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World's biggest cash-transfer scheme set to cut cost of getting welfare to the poor

A biometric database will be used to channel welfare and subsidy payments to hundreds of millions of Indian citizens.

An Indian Sikh (centre) looks through an optical biometric reader, which scans an individual's iris patterns, during registration for an Aadhaar card in Amritsar.
An Indian Sikh (centre) looks through an optical biometric reader, which scans an individual's iris patterns, during registration for an Aadhaar card in Amritsar.

NEW DELHI // By its own estimate, India's government spends 3.65 rupees to transfer a single rupee's worth of benefits to the poor.

But plans are afoot to streamline the system through the introduction of the world's biggest cash-transfer scheme.

The initiative, announced by the prime minister, Manmohan Singh, last week, will funnel welfare and subsidy payments to hundreds of millions of people through the use of direct electronic payments.

Inefficiency and corruption - or what the government euphemistically calls "leakage" - are the chief problems the cash transfers are intended to solve.

According to government statistics, subsidies and welfare benefits add up to about 3.25 trillion rupees (Dh228 billion), or about 3.5 per cent of India's gross domestic product (GDP).

A statement from the premier's office said the transfers would "cut down wastage, duplication and leakages, and enhance efficiency".

It gave no timeline for implementation, merely stating that the system would be put into place in an "accelerated mode".

The government did reveal that Aadhaar, a biometric database of India's citizens, would be used to channel the direct payments.

The cash transfers would account for government payments made under welfare schemes such as the rural employment guarantee scheme, scholarship and employee pension programmes, health benefits, and some fuel and fertiliser subsidies.

Himanshu, an economics professor at New Delhi's Jawaharlal Nehru University, said that while the cash-transfer mechanism "looks very good in theory", those in need "just won't get the money".

Nonetheless, the Indian government has been indicating, for some time now, its willingness to implement a system of this nature.

Last year, in his annual budget, the then-finance minister, Pranab Mukherjee, deploring the "drift in governance and a gap in public accountability", mooted the idea of cash transfers to replace fuel and fertiliser subsidies.

A planning commission report in 2005 showed, for instance, that about 58 per cent of subsidised grain does not reach its beneficiaries, because of inefficiencies and corruption. In some states, such as Bihar and Punjab, these "leakages" touched 75 per cent.

The public distribution system for subsidised grain risks becoming "an albatross around our neck", said the finance minister, P Chidambaram, during a previous stint in the same post in 2007.

He pointed out that it was so inefficient that it spent 3.65 rupees to transfer one rupee of benefits.

A panel headed by Nandan Nilekani, the former chief executive of Infosys who was tapped to head Aadhaar, recommended in February that any government payment exceeding 1,000 rupees be made electronically.

"Electronic payments are the first step on the ladder of financial inclusion," the panel's report said. "The Aadhaar number, due to its uniqueness … serves as a natural financial address for sending payments to accounts of beneficiaries at banks and post offices."

Aadhaar, which was formed in February 2009, has already enrolled 200 million Indians, and the government has sanctioned a further enrolment "at full speed" of another 400 million.

Aadhaar has already been running pilot projects, involving the direct transfer of kerosene subsidies, in several states.

Similar cash transfer mechanisms function in Brazil, Indonesia and Chile, said Yamini Aiyar, director of the Accountability Initiative at the Centre for Policy Research, a Delhi-based think tank.

But Ms Aiyar said India's model might founder because of an inability to fix a realistic poverty line and to identify beneficiaries accurately.

"How are you going to decide whom to give cash payments to, if you can't decide who the poor of India are?" she said.

Mr Himanshu said India's small and marginal farmers were "the ones who are really stuck in agriculture, who need the money. But very often they don't have proper land records, so they'll lose out".

A committee headed by the economist Vijay Kelkar has recommended, in a new report on fiscal consolidation, significant cuts to government subsidies. Claiming that the Indian economy was "poised on the edge of a fiscal precipice", the report recommended reducing subsidies to 1.8 per cent of the GDP by 2014-15, by raising the prices of subsidised fuel, fertiliser and food.

The Kelkar report too contended that "a growing body of evidence suggests that the introduction of direct transfer of cash subsidies may be a more efficient way of reaching the beneficiaries".

ssubramanian@thenational.ae

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