Cash transfers are here to stay; focus on their design

There is a latent demand for such schemes as the GDP growth has failed to generate gainful employment

In the recent interim Union budget, the finance minister introduced a scheme called Pradhan Mantri Kisan Samman Nidhi. The scheme, backed by hefty budgetary allocation, envisages an annual transfer of ~6000 to all the small farmers with land holding less than two hectares. The launch of the scheme has renewed interest in the broader idea of cash transfers (CTS). Interestingly, the principal opposition party is also promising a cash transfer scheme, with some variations in details.

Though the specific scheme is in its embryonic form and many implementation challenges remain, cash transfer is an idea whose time has come. Given the potentially profound impact on the political economy of India, the genesis, evolution and broader dynamics of the idea of cash transfers should be understood.

There are many reasons which have expedited the adoption of cash transfers. First, the development of the technological infrastructure. For the first time in history, we have technologies such as increased access to mobiles, biometric identification and improved access to banking. The so-called JAM (Jan Dhan, Aadhaar, mobile) trinity has taken care of most of logistical problems involved in cash transfers.

Second, there is a latent demand for such a redistributive scheme as the GDP growth has failed to generate gainful employment, a phenomenon known as jobless growth. Both these factors have made some form of the cash transfer politically very attractive. A research paper published by British think tank Overseas Development Institute found that cash transfer schemes are immensely popular in countries as different as Pakistan, Brazil and Philippines.

Third, there has been an ideological component to cash transfers. Economists on the Left perceive it as a way of expanding the scope of the welfare state. Those with libertarian tendencies like the minimum leakage and efficient delivery of the subsidies. Milton Friedman was one of the first economists to advocate a negative income tax to replace the myriad welfare programmes.

What are the political and economic implications of cash transfers? The scheme launched by the finance ministry is likely to be the first iteration. Cash transfers can take various forms: they can be conditional or unconditional, universal or targeted. It is reasonable to assume that different political parties will come up with different flavours of the scheme.

Moreover, they will also compete by promising a higher amount of such transfers. For example, if one political party promises an annual transfer of ~6,000, another party would try to promise ~6,500 or even more to appeal to voters. Such competition is likely to be very intense, as the cash, unlike other public goods and services, is both easily quantifiable and has a “more is better” character. Such competition is likely to lead to an expansion of cash transfers schemes in a short span of time. But as basic economics suggests, there is no free lunch. If the cash transfer schemes expand, resources must be diverted from somewhere.

The future cash transfers are likely be financed by a combination of increased taxation and reduced expenditure on other public goods and services. Both these options have their share of problems.

Taxation can take a variety of forms. Unless there is a natural tax buoyancy due to increasing growth, most forms of taxes have a welfare cost. Some taxes are highly distortionary and wealth destroying. For example, any tax that impedes innovation and entrepreneurship is likely to be very costly in the long run. Other form of taxes, say a tax on carbon emission and resource rent, may not be that costly. For financing cash transfers, economists and tax administrators will have to find novel ways to increase government revenue with minimal distortion and welfare cost.

Financing cash transfers by slashing public expenditure will be problematic in a different way. Public provision of goods and services is necessary in case of inadequate private supply. This can happen due to multiple reasons. It is unlikely that only cash transfers can act as a substitute to the full range of public services such as healthcare, education and food security. However, there is some scope for the rationalisation of government expenditure. Better targeting and reduced leakages due to technological measures may provide additional resources.

Cash transfer is here to stay. Like most powerful ideas, it can both be a source of good and evil, depending on the specifics and implementation details.

A properly designed cash transfer scheme will help alleviate poverty, provide support for tiding over income shocks and reduce, if not eliminate, leakages and corruption. A badly designed scheme would be fiscally onerous and counterproductive. Much will depend on finding a modus vivendi that satisfies voters and experts.