Don’t Make a Hash of the Cash

Will the Government’s cash transfer scheme set off inflation? This and other risks to watch out for

The Centre’s Direct Cash Transfer scheme may well turn out to be a ‘game changer’. But a game is no game unless it bears the distinct possibility of a loss. And a change is no change, at least not one of consequence, if it entails no risk. For the Congress, ‘Aapka Paisa Aapke Haath’ is a handy slogan. But what if it ends up as ‘Aapka paisa ho gaya raakh’? If ‘Your money in your hand’ ends up as ‘Your money turns to ash’?

Could inflation ravage this otherwise splendid idea?

At the moment, the scheme is being tested on scholarships and pensions in a few districts. The actual idea, however, once Aadhaar allows the Centre to reliably address the needy via an all-India computer network, is to turn every subsidy into a transfer, with cash e-wired directly to their bank accounts. For food alone, this would mean about Rs 1 lakh crore sent across without any middlemen laying their itchy fingers on the money along the way. Counting all central subsidies, the sum dispensed may be more than twice that figure—for about 400 million beneficiaries. That’s a lot of money for a lot of people. Disintermediation on such a stupendous scale not only promises efficiency that could confound old notions of governance, it also addresses Rajiv Gandhi’s admission that only 15 paise’s worth of every rupee spent on the poor ever reaches them. For far too long, 85 paise has either gone into welfare administration or been siphoned off by crooked administrators. Ideally, each rupee allocated would reach them.

Which, of course, is the scheme’s aim.

The irony is that fears of its inflationary impact also draw on the same figure of 15 paise. Would that 85 extra paise in cash at the disposal of millions not result in a ‘demand shock’? After all, those who pocket that 85 paise right now are far fewer, and they stash their cash away or buy stuff like gold and property. In contrast, the poor exist in multitudes, and most of them are so hard-up on money that they usually spend every additional paisa they get instantly; a flash flood of cash in their hands could have too much money chasing too few goods; which would mean inflation.

Of course, a slow rollout could contain that risk, but for the DCT scheme to have a big enough impact on poverty for the Congress to claim credit at next year’s hustings, subsidies would require rapid conversion to cash. In which case, would it not result in runaway prices? “Yes,” says Michael Walton, a lecturer of International Development at Harvard University’s Kennedy School of Government, “[In theory], it could be inflationary, [but] only if this increase in purchasing power fails to get responsive supplies of food or kerosene.”  

Indian economists who have studied the DCT proposal dismiss the worry. True, Kaushik Basu did flag “a risk of higher inflation” after the scheme was unveiled late last year, but India’s former Chief Economic Advisor also made it clear that it need not mean cash flying freely across the countryside like twirls of confetti. A cash transfer in itself need not call for cash creation.

On a zoom-out view of the economy, as economists see it, it’s likely to work out fine. So long as the Centre’s welfare outlay—upped only modestly by the Union Budget of 2013-14—stays steady in real terms and its overall spending does not spin out of control, they say, fears of price spikes are exaggerated. All added up, it would still be the same sum of money released by the Government, regardless of who gets it. That siphoned-off cash has been going out of circulation is a myth, says an economist with monetary expertise: “Money doesn’t stay idle.” Transfers, he says, are neutral in that effect. “Total spending stays the same in the economy and so there would be no aggregate effect on the balance of demand and supply.” And so cash transfers are unlikely to result in a burst of extra money fanning out too fast for supplies of stuff bought by it to keep up. “The argument that cash transfers are inflationary in general is invalid,” says the economist, “What the cash transfer scheme will hopefully do is reverse the ratio of benefit delivery: perhaps from 85:15 to 15:85 in favour of the intended beneficiaries.”

Most handouts currently rely on a network of ration shops that sell foodgrain and kerosene at special rates to entitled cardholders. If the Centre’s proposed DCT-driven Food Security policy is put into effect, the poor will be entitled to rice at Rs 3 and wheat at Rs 2 per kg (upto a limit), and their accounts will be credited with the extra money needed to buy these items at regular market prices that others pay. So a bank account will get, say, Rs 17 for a kg of rice if it is available out there at Rs 20.

