More for the Poor and Less for and by the State: The Case for Direct Cash Transfers

There are few countries where the state and the policy and intellectual community have been as committed to poverty eradication—both in terms of rhetoric and through a range of subsidies and an array of targeted poverty reduction programs—as India. In 2006–07, there were at least 151 centrally sponsored schemes (CSS), entailing annual expenditures of about Rs.72,000 crore. Of this, about Rs.64,000 crore, i.e., almost 90 percent, were allocated to thirty schemes. In the 2008–09 budget, these thirty schemes (now reduced to twenty seven due to consolidation) have been allocated nearly Rs.79,000 crore, i.e., an increase of 23 percent over two years. This is even without including other CSS that masquerade as additional central plan assistance, such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the Backward Region Grant Fund (BGRF).

A similar amount is budgeted for food, fertilizer and fuel subsidies. Rs.32,666 crore has been allocated to the Food Corporation of India (FCI) for procuring and distributing foodgrains through the public distribution system (PDS), and Rs.30,986 crore for fertilizer subsidies (not including any fertilizer bonds that will have to be issued).3 If we add to this the budgeted PDS expenditure on kerosene and LPG of Rs.2,700 crore and Rs.21,554 crore of oil bonds that were issued until December 2007, the total amount of these subsidies is nearly Rs.88,000 crore. Once one adds the remaining CSS and the oil bonds for the last quarter of FY 2007–08, total expenditures on CSS and subsidies will comfortably exceed the Rs.178,765 crore that is the states’ share of central tax revenue. Is this enormous expenditure through centralized mechanisms the best way of improving the welfare of India’s poor and achieving India’s development objectives? For instance, if these budgetary trends continue, these expenditures will soon be sufficient to transfer Rs.1 crore annually to each panchayat—more than an order of magnitude of what they receive today. Might that be a better way to achieve these goals?

Deficiencies of Existing Schemes

While there is little rigorous analysis about the effectiveness of CSS and principal subsidies, there is plenty of indirect evidence that points in the direction of waste and ineffectiveness. Numerous reports and analysis attest to one incontrovertible fact: most of the resources in these programs fail to reach their intended beneficiaries. Not only is this a reality known to policy analysts, NGOs and international donors, who support the programs; state functionaries who are supposed to implement and monitor these programs are equally well informed. The government’s own assessments, conducted variously by the Comptroller and Auditor General (CAG), Planning Commission and other agencies, show that CSS have been process-driven, with little emphasis on measuring outcomes. In 2001, a working group of the Planning Commission had stated, “Accountability in the monitoring process is very weak. The fear of adverse remarks has prevented officials from reporting poor performances. Concealment of shortcomings and manipulation of data have been resorted to, to cover poor performances. Due to concealment of weaknesses in programs, appropriate corrective actions are not taken. Monitoring units tend to shift responsibilities for poor performances to line departments. Monitoring Units and the Departments furnishing data and reports are not held accountable for false pictures created by them.” Indeed, the Prime Minister himself in a recent speech reiterated, “we spend far too much money funding subsidies in the name of equity, with neither equity objectives nor efficiency objectives being met.”

To its credit, the 2008 budget acknowledges this reality by deciding to “put in place Central Plan Schemes Monitoring System (CPSMS)” to track and report on state-wise/districtwise expenditures, outputs, etc. for “Central Plan and Centrally sponsored schemes”. It is a little known fact that the budget document has never reported actual expenditure at the level of a scheme, which is available only for some CSS through various audit documents and parliamentary standing committee reports. As noted in Virmani (2007), “the connection between release of funds by the central government and the actual expenditures for physical inputs by the implementation agency, is currently very obscure”. This after more than half-century of such schemes starting from community development programs in the mid-1950s.

It is important to emphasize that most of these CSS have had good intentions and much thought has gone into their design. However, in each case only a small fraction of overall resources reaches the poor due to, in varying degrees, targeting inefficiency (inability to reach the poor), leakages (to the non-poor), participation costs (foregone earnings that are especially consequential in employment programs) and large administrative costs. Guhan (1994) estimated that for a budgetary expenditure of Rs.100, the final transfer to the poor was just Rs.21.6 through the Maharashtra Employment Guarantee Scheme (EGS), where the poor self-selected themselves by choosing to do manual labor on public works, and a paltry Rs.11.2 under the PDS. More recently, in 2005, the Planning Commission estimated that the government spends Rs.3.65 to transfer Re.1 worth of food, suggesting leakage of about 70 percent. At a recent meeting of the National Development Council, Finance Minister P Chidambaram remarked, "we need a PDS for the poor, but unless it is efficient, procures adequate quantities of foodgrain and delivers food to the poor, the PDS could become an albatross around our neck and an opportunity for rent seekers to enrich themselves."