The Case for Direct Cash Transfers to the Poor

The total expenditure on central schemes for the poor and on the major subsidies exceeds the states’ share of central taxes. These schemes are chronic bad performers due to a culture of immunity in public administration and weakened local governments. Arguing that the poor should be trusted to use these resources better than the state, a radical redirection with substantial direct transfers to individuals and complementary decentralisation to local governments is proposed. The benefits, risks and associated reinforcement of institutions and accountability are outlined. There are few countries where the state and the policy and intellectual community have been as committed to poverty eradication as India – both in terms of rhetoric and through a range of subsidies and an array of targeted poverty reduction programmes. In 2006-07, there were at least 151 central sector (including centrally-sponsored) schemes – hereafter collectivley referred to as CSS – entailing annual expenditures of about Rs 72,000 crore. Of this, about Rs 64,000 crore, i e, almost 90 per cent, were allocated to 30 schemes.1 In the 2008-09 budget, these 30 schemes (now reduced to 27 due to consolidation) have been allocated nearly Rs 79,000 crore, i e, an increase of 23 per cent 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).2 A similar amount is budgeted for food, fertiliser and fuel subsidies. An amount of 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 fertiliser subsidies (not including any fertiliser 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 2007-08, total expenditures on CSS and subsidies will comfortably exceed the Rs 1,78,765 crore that is the states’ share of central tax revenue. Is this enormous expenditure through centralised 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?