Cash transfers may not suit all beneficiaries: Report

Funds transfer image via Shutterstock
With Aadhaar crossing one billion enrolment mark and the government showing inclination to use the platform to switch over to cash transfer while dispensing welfare schemes, the debate on whether direct benefit transfer is better than the existing system of in kind transfer is bound to intensify in coming days.

A recent paper by economist Maitreesh Ghatak of London School of Economics with Chinmaya Kumar and Sandip Mitra analyses the issue and concludes that in “areas where market access is not easy, cash transfers are not going to be very effective. In contrast, in areas where the administrative capacity is weak and there is limited accountability (say, by the media or local government bodies), cash transfers may be a good way of empowering the beneficiaries.” 

They studied Bihar’s mukhyamantri cycle yojana which provides money to purchase a bicycle to every student who is enrolled in class 9 in a government or government-aided schools. As part of the scheme a sum of Rs. 2,500 is given to the students with at least 75 per cent attendance. Girls were sole beneficiaries of the scheme till 2009 and their enrolment in secondary schools is reported to have gone up significantly after the introduction of the scheme in 2006. 

As part of their project, the authors did a survey in 36 villages across six districts. They found out that only 3 per cent of the beneficiaries said they did not receive the money despite meeting eligibility conditions. Almost 98 per cent of the respondents said they purchased new bicycle with the fund received under the scheme. 

The authors conclude that “some of the basic indicators of the performance of this programme—including exclusion rate, corruption and leakage, grievance rate and money utilisation rate—suggest that the bicycle programme is functioning well, and that most beneficiaries seem to be satisfied with it.” 

Despite high level of satisfaction with the programme, a majority of respondents (55 per cent) preferred bicycle over cash. One of the reasons for marked preference for the kind rather than cash was that nearly 98 per cent respondents said that they had to add an additional amount to purchase a bicycle. The authors therefore argue that “our study suggests that “free to choose” ideas that lie behind cash transfers or vouchers may be more relevant once the income of the beneficiaries cross a certain critical threshold.”

The study shows that richer the household, greater is the preference for cash over kind. It shows that an increase of household income by Rs. 1,000 increases the probability of preference for cash by 6 percentage points. Similarly, there is a marked preference for cash in households with pucca dwelling units. It also shows that households with more members had preferred cash over bicycles. 

The survey found out that the age of head of household as well as the number of working women had had impact on preference for cash or kind. Obviously, the location of village and its distance from the market having bicycle store too had impacted the decision. What is more, bicycle being visible good, there was demonstration effect at play while making a decision to buy the kind of cycle and the top-up amount therefore changed accordingly.

The authors therefore conclude that while cash may seem to be a preferred option on the face of it, there is no guaranty that different groups of beneficiaries will have identical reaction to the same programme. There are number of variables at work. 

Maitressh Ghatak in an emailed response to Business Standard says that “Our study suggests different people have different preferences over cash and kind. Ideally, we should do regular impact assessments but that may be too time-consuming and resource-intensive. So, we should do some large scale initial studies and then devise programmes based on these findings (e.g. Cash in urban areas) but also have an option to switch to respect individual preferences.” 

Sandip Mitra of Kolkata-based Indian Statistical Institute is of the opinion that “any development scheme for this large sized country might have negative implications in the long run unless it tries to capture the heterogeneity.” And Chinmay Kumar, co-author of the paper, argues that “we shouldn't see transfer programmes in the binary of cash versus kind. We should instead try to move towards a system that provides beneficiaries the option of switching between the two types of transfers depending on their needs/preferences.”