Cash in lieu of grains may reduce leakages, but may not protect ag... against foodgrain inflation: Karthik Muralidharan

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1 BS APPS BS PRODUCTS BS SPECIALS SIGN IN TRENDING ON BS #BiharElections #FiatAbarthPunto #IndiGoIPO News You are here: Home» Economy & Policy» Q&A Cash in lieu of grains will reduce leakages, but might not protect against foodgrain inflation: Karthik Muralidharan Interview with professor of economics, University of California Sanjeeb Mukherjee New Delhi November 5, 2015 Last Updated at 16:52 IST 1 Karthik Muralidaran Through the Jan Dhan-Aadhaar-Mobile (JAM) platform, the Narendra Modi government plans to transfer most of the subsidies over a period of time and minimise the human interface. Karthik Muralidharan, professor of economics in the University of Columbia, says in an interview with Business Standard that direct-benefit transfer (DBT) can be successful only if cash is deposited in predictable and timely manner. Excerpts: ALSO READ DBT administrative control shifts to Cabinet Secretariat SC order on Aadhaar sweetens cash-for-grain initiatives NITI Aayog against free health care, bats for more private sector role Can the Aadhaar juggernaut be stopped now? NITI Aayog sub-groups set to present reports components of JAM. The Modi government has given a big push to direct transfer of cash through the JAM initiative. Do you think clubbing the three could be a win-win situation? The Economic Survey lays out the transformative potential of the JAM platform. You need universal bank accounts (Jan-Dhan) as a foundation for enabling universal DBT-based social welfare programmes. Aadhaar provides secure authentication and security for end users, so that only they can access their funds. Mobile is the most ubiquitous source of last-mile connectivity in India and is, therefore, the logical base on which to build a digital payments infrastructure. Not every problem or solution needs all three For instance, leakages in PDS (public distribution system) may be reduced by using a PoS (point of sale) based e-pds with biometric authentication. You don t need a bank account for this. Also, near-universal mobile penetration can be used to build an outbound call centre by which the government can get real-time high-frequency feedback on programme implementation quality. 1 of 6 11/5/15 1:48 PM

2 While the three components of JAM are not always needed together, they can provide a foundation for transforming the design and delivery of social welfare programmes in India. At what level should the Centre scale up the direct transfers of cash? Do you think scaling up the programme at this stage is prudent? It is important to distinguish two types of DBT. One is using DBT to cut out intermediate layers in cases where the programme benefit was already a cash benefit (such as scholarships or rural employment scheme payments). The second is using DBT to change the design of welfare programmes from in-kind to cash transfers. Conceptually, the two are different, and require different approaches to analyse. The first type of DBT is less controversial and it makes sense to initially focus here. In a recent research, we found that using biometric payments linked to bank accounts (using smartcards) sharply reduced NREGS (national rural employment guarantee scheme) leakage in Andhra Pradesh by 40 per cent and also led to faster and more reliable payments. The AP Smartcard project not only featured DBT, but also invested in a last-mile banking infrastructure through business correspondents for easier access to cash in the accounts. We find that while biometrics reduced leakage, it was the use of local business correspondents that was key to reducing time to collect payments and payment delays. Over time, wide-spread use of mobile banking and digital payments should reduce the need to hold and use cash. But in the current circumstances where cash is still ubiquitous, it is essential to ensure last-mile financial access accompanies the DBT push. For DBT to be perceived positively by the end user, it is not enough to have more cash deposited in her account and have this done in a more predictable and timely fashion. It is also important to be able to access the cash easily. The launch of payments banks is a big positive step in this direction. What about the second type of DBT, where in-kind benefits might be replaced by cash benefits via DBT? The idea of cash transfers in the PDS is not new, and the question of the relative benefits of cash versus in-kind benefits is a very old one in public economics. There are good theoretical arguments on both sides of the debate. On the positive side, DBT could reduce leakage by not needing to run a dual price system, increase beneficiary choice and flexibility, and improve dietary diversity. On the negative side, DBT might not adequately protect against food-grain inflation. Spatial indexation of the value of a DBT in lieu of an in-kind benefit is a difficult technical problem to solve. There are also concerns about intra-household bargaining over cash and the possibility that cash will be spent poorly. Thus, this question needs to be decided empirically, accounting for both nutrition impacts and beneficiary preferences. You were planning to do an analysis of a pilot on the use of smart cards for PDS in Bihar. What are the findings? Our PDS pilot in Bihar focused on understanding actual beneficiary preferences over cash versus kind benefits in the PDS. We did this by providing randomly selected beneficiaries the option of exchanging their PDS coupon for a cash deposit in their accounts. In our pilot of around 200 households over three months, we found that 80 per cent of coupons were exchanged for cash and 90 per cent of households exchanged at least one coupon. 2 of 6 11/5/15 1:48 PM

