Direct Cash Transfer

Hi All,

Direct Cash Transfer(DCT) is a term that i came across in Nandan Nilekani's Imagining India and it has caught my imagination since then. It refers to the practice of government placing some amount of cash, based on requirement, into an individuals bank account in order to help him/her tide over a certain difficulty or to offset the removal of government subsidy that had been in place till then.

DCT has been experimented ,with varying levels of success ,all around the world and on the whole the beneficiaries of this concept have given it a big thumbs up. DCT tends to have a whole lot of advantages associated with it. I will state some of them here.

1.) Targeted Subsidies - Only a fraction of the subsidies today actually reach the intended audience. With DCT, subsidies can be targeted and made to reach only the people they were meant for. For ex. LPG cylinders being supplied to rich households are subsidised to the same extent as the ones beings sent to middle/poor households. This clearly doesn't make sense.

2.) Massive Savings- Apart from making perfect logic, DCT will also translate into good savings for the government. The cash transfer is going to be made only to families which need them and not to everyone by default, which is how the present system works.

3.) Responsible/Reduced Usage - Because DCT will only compensate for a finite amount of resources consumed, it will encourage beneficiaries reduce their usage of these resources. For the sake of continuity, lets again take the case of LPG:

Actual cost of one cylinder - 550

Cost to consumer - 350

Subsidy - 200

If the government sets the cylinder limit at 8/family/year then it would need to deposit 8*200=1600 into the accounts of the families and carry on and sell each cylinder at actual cost price.

Advantage 1: Subsidy provided to people who don't need it(read Ambanis' and the likes) will be eliminated.

Advantage 2: If families use more than their stipulated amount of cylinders, they would have to do so at actual cost of the cylinder.

Now that we have seen the merits of this system, i would like to highlight the challenges this system poses.

1. Mammoth Task - Creating bank accounts for millions of house holds across India will be no easy task and will require many changes/simplifications in the procedures for account creation. Orientation and acquaintance courses must be held to make the masses more familiar with banking terms/formalities etc.

Silver Lining - The banking system in this country is quite strong and that banks and their ATMs are spread across the width and the breadth of India.

2. Unwillingness - People might not be, initially, so receptive to the the idea of universal subsidy being removed and a more targeted system being brought in to replace it. Stiff resistance might be encountered from families which are large in number(5 or more) as they certainly would need more of these resources.

Silver Lining - This concept is politically "sell-able" due to its obvious benefits. Some Indian politicians were even making some noise about this in the recently concluded Lok Sabha elections. So for once, we can actually confide in our politicians to get the convincing job done!

So what do you guys think about this concept of subsidy delivery. Please share your thoughts.