In defense of Direct Cash Transfers

Untitled-1The media, the blogosphere and twitter is abuzz with the UPA’s announcement of the start of Direct Cash Transfer (DCT) scheme for subsidy payments. This is quite an ambitious scheme by any measure and intends to use the Aadhaar platform as a backbone to roll out Direct Cash transfers to the subsidy earners. As can be expected the govt has received a lot of brickbats for this, some more nuanced intellectual ones, and some more apologetic, I’m-confused ones from our media doyens. I am net positive on Direct Cash Transfers. I explain why below.

Firstly, a quick refresher to how this scheme works. Let’s say rice is a subsidized good sold at Rs. 2 per Kg. The actual market price for rice is Rs. 40, so the govt. is essentially subsidizing rice by Rs 38 per kg. Today, you go to the ration shop and get Rice at Rs. 2. Once DCT kicks in you purchase your rice at Rs. 40 per kg. But the govt. will transfer Rs. 38 to your bank account per Kg that you bought. It seems an equivalent transaction, but this transaction changes a lot.


Before I go into why I like the scheme, let’s talk about a few caveats:

  • I’m assuming that the govt. will be able to implement it such that the turnaround time for subsidy payment is almost nil. Ideally it would be like a credit card transaction that as soon as you complete a real transaction the subsidy money is deposited in your account. I realize it’s not this way now, but it would need to come as close to this as possible. This would be important, else the feasibility would reduce since the rural poor would have to shell out a lot more money to get the food on his/her table and the subsidy money would become like an afterthought.
  • I’m assuming that the govt. will enable subsidy money to be paid on rice even purchased from private outlets and not just ration shops. This is a bigger ask since this means integrating with Private POS/CRM systems, but this would be a big help.


Now let’s look at some of the advantages.

This change in the transaction does one unique thing. Now there is only one market price for the good. There is nowhere you can get rice at lower than Rs. 40 a kilo. Hence the incentive for diverting Rs 2 kilo rice to the black market for Rs. 40 kilo rice just vanished. The Ration shop owners now don’t have an incentive not to sell their goods to the ultimate ration shop beneficiaries. More Ration rice flows into the hands of the rural poor and lesser black marketing of rice happens. The rural poor additionally demands that all rice sales is ‘entered into the system’ so that they receive their subsidies.

This also reduces the amount of black money in the system. The money generated by the ration shop owner diverting ration rice into the black market is now shut. Instead that money is now in the bank accounts of the rural poor, as pure clean white money. Money remains in the system, the profits generated by the ration shop owner is now clearly noted by the system and he pays tax on that.

In addition if the subsidy is given even for Rice purchases from private stores like a Reliance fresh, etc this causes a lot more competition, because the ration shop owner (and Reliance Fresh) now needs to offer better prices, or better services to attract customers to their stores. At some level I think this will mean more consumption from the private supply chains rather than the PDS system. This in turn strengthens the private supply chains and encourages them to invest in more stores, logistics to supply these subsidized goods to the rural poor. I bet a Reliance Fresh might come up with a new offer, get Rice at Rs. 36, below the subsidy price. Hence you’re net positive. Price competition will help the rural poor.

Now considering how much black marketing happens today (where there is a consensus that it’s massive), there is that much extra white money in the hands of the rural poor. Some recent economic studies tell us that when the poor receive extra cash they tend to spend a disproportionate amount on aspirational products. Firstly there is more food on their table, there is more money for them to start businesses, there is more money for biscuits, chocolates, restaurants and cigarettes. Result – a good boost for the rural economy. More demand means more retail stores come up trying to sell these goods, more restaurants, more economic activity.

For the govt. this will give massive data to learn about the purchasing behavior of the rural poor and help target social schemes better. Consider that a few years down the road, the govt can analyze this big data to create more innovative subsidy schemes. They can target subsidy schemes better. For example, a massive flood hit Bihar this year and massive economic damage has been caused. Turn on extra subsidy for Bihar next 2 years. They could bundle subsidies together. Or turn off subsidies instantaneously. This could be the pilot for offering a similar model on minimum support price for agriculture as well, hence letting the govt. mess less with markets and their dynamism.


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