3 We, then, replicated the same experiment in Rajasthan in the past four months. We have found much lower rates of take-up (below 40 per cent). We are still analysing the data to understand the determinants of take-up. The varying results highlight the importance of careful empirical testing and evidence before making large-scale policy changes. In food, there are a couple of pilots to directly transfer the subsidy into beneficiaries bank account. There have been some failures, too, like the Puducherry state government experiment. What should be the ideal way to move forward on this? We don t have enough data or evidence at this point to pronounce the prior pilot as a success or failure. Going forward, it is essential to make sure these pilots are accompanied by credible evaluations of both process and impacts, so that we have better evidence to inform important policy choices. As academic researchers, we hope to support the government in doing this going forward. Do you think the Supreme Court judgment restricting the use of Aadhaar to a few social security schemes is a setback? I don t see the Supreme Court judgment as a setback as much as a pause and a call for more thoughtfulness before scaling up. There are two important concerns. The first is the risk of exclusion errors if Aadhaar-based authentication is insisted upon for all transactions. The second is the need for a legislative framework for Aadhaar-linked benefits along with suitable privacy protections. At the same time, it is important for the Supreme Court to be informed of the large benefits of biometric payments as demonstrated by our study in Andhra Pradesh. Also, Aadhaar can be highly socially-progressive by enabling financial inclusion of millions of illiterate adults who might not be able to remember passwords or PIN numbers. It is important to pass a UID Bill that defines the parameters for use clearly, focusing on making Aadhaar-based benefits convenient for beneficiaries rather. A thoughtful and bipartisan legislative response that addresses the valid concerns raised by the Supreme Court would help the government realise the full potential of the JAM platform. Some states are not prepared to migrate to the electronic system of benefit transfer, as it would cut down the human interface. Do you think there is still a large section of population in India which would want experiments like DBT and Jandhan to fail? This is a very important point. Our study in AP shows that biometric payments have the technical capacity to reduce leakage and improve beneficiary experiences. But clearly, there are also losers in particular, lower level officials who were beneficiaries of corruption and part of political patronage networks. Thus, realising the benefits of the JAM platform requires political will to prioritise poor beneficiaries over intermediate political actors. This will happen when state-level leaders perceive this to be electorally beneficial, and the fundamental political economy question is to understand the conditions under which the political economy of patronage is replaced by the political economy of better service delivery. One reason to be optimistic is that states such as Tamil Nadu and now Andhra Pradesh seem to have made this transition. This could serve as role models for other state leaders as well. Much of the initiatives that the Modi government is pushing now, had started during the previous United Progressive Alliance (NPA) government. What is the basic difference between the way adopted by the previous government and the current one in pushing these initiatives? An ambitious agenda like transforming the design and delivery of social welfare programmes for 3 of 6 11/5/15 1:48 PM

4 a country of 1.2 billion people requires many years of consistent hard work, and is unlikely to succeed without broad bipartisan support. The idea of a UID was seriously explored by the first NDA (National Democratic Alliance) government. The UPA government, then, laid the foundations for the project by setting up the UIDAI (Unique Identification Authority of India) and recruiting Nandan Nilekani to run it. The current NDA government is now taking the next step of integrating the platform with service delivery. There will inevitably be differences at the state level in the amount of political and bureaucratic leadership shown in implementing this endeavour to its full potential. However, I am optimistic about the long-term success because states are likely to emulate examples from early successes and also learn faster about mistakes to avoid. The NITI Aayog can play an important role in facilitating both experimentation and learning across states. READ MORE ON DBT JAM SUPREME COURT AADHAR KARTHIK MURALIDARAN AADHAAR PDS NDA UIDAI NITI AAYOG PREVIOUS STORY No joint statement with US on climate change on the table at Paris talks: Ashok Lavasa NEXT STORY Gold deposits to get % returns RECOMMENDED FOR YOU Beyond Business GO LATEST NEWS ALL IN THIS SECTION Shira Ovide: Facebook's perfect balancing act Bhupesh Bhandari: The dealers' leader Castrol India posts 21.5% rise in net profit at Rs 143 cr Solution for resolution Fly without caps MOST POPULAR 4 of 6 11/5/15 1:48 PM

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