dealer directly enter into such a database? Or would you give the beneficiaries a card that can be swiped at the dealer’s place to obviate deliberate and accidental errors by the dealer in capturing data related to transactions by the beneficiaries?

The best way that I can see is to issue smart cards to the beneficiaries instead. The dealer sells at market prices and, upon swiping the card, the subsidy amount is deducted from the bill payable by the customer. The total subsidy payable is then credited to the dealer periodically. Much the way credit card payments function.

Since subsidy is paid only upon purchase, the entire rigmarole of monitoring for defaults and all that is avoided. Banking transactions are significantly reduced since transferring cash to only the dealers instead of all beneficiaries should cut down on the transactions significantly. Data capture is more authentic and fine-tuning the system easier.

Further, in the specific case of fertilizer subsidies, one can even see a portion of farm credit being passed on through giving additional credit through the smart cards. Defaults on credits given through smart cards can be reduced because loan defaults could be tagged to inactivating the card and, thus, interest rates can be reduced because default risk would be significantly lower. Lastly, drought relief and the like could be passed on either by way of reducing/waiving payback of credit or by extending additional credit to the target group.

The issues related to usage of smart cards could be infrastructure and education in the use. Neither of these can be considered as insurmountable and, if GOI has the will, it could provide the choice to the beneficiaries of opting between cash transfer and smart cards where possible for a beginning.

If it is only the instant attraction of handing over cash – the political dividend – that drives the policy, nothing further can be said!

Go here for the other part