India tries handing out cash to poor

Budhi Bawal - Uddal Singh, a retired army sergeant, is part of an experiment trying out radical changes to the Indian welfare system that the government plans to adopt nation-wide. And he's furious.

He along with the 250 000 residents of Kotkasim, a bloc of Alwar district in western Rajasthan state, were chosen to be part of a pilot scheme to end the sale of subsidised kerosene, a fuel used by the poor for lighting and cooking.

Instead of buying it at a heavily discounted rate at the local government shop, those with ration cards were each in theory paid cash by the government and required to purchase the liquid at the market price.

"Since one year, no money has come into my account, not one paisa [cent[," the moustachioed 58-year-old said bitterly in the village of Budhi Bawal, a dusty one-street settlement of a few thousand people, mostly farmers.

Instead of lighting his kerosene lamps, he says he now makes do with candles at night.

Officials "come here to the shop, see the record of our ration card numbers and say the money will come", he explained outside the grubby Fair Price Shop run by the local government dealer.

Model for the future

The Kotkasim trial has been disruptive, tricky to implement, and - depending on who you listen to - either a roaring success in cutting wasteful state spending, or a disaster that has caused hardship.

The conclusions are important.

In New Delhi, where the trial is viewed as a model for the future, the government is fast-tracking plans to distribute as much of India's $61bn welfare budget in cash as possible.

India is home to hundreds of millions of some of the poorest people on the planet who depend on government hand-outs for survival.

"As long as the money arrives in people's accounts, the scheme is not a bad idea at all," village leader Rakesh Kumar said in an interview.

But he estimates 70% of people in his area have had problems receiving the cash.

Bringing the poor into the banking system

"We have had to deal with the fall-out of the government's experiments."

The attraction of paying cash to the poor and leaving them to spend it has been enhanced by two foreign programmes which are broadly seen as successful: Mexico's Progresa or Oportunidades, and Brazil's Bolsa Familia.

Under the cash model, governments can keep track of the money they spend better, cut out middlemen, and even make the money conditional on beneficial things such as sending children to school.

They also bring the poor into the banking system, obliging them to open accounts to receive welfare payments.

Nandan Nilekani, who runs the government's scheme handing out new biometric IDs known as Aadhar, says the system has already reduced fraud.

"When Aadhar is used, in some of pilots, there has been a 20-30% reduction in beneficiaries by reducing duplicants," he says, pointing to trials in the states of Tripura, Jharkhand and Andhra Pradesh.

Political risks

Nation-wide 200 million people already have a new unique Aadhar ID and Nilekani's scheme aims to cover half the population, or 600 million people, in the next 18 months.

"On the basis of Aadhaar, we can ensure that the benefit of schemes reach genuine beneficiaries and that there is no mediator," Prime Minister Manmohan Singh said last weekend.

India subsidises everything from fertiliser and food to kerosene so cutting waste is crucial to the government's drive to rein in its budget deficit.

But a welfare shake-up is politically risky and fraught with danger in a country where an estimated 42% of children under five are malnourished.

The Public Distribution System is the biggest such scheme in the world, providing subsidised kerosene, wheat and rice to up to a quarter of all households from cob-webbed shops of the sort seen in Budhi Bawal.

It is also staggeringly inefficient. An estimated 58% of grains purchased by the government fail to meet their intended targets, data from the national Planning Commission showed in 2005.

$30 000 saving

The results in Kotkasim are described by the top local administrator, District Collector Ashutosh Pednekar, as "remarkable".

Figures from his office show kerosene consumption has fallen 82% since the cash scheme began, a saving for the government of $30 000 per month.

Before, crooked dealers would siphon off subsidised kerosene at a quarter of a dollar a litre and sell it on the black market for around half a dollar, where it was purchased as a cheap replacement for diesel to run tractors or generators.

Those entitled to discounted fuel also had an incentive to draw their full allotment - up to three litres per month - and then sell it on at a profit.

"The diversion of kerosene for purposes other than cooking and lighting has been stopped," Pednekar said.

'Not going gaga'

"The moment you start selling kerosene at a market price, the business collapses for those with a business in 'leakages'," added the 34-year-old.

Under the next phase of his plan, the sale of subsidised cooking gas cylinders will be phased out in Kotkasim.

In five months time, the whole of Pednekar's district of Alwar, home to 3.7 million people, will move over to the cash transfer system for kerosene.

While he conceded people were "not going gaga" over the cash system, "by now, there would have been a hue and cry" if they had not received the money.

In the dusty villages of the trial area, AFP spoke to households who said the cash had indeed arrived promptly.

Cash transfer system

But there was also anger and confusion.

Some complained of surly bank officials who refused to help them; others said repeated complaints had come to naught; many said they had either stopped buying kerosene altogether or were now paying the higher price from their own pockets.

John Blomquist, an economist from the World Bank in New Delhi and expert on welfare programmes, says cash transfers can be an effective strategy to cut fuel and power subsidies.

"As countries get more developed, you tend to see fewer in-kind benefits" such as subsidised fuel, he said.

"You can design a great cash transfer system, but it's really about do you have the mechanism in place to implement well? Can you monitor well?"

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