Economic Update

Published 18 Feb 2013

The national rollout of the government Direct Cash Transfer (DCT) scheme in early January is the largest and most comprehensive overhaul of India’s subsidies and benefits distribution programmes to date. However, the programme’s quick introduction, as well as a number of other challenges, may prove problematic to its implementation and success.

The DCT scheme will attempt to circumvent a problematic welfare distribution system that has cultivated a record of wastage and corruption. In December Sonia Gandhi, President of the Indian National Congress, said, “The purpose of this scheme is to ensure that the money being disbursed in pension, scholarship, National Rural Employment Guarantee Act wage payments and social benefit schemes reaches the beneficiaries directly and without any delay.”

The scheme will eventually channel around $58bn annually in subsidies and benefits directly to the bank accounts of India’s poor and most vulnerable. However, the government faces several challenges in implementing the new scheme.

Since its announcement in the 2011/12 budget, several of India’s state governments have been vocal in their criticism and protests regarding the policy’s breakneck implementation. Most have centred on technological and infrastructure shortfalls, which became evident on December 31, 2012, hours before the scheme’s official launch.

Intended to cover 51 districts in January, 18 states by April 2013 and the rest of the country later this year, the scheme was pared back on its January 1 launch to 20 districts. Also affected was the number of welfare schemes introduced, which was reduced to 26 from the 36 originally intended. Several key areas of the scheme, however, such as food, fuel and fertiliser subsidies, were introduced at the launch.

DCT’s introduction has been congruent with India’s new “Aadhaar” card national identity programme, which gives every citizen a 12-digit numerical identification card. Serving as proof of identity and address, Aadhaar cards are correcting many of the inefficiencies seen in government service delivery – notably the inability to authenticate the identity of individuals. This shortfall has helped cultivate corrupt practices, denied beneficiaries their rations or welfare and deterred private sector institutions from deepening their presence in poorer markets.

The introduction of both the Aadhaar card and the DCT scheme will now make it easier for India’s unbanked to open accounts. At present, just 40% of India is considered “banked”, though the government has been making progress in rolling out financial services to poor and rural areas.

Responding to edicts issued in 2011 for banks to open branch services in rural areas and habitations of 5000, more than half of the 4000 settlements identified by the Reserve Bank of India (RBI) had been covered by October 2012. The government has also expanded its “Swabhimaan” Financial Inclusion Campaign to more than 110,000 settlements with a population above 1000 through branches, business correspondent agents, mobile vans and micro ATMs at local shops. In March 2012, the RBI reported that more than 30m “no frills” bank accounts had been opened, bringing the total to 99m.

However, where progress in banking may have been notable, the Aadhaar card rollout has been comparatively slow. Over 210m Aadhaar numbers have been created, but this is less than one-third of the number targeted under the DCT, with Delhi reporting just 40% coverage in January.

In a population of 1.2bn, such challenges are not unexpected. However, the DCT scheme is a warranted reform, as losses due to corruption and inefficiency are estimated to be as high as 40%. The past year has seen a number of national anti-corruption protests after it was revealed that some $14.5bn had been stolen from a food subsidy programme in one state alone over the past decade.

The Indian government has cited successful sister schemes in Brazil and Mexico, yet these make poor comparisons as they target small percentages of their population, whereas an estimated 46% of Indian children are malnourished and require food subsidies. Moreover, the DCT provides no protection against perennial local market price manipulation and wider inflation.

Yet while these issues are not enough to derail the programme’s rollout, it has highlighted that errors are unavoidable. While a 2% margin of error seen in trials may be considered small, nationally this extrapolates to tens of millions.

Nonetheless, the DCT scheme remains an arguable improvement on current mechanisms, and monies saved from seepage may constitute the bedrock of future welfare schemes, as well as provide some measure of political emancipation. It will take several months to know whether the DCT programme will prove successful enough to survive the vicissitudes of Indian democracy,but the potential benefits are clear.