Cash transfers for welfare are beyond politics

Popular public narratives consider direct cash transfers mostly as tools to get votes with little return for society. They have been undoubtedly used for a political purpose, but one cannot deny the global scientific evidence that it is the most frictionless and cost-effective instrument to lift people out of poverty. Over the last three decades, it has been advocated for by economists on both the left and right, and today, it is used widely (1.2 billion people receive cash transfers globally). 

The Indian state has cash transfer schemes worth more than INR 2,50,000 crores across the central and 16 state governments. This is an opportunity to make an unprecedented impact on India’s socio-economic goals by smoothing the lives of the poorest or the poor, creating long-term self-reliance, and catalysing economic growth (as a demand-side measure). Counter-intuitively, it also has the potential to ease the long-term welfare burden on the state. If we do not act now, it will be a colossal loss of opportunity. 

There are three main facets to consider: how cash transfers coexist with other economic growth and welfare measures; how cash transfers are designed to balance equity and effectiveness; and the third, continuous good measurement and iteration.

Cash vs the Rest

Any state must plan its budget with the twin goals of economic growth and welfare. When designed well, they reinforce each other. The split in the budget would depend on a state’s current performance on various indices and its intended socio-economic goals. In the welfare stack, schemes must be designed as a whole, not siloed in individual ministries, to achieve a combined outcome and prevent distortions. 

Each scheme in the stack must be for an intended audience, with a specific purpose, and an understanding of its mechanism of welfare, distribution friction, and complementarity to other schemes. For example, cash transfers are likely to work best when basic infrastructure in healthcare, education, and local markets is in place. Cash is not an alternative to creating such infrastructure. Yet, while cash takes care of consumption smoothing, a social insurance scheme like Ayushman Bharat is a good complement. Furthermore, microfinance can work for target groups with incomes above a certain level, so that loans are used for economic activities that generate returns. This is how a symphony of complementary schemes could be created.

The design should avoid distortions, such as a single household receiving multiple unplanned benefits, choking labour market supply, and large portions of benefits going to the rich. For example, cash transfers and food subsidies target the same expense. Only 10% of electric subsidy was received by the bottom quantile. Further, in some states free electricity has led to wastage and more tubewells that deplete groundwater. Welfare policy must avoid these pitfalls.

The state must use the ‘Science of Welfare’ to design a welfare policy, a set of schemes, which enables wholesome welfare, short-term income smoothing, long term self-reliance, and a boosting of the economy rather than distorting it. This will not only save money for the exchequer but lead to better outcomes for the society. Given the fiscal pressure that cash transfers have created, this is a here and now question.

Cash Transfer Design

Cash transfers are not a monolith. They can differ based on the amount, frequency, time of transfer, messaging, eligibility, transfer infrastructure, and paired interventions. These can be programmed scientifically depending on the outcomes the state wants. 

Global evidence also shows that lumpsum transfers once a year as opposed to monthly, leads to more asset building vs. consumption smoothing . The name of the scheme itself can lead to different outcomes: one name could inspire using the money for the girl's marriage, while another could lead to the purchase of a bicycle for work.

Timing of the transfer matters: cash transfer before sowing season significantly increased agriculture productivity in Telangana. Similarly, transferring cash at the time of educational fee payment can have a positive impact. Using mass media communication and AI-based personalized communication can further drive specific behaviors. One must also consider the use of India’s strong governmental and non-governmental communities ranging from Anganwadi workers, Self Help Groups, etc. to soft intervene to save money, build assets and make good investments. Not to miss, scheme implementation and processes should prevent distribution friction and allow last-mile inclusions.

The state must use local context and global evidence to design good cash transfer schemes. Every state needs its own cash transfer design, based on its unique circumstances and objectives. Good design yields higher impact, a free lunch, given that the money is already committed by the exchequer.

Measurement and Iteration 

Outcomes of cash transfers include improvements in quality of life, measured by spending patterns, economic ecosystem spillovers, and long-term poverty alleviation. Each state’s local economy, context and habits determine whether and how much these objectives are met. 

Thus, the state must continuously measure outcomes and iterate on the policy. The distribution efficiency of cash transfers should be tracked at a high frequency or in real-time, and fixes should be implemented quickly. The socio-economic outcomes must be tracked at mid-frequency. New design innovations must be tested through experiments and pilots to determine policy tweaks. Not to miss, the measurement is itself a science and needs to be done in conjunction with trained economists. Multiple design experiments and outcome measurement with good science are the recipe for getting the best outcomes.

To summarize, cash transfers need to be seen in alignment with other welfare measures, they need to be designed scientifically and constantly iterated upon. We have a chance to lift millions out of poverty. The state has assigned an unprecedented budget to cash transfers. It is time to get the most bang for the buck.

(Views are personal; Pankhuri Shah is the