Saturday, December 1, 2012

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

12 comments:

  1. You have well analysed the paths to amelioration and the many pitfalls in between. I do agree with you solution. However, nothing is fool proof. Remember, we are the country of Jugaad!

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    1. I always remember that quote Uma - 'It is difficult to make anything fool-proof because fools are so ingenious'

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  2. Very good point. Completely agree to the concept of a smart card doing away with most of the fraud. Actually smart card coupled with fingerprint authentication is more fool proof to minimize chances of fraud. I used to work for a technology firm which used smart cards for doing NREGA/NREGS payments and it sure worked very well.

    -Ash

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    1. Smart cards also block a lot of ways available for petty corruption

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  3. i have recently developed a habit of commenting on posts taking cue from other comments (primarily because i have absolutely no clue what those posts are all about).

    loved your analysis and there can be a full proof system only when the concerned authorities have the intention of doing that.

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    1. Mmm! I do not do this too often - write things that people need to understand, Debs :) Not that I agree that you do not hv a clue abt what I hv written :) Thanks for plowing through it and commenting :)

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  4. I am sure even if the smart cards are given people will find some ways. The problem is people the first thing they do is try to find a loophole.

    There use to be time When I knew everything about the subsidies as I worked on my fields but now I have lost the knowledge.

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    1. People find loopholes in every system, Bikram - Govt. can at least avoid providing loopholes :) All of governance is in the art of making a satisfactorily functional system - the perfect system is always elusive. I hv been seconded as consultant to GOI for a decade so it is not like I do not know what I talk of :)

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    2. Well that is good sir, Hopefully they will listen to you...

      all the best , the govt can try for sure sir.. but I think we the citizens also have some duty towards it , I dont mind people using the loopholes but there should be a end to it all at some place .. I mean when will our stomachs fill

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  5. Finally I get to read a professional article from you! You are the boss in this field. What do I comment about this? I think one problem is that country is too big and diverse to implement anything.

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    1. Implement anything with near-perfect success yes, TF! Hassle is that the diversity is also a convenient excuse for people to not do anything

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