December 5, 2023


Can cash transfer schemes fix economic distress?

There’s going to be a lot of analysis in the coming days and weeks about the recent assembly election results. A lot of them will be political and electoral and how this affects campaigns for the 2024 general election. One aspect that shouldn’t be overlooked is the cause of some of the results; one of them being promised economic schemes.

Cash transfers have become the go-to for political parties, with several trying to outdo the other. It sounds simple enough – the government gives people a fixed amount of money to help increase their purchasing power. While it may reap political and electoral dividends, does it actually help alleviate economic distress on a broader scale?


Over the past few decades, social welfare schemes have transformed. Cash transfer schemes have become an increasingly preferred way to tackle poverty and inequality. Its origins can be traced back to Latin America. Following the failure of structural adjustment policies in the 1980s, many regional governments looked to conditional cash transfers. Mexico’s Progresa, now often referred to as Prospera, was among the first and became a prototype for other similar programmes.

The goal was three-fold – alleviate poverty, improve food security, and break intergenerational poverty cycles for socioeconomic development. These cash benefits depended on certain conditions like attending workshops or ensuring their kids attended school and received an education.

It then travelled to other parts of the world, particularly developing economies. In many of these countries, capitalism hasn’t borne fruit. In fact, it widened the gap between the rich and the poor. Several countries have taken the lessons learnt in Latin America and applied them domestically. Two examples are South Africa’s Child Support Grants and Indonesia’s universal health care. Many such schemes operate on less than 0.5% of the national GDP.

The United Nations has posited that it would take only 2% of the world’s GDP to provide basic social security to the world’s poor. It believes that they provide economic growth with equity.

In India, significant cash transfer schemes have been in place since the early 2000s. In 2012, Prime Minister Manmohan Singh announced the direct cash transfer scheme, where money went directly into a beneficiary’s bank account. Another example is the Janani Suraksha Yojana (JSY), a conditional cash transfer (CCT) scheme for healthcare services. It’s considered among the largest in the world.

The Direct Benefit Transfer (DBT) system has over 300 schemes under its ambit. When the pandemic hit, the government decided one of the best ways to help was through cash transfers – ₹30,000 crore into the accounts of Jan Dhan account holders and over ₹5,000 crore into linked LPG connections.

These types of schemes aren’t limited to times of economic crises. They’ve also become a campaigning tool. But are they what’s needed to help alleviate distress in the long run or just a temporary ban-aid?

VIEW: They’ve proven to be effective

India’s war against poverty has seen mixed results. One of the biggest reasons is that economic and social welfare schemes are often leaky. In 2008, economists Devesh Kapur, Partha Mukhopadhyay, and Arvind Subramanian made the case for cash transfers. They argued that if the ₹1.8 lakh crore spent on centrally sponsored schemes and subsidies were distributed equally to millions of households, it would’ve resulted in over ₹2,140 per household.

When the DBT was implemented, it was called a “logistical marvel” by the IMF. The sheer size of India’s population has meant utilising technology like Aadhaar. There’s a reason why African and Asian countries have adopted different cash transfer schemes – they’re effective. They’re effective in being multi-sectoral and integrated to tackle short-term poverty while protecting the formation of human capital. Even if you want to look at it strictly from the point of view of optics, these schemes allow governments to demonstrate pro-poor delivery of public resources.

Studies have shown that such schemes don’t make people lazier or lead to waste. They remain popular among the public, often reflected in political support. Take old age and widow pension schemes. Though they’re smaller in comparison, they’ve proven to be effective. The losses incurred by a government often have to do with leakages in the policy/scheme. While financial management will be the key to its success, it can work miracles.

COUNTERVIEW: Not a long-term solution

Giving money directly to people is a good idea on paper. The reality is that they’re not going to get that money every day. Bringing people out of poverty requires a more nuanced approach that looks at the problem in a broader more long-term context. A sustained cash transfer scheme will dilute people’s entitlements and could lead to the state’s withdrawal from essential services.

The issue of leakages is rampant. It’s one of the biggest drawbacks of cash transfer schemes, especially in a country of over a billion people. Let’s assume the technology and infrastructure are in place, it doesn’t solve the problem of targeting. There needs to be a credible mechanism to identify beneficiaries that don’t leave out a large section of the poor and economically vulnerable population.

Take agriculture as an example. Telangana’s Rythu Bandhu Scheme (RBS) from 2018 defined cultivators in terms of land ownership. It reached 79% of the beneficiaries. However, 76% of the farmers didn’t use the amount for agricultural activities in the rabi season. Then there are the distributional effects of different kinds of benefits within a family. Direct access to food favours kids rather than adults only.

Reference Links:

  • Cash transfers – Open Encyclopedia of Anthropology
  • Conditional Cash Transfer Schemes for Alleviating Human Poverty: Relevance for India – UNDP
  • Cash transfers: Miracle or Mirage? – Mint
  • Cash transfer schemes in India: Bandwagon politics or smart economics? – Newslaundry
  • Conditional Cash Transfer model can empower families to build their dream home through subsidy from PMAY and CSR Grants – Times of India
  • Why Cash Transfers Cannot Replace Structural Reforms In Agriculture – India Spend

What is your opinion on this?
(Only subscribers can participate in polls)

a) Cash transfer schemes can fix economic distress.

b) Cash transfer schemes can’t fix economic distress.


For the Right:

The Uttarakhand tunnel workers have been rescued. It’s time to ask hard questions about the project

For the Left:

The winning template is here to stay