To satisfy any extra demand for foodgrain, the Centre will be ready to release buffer stocks. As a safeguard against the cash being blown up on other items (such as booze), successive monthly transfers might even be made conditional on the actual use of funds for the intended purpose. Aadhaar cards swiped at ration shops will update a central database, and if a family stops buying foodgrain, it gets nothing for it the next time round. This would contain the spillover effect of the cash on demand for other products. Union Food Minister KV Thomas has been categorical about this. The system, he insists, has been designed to be dupe-proof.

That also explains why the man whose job is to get jumpy about jumpy prices, RBI Governor D Subbarao, seems so calm about the scheme. Asked recently by reporters whether it would spark inflation, he had replied, “I don’t think so. If cash is used for necessary consumption, it will be productively spent; I don’t think there will necessarily be any inflation implications.” Social activist Nikhil Dey of the Mazdoor Kisan Shakti Sangathan sounds a lot surer of it. “If cash transfers are made conditional—as the intent of the proposed Food Security Bill is—on buying only food or fuel,” he says, “then its impact on prices can easily be negated by adequate supplies [of food and fuel].”

If inflation is a worry, say activists, it’s that arising from other sources, which transfer payments may not be able to keep up with. ‘Linking the quantum of cash transfer payments to inflation rates is imperative to ensure that the beneficiaries are not adversely affected by increases in the price of goods they consume,’ says a study titled Global Subsidies Initiative. Undertaken jointly by the Geneva-based International Institute for Sustainable Development and Delhi-based thinktank TERI, this study makes a special mention of fuel prices, which it warns are so volatile that State responses are often too late to shield the poor from their impact. Apart from costlier transport and storage, foodgrain prices are vulnerable to hikes in what the State pays farmers for procurement. This is cost-push inflation, cautions Kaushik Basu, and should not be mistaken for DCT-driven inflation.

If anything, the Centre expects the scheme to help calm inflation down in the medium to long term. By calculations of the Union Finance Ministry, savings on lower transaction costs and less wastage should lower the country’s subsidy bill and thus crunch the fiscal deficit, which in turn would keep excess cash from cavorting around the economy and turning prices restive.

Yet, it would be naïve to assume all is well with the idea. If not all-India inflation, the scheme is fraught with local risks that welfarists dare not overlook:

» BANKING INADEQUACY: The Centre’s target of arming 90 per cent of all beneficiaries—over 90 million households—with bank accounts within a year looks unrealistic, given the lethargy of banks on this front. Their ‘inclusion costs’ are still too high, over half of all no-frill accounts remain inoperative, an army of ‘correspondents’ sent out to enroll villagers has achieved little, and it isn’t clear if mobile-banking can plug the gap.

» POLITICAL BACKLASH: The notion that an entire cohort of middlemen can be knocked out without any disruption might be far-fetched. Vested interests that sponge on welfare allocations might try to retain their ill-gotten privileges by using their local clout to twist the scheme. Officials who validate Aadhaar identities and certify cash eligibilities—in league with local politicians—could use this authority as a tool to extract bribes, leaving the poor with less than what they are entitled to.

» BLACK MARKETING: Officially set ‘market’ prices of food and fuel may refuse to hold good if the envisioned e-surveillance of stocks fails to stop mass diversion of supplies (say, to illicit liquor makers) and scarcity rackets run by hoarders (to sell at higher prices). Extra cash in the hands of buyers could amplify extortive pricing scams. Unless policed, this could spell price blips. “Some local markets (in remote areas) may face a flash of inflation where supply lags demand,” says Michael Walton.

Even so, such ailments would probably be outweighed vastly by the scheme’s benefits. Extended beyond ration shops to all retail outlets, for example, competition among them for transferred cash could shift the wider market’s incentives around to serve the poor in earnest ways for a change. They would not be supplicants, but customers. This difference alone could alter their quality of life. If ancient patterns of social exclusion do not play spoilsport, this might even be the real game changer.

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