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How much will cash transfer cost? by Himanshu
Last week, a group of 40 economists wrote an open letter to United Progressive Alliance (UPA) chairperson Sonia Gandhi arguing for cash transfer as a mode of delivery for the proposed National Food Security Act (NFSA). The letter was carried in detail in several newspapers including Mint.

The good thing is that there is now almost a consensus, at least among economists, that whatever be the mode of delivery of subsidy, there is no space for a targeted system. This has been made amply clear not only in the letter of the group of economists, but also in several of the papers, including those which have argued for cash transfer. The letter argues for a near universal system with exclusion of the very affluent. This consensus is not a mean achievement considering that the government is hell bent on conducting a below poverty line (BPL) census with the full knowledge that the error rates are going to be substantial. Incidentally, the National Advisory Council (NAC) has also conceded the BPL census as a necessity for the final roll-out of NFSA.

But what the letter does not specify is why a cash transfer system would be better and efficient against an in-kind transfer. (For an excellent symposium of articles on cash transfer, readers can refer to the last week’s issue of the Economic and Political Weekly.) And more importantly, what it does not say is the actual amount of cash that has to be transferred. There is a strange silence on all this. If the entire purpose is to save on subsidies, then it needs to be shown clearly.

But there is also a consensus that a system of cash transfer merely seeks to change the modalities of delivery without altering the exact quantum of subsidies that need to be delivered. It is also agreed that there will not be any self-selection simply because cash is fungible and can be used for various purposes; also because a system of cash transfer does not involve any transaction cost with money delivered to the recipient’s account through electronic transfer.

Given the current market prices and the proposed prices for foodgrain in the NAC proposal, the average subsidy works out to be Rs. 13 per kg of foodgrain. With the entitlement at 7kg per individual per month, the annual subsidy per person works out to be Rs. 1,092. Of the total population of 1.21 billion, given the exclusion criteria of affluent families in the letter, this would at most exclude 5-10% of the country’s population. But let’s assume that roughly 20% of the country’s population is excluded. The annual subsidy bill would be Rs. 1.06 trillion for food alone. This is almost double the existing government claim of food subsidy and almost Rs. 25,000-30,000 crore higher than the cost projections of the NAC.

The subsidy projections here are based on a minimal subsidy transfer. It works out to Rs. 91 per person per month or around Rs. 450 for a family of five. The only alternative figure for what people perceive as the minimum subsidy as part of cash transfer is available from the much-publicized Self Employed Women’s Association (Sewa) study in Delhi. The Sewa report suggests that the minimum cash transfer that the poor wanted was Rs. 2,500 per month in 2009 if they have to shift to a system of cash transfer. That would imply an annual subsidy of roughly 10 times compared with the current food subsidy. Incidentally, based on this report the Delhi government is at present conducting a pilot in Raghubir Nagar locality.

I must also add that I am assuming more than 50% of the households outside any financial net would have bank accounts in the next six months, something we have only dreamt of in the last six decades. I am also assuming zero leakages because unique identification number is just around the corner with all of us using our biometrics to identify ourselves. And I am only talking of food and not of kerosene, sugar or any other subsidy. But more importantly, I am assuming that this system will not add to any inflationary pressure, notwithstanding the repeated claims of government economists that just Rs. 15,000 crore of the Mahatma Gandhi National Rural Employment Guarantee Scheme transfer in rural areas is the primary reason for inflationary pressure. I am also assuming that this system will also stabilize prices, stimulate agricultural production and there will be no inflationary pressures due to speculative activity. But if it does so, we can always raise interest rates and hope for inflation to come down as we have been doing for the last three years.

Last but not the least, I am not assuming that this will reduce malnutrition. After all, there are limits to paternalism, and if the consumers want to use it for non-food expenditure, they should be allowed to. In any case, why should the government be paternalistic and assume the responsibility of reducing malnutrition. Efficiency is after all about money spent, and not who gets it, how much and for what purpose.

Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at the Centre de Sciences Humaines, New Delhi.