The value of cash transfers will be huge when fully rolled out, for now the savings will be just 0.01% of GDP
Few topics have attracted as much attention—but also confusion—as the government’s recent thrust to transition India’s creaky, product-centered subsidies to a system of electronic, direct cash transfers. In some quarters they are (wrongly) seen as a panacea to all our current ills—expected to result in significant fiscal savings, better identification of the poor, while simultaneously boosting consumption. In other quarters, they are simply seen as a political gimmick that will necessarily result in more inflation.
Where does the truth lie? Are cash transfers, per se, the source of fiscal savings? Or is it unique identification that drives the savings? How large could the end-state savings be? And is this a game changer in the next year or two? Can the combination of unique identification and cash transfers simultaneously result in fiscal savings and higher aggregate demand? And what does the experience of other countries tell us about the design and efficacy of cash transfers?
In the first part of a two-part series we try and sift through these fundamental issues: why it is important not to confuse unique identification with cash transfers, what the quantum of the end-state savings may be and why, in the near term, intent will be more important than technology in improving the fisc.
Are cash transfers the source of fiscal savings?
No! Cash transfers, by themselves, do not necessarily lead to fiscal savings. To understand why, it is critical to distinguish between Aadhaar (unique identification) and direct cash transfers—concepts wrongly used interchangeably.
Aadhaar’s role is to establish a unique identification backed by bio-metric confirmation. All Aadhaar does is to confirm that “X is truly X”. And this is where the bulk of the fiscal savings lie—by rooting out fake beneficiaries, ghost ration cards and identification-error related leakages. Currently, for example, three different people may claim to be John Doe and claim the benefits intended for him. A unique identification system is expected to root out the pretenders.
None of this has anything to do with cash transfers! In theory, the government can continue to have product-based subsidies and experience savings by simply bringing them under the ambit of Aadhaar—as pilot studies have demonstrated. Why is this distinction important? Because financial inclusion and bank accounts may take significantly longer to enable. But as long as the current welfare programmes come under