7/19/13

Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

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Home Economics Direct Cash Transfer Scheme- A game changer? PART 1

Direct Cash Transfer Scheme- A game changer? PART 1

Posted by TIE on Mar 28, 2013 in Economics, Public Policy | 0 comments BY: Prakriti Kohli and Sanjita , ABSTRACT To meet the socio-developmental objectives of poverty elimination and inclusive growth, a number of Government sponsored programs and schemes have been introduced. However, efficiency and effectiveness have not been achieved by any of the programs and schemes optimally. Rampant leakages and corruption have made many schemes dysfunctional. Direct cash transfer scheme has been aimed to mitigate these malaises. Direct cash transfer scheme aims to reduce leakages, cut down corruption, eliminate middlemen, target beneficiaries better and speed up transfer of benefits to eligible individuals . This paper examines the broad thrust and evolution of direct cash transfers along with its operation model in India. Also included is a critical evaluation of the problems, impact, readiness of the scheme in India followed by important inferences and suggestions. A close look at the Bolsa Familia plan of Brazil reveals the key ingredients of a successful cash transfer scheme INTRODUCTION In a recent study by the Planning Commission, it is ascertained that the Public Distribution System (PDS) is so ineffective that 58% of the subsidized grains do not reach the targeted group and almost a third of it is trajected off the supply chain. According to the Finance Ministry, the inefficiencies of the PDS cause the government to spend 3.65 for transferring 1 to the poor. To generate budget savings and reduce corruption, the Government of India launched the Direct Benefit Transfer (DBT) scheme on January 1st, 2013. The DBT program aims that entitlements and benefits are transferred directly to the beneficiaries with the help of biometric Aadhaar-linked
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Shri Ram College of Commerce, Delhi University

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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

bank account. At present, the scheme is covering 7 welfare schemes in 20 districts in 16 states. The programme covers schemes like education, scholarship for the Scheduled Castes and Scheduled Tribes and pension to the widows. Food, fertilisers, and fuel have been kept out of its purview at this time. The DBT scheme aims at cutting a subsidy bill of 1,64,000 crores apart from other benefits like better delivery, accurate targeting, broader choice, reducing delays and corruption. This paper aims at taking a deeper view at the direct cash transfer scheme and answers the following questions: 1. 2. 3. 4. 5. 1. What is direct cash transfer scheme? 2. What is its operation model in India along with a critical analysis of the same? 3. Is DBT scheme a poll plank for the UPA and will it help them win elections? 4. How have other countries adopted the cash transfer scheme? What are the important inferences and suggestions for the DBT scheme?

Understanding these questions helps us develop a key insight on the implications of direct cash transfer scheme and whether or not it is a game changer. While P. Chidambaram calls it magical and Sonia Gandhi calls it revolutionary, the actual reality has to be reviewed

WHAT IS DIRECT CASH TRANSFER? As the name suggests, direct cash transfer is the direct transfer of government subsidies and other benefits to the entitled people usually provided by the government. In India, the UPA government is going to introduce the scheme to reach out to poor people directly in order to plug leakages and cut delays in transfer of subsidies to the poor. The areas that would be covered by the program include scholarships, pensions and unemployment allowances and later MNREGA and Public Distribution Schemes . It is assumed that it will help to bypass corrupt middlemen, would help in cutting down wastage and duplication. It is fundamentally being established to ease the burden of subsidies and letting the genuine beneficiaries avail the advantage.

EVOLUTION OF CASH TRANSFER SCHEMES. Cash Transfer schemes originated in middle-income Latin American countries that had good infrastructure and supply systems. They were positioned as formal, publicly provided safety net programmes that essentially supplied cash to the needy and helped them tide over the period of economic crisis. The earliest of such programmes, Progresa, was initiated in 1997 in Mexico with a new approach integrating interventions in health, education and nutrition. It was based on the understanding that these important dimensions were direct correlates of human welfare. In Brazil the first CCT programme was started in 1996 with a focus on child labour. While some more programmes based on the CCT philosophy were introduced to address specific areas, these were integrated in 2004 into the now well-known programme Bolsa Familia. Other countries that initiated CCT programmes include Chile, Colombia, Ecuador, Jamaica, South Africa and Turkey. In Asia, Bangladesh had a Female Stipend Programme as early as 1982 followed by a Food for Education Programme in 1993. Food grants were later converted to cash grants in 2002. Indonesia launched a pilot CCT programme called Programme Keluarga Harapan (PKH) in 2007. Its beneficiaries are very poor households that have pregnant women and/or zero to 15-years-old children. The PKH requires them to access education and health services to be eligible for the cash transfer.
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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

EVOLUTION IN INDIA The government in order to leverage technology solutions and in particular the Aadhaar i.e. the Unique Identification (UID) programme for this purpose, constituted a task force on Direct Transfer of Subsidies on Kerosene, LPG & Fertilizer headed by Nandan Nilekani (Chairperson of UID Authority). The task force proposed the Solution Architecture (Core Subsidy Management System (CSMS)) to achieve a fully electronic back-office process for direct transfer of subsidy. The system would automate all business processes related to direct subsidy transfer and can be customized according to the business rules. At the very core of the system would be: Aadhaar Integration, ERP Integration and Integration with nodal bank and payments gateway.

Operational Process and Elements

INDIA: IMPLEMENTATION PLAN Basic Idea The money is directly transferred into bank accounts of beneficiaries. LPG and kerosene subsidies, pension payments, scholarships and employment guarantee scheme payments as well as benefits under other government welfare programmes will be made directly to beneficiaries. The money can then be used to buy services from the market. For eg- if subsidy on LPG or kerosene is abolished and the government still wants to give the subsidy to the poor, the subsidy portion will be transferred as cash into the banks of the intended beneficiaries. What are the immediate critical success factors? 1. 1. The governments efficiency in dealing with the fundamental issues like the basis of targeting, definition of poverty line & identification of intended beneficiaries 2. Effectively subsidizing the poor for fertilizer or kerosene once the prices are market determined and are liable to fluctuate 3. Devising a methodology to transfer the cash subsidy to the poor 4. State governments endeavor in taking up fundamental reforms required in Public Distribution System (PDS)
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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

Phase I

Phase II

Direct transfer of subsidy through state governments/UT Administration.

Subsidy transfer to beneficiaries.

The cash equivalent of subsidy is transferred directly States purchase commodity from manufacturers to beneficiaries through their bank accounts by at market price linking transactions to Aadhaar.

Central government transfers the differential subsidy directly to the state govts./UT.

The commodity purchase and then transfer of cash subsidy to their account will be based on successful authentication of the beneficiary through Aadhaar at the point of sale.

Subsidy amount is proportional to commodity uplifted from the retail points in a state/UT.

States reform their distribution system based on the CSMS system proposed by the Task Force.

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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

The following steps have been taken by the government to guarantee a successful implementation of the scheme: 1. An efficient Electronic Benefit Transfer (EBT) system would require the benefits transfer system compatible with the banking system, transfer of funds to the beneficiaries accounts and facilities for the drawl of the amount by the beneficiaries as per their requirement. This will not only bring in greater efficiency in the transfer of benefits but will also reduce pressure on the bank branches for dealing with these transactions, reduce the requirement of multiple accounts for various schemes and facilitate the process of financial inclusion.

1. To ensure that every beneficiary of the government scheme has a bank account, the banks must map the list of beneficiaries under every scheme, already available with the state government, with bank account details. In case the beneficiary doesnt have a bank account, a new bank account for the family in the service area branch should be opened. Vice versa, as soon as the bank account gets opened, the beneficiary should get mapped.

1. For those who dont have access to bank branches, they rely on Banking Correspondents or BC. In May 2012, the Department of Financial Services (DFS) chalked out a plan to split the country into 20 clusters for BCs. Each cluster is to be managed by one BC company, elected by a price-based auction. The function of a BC would be to pay the person who wants to withdraw money from his account in case the person is not able to access an ATM or bank. The authentication by the person would be given by a fingerprint on a micro-ATM.

1. 4. The Central Plan Scheme Monitoring System (CPSMS) is a public financial management reforms initiative of the government of India which monitors programs in the social sector and tracks funds disbursed. It provides real time information exchange with the banks providing greater transparency and accountability to social sector. It provides a platform for schemes for making payments directly in the bank accounts of beneficiaries. Departments using CPSMS should map the details of the bank account of the beneficiary in the scheme database of the CPSMS. This should also be brought to the knowledge of the beneficiary so that she/he is aware that the benefits shall be electronically transferred to the bank account.

1. Aadhaar Payments Bridge (APB) is a repository of Aadhaar number of residents and their primary bank account number used for receiving all social security and entitlement payments from various government agencies . This is the bridge/platform that will be used for the Direct Cash Transfer. APB requires using Aadhaar number as the primary key for all entitlement payments. This would weed out all fakes and ghosts from the system and ensure that the benefits reach the intended
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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

beneficiaries. The key steps in posting payments via APB are: Service delivery agency that needs to make payments to its beneficiarie s (such as MGNREGA wages, scholarships disbursement, old age pension etc.) provides APB File containing details of Aadhaar number, welfare scheme reference number and the amount to be paid to its bank (called sponsor bank) Sponsor bank adds bank IIN (Institute Identification Number provided by National Payments Corporation of India NPCI to participant banks) to the APB file and uploads onto NPCI server NPCI processes uploaded files , prepares beneficiary bank files and generates settlement file. Settlement file is posted to bank accounts with RBI Destination banks can download the incoming files for credit processing after the settlement file has been processed

INDIA: STATISTICS The Prime Minister has set up a three-tier architecture for monitoring the scheme . This includes a national ministerial committee, a national executive committee and implementation committees. The seven schemes that will now employ direct cash transfers to beneficiaries accounts are mostly related to student scholarships and stipends, the Indira Matrutva Yojna and the Dhanalakshmi schemes. It is estimated that at least two lakh beneficiaries have received cash benefits from Jan 1. Cash benefits in the remaining 19 schemes will be available from February and March when the government will cover 23 other districts across the country. The government had originally identified 51 districts across 16 states to be covered by the programme under which cash subsidy benefits will directly go to the bank accounts of beneficiaries with mandatory requirement of Aadhaar number. The states covered in the initial phase are Karnataka, Maharashtra, Delhi, Rajasthan, Madhya Pradesh and Punjab and UTs of Puducherry, Chandigarh and Daman and Diu. Subsequently, four districts each of Himachal Pradesh and Gujarat were exempted from the roll-out because of the assembly elections. This will be extended to 11 more districts from February 1 in states including Kerala, Haryana, Sikkim, Goa, Andhra Pradesh and Jharkhand and 12 more districts in states including Tripura from March 1. Name of the scheme Post-metric scholarship for SC Students Pre-metric scholarship for SC Districts/states in which the pilot will start Puducherry, Nawanshahr, Fatehgarh Sahib, Gurdaspur Anantpur, East Godavari, Diu East Godavari No. of beneficiaries 48,000

24,000
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Direct Cash Transfer Scheme- A game changer? PART 1 | The Indian Economist

Students Post-metric scholarship for OBC Students Post-metric scholarship for ST students Indira Gandhi Matrutva Sahayata Yojana Dhanalakshmi Scheme Stipend to trainees under the scheme of welfare of SC/ST job seekers through Coaching-cumGuidance and Vocational Training Puducherry, Alwar, Anantpur, East 1,05,000 Godavari, Daman, North Goa Tumkur, Wayanad, Harda 4,800 Dharwar, Puducherry, NW Delhi, 55,000 Diu, North Goa, Amaravati Fatehgarh Sahib 8,000 Karnataka, Kerala, Haryana, 650 Punjab, Delhi, Madhya Pradesh Rajasthan, Andhra Pradesh, Maharashtra, Jharkhand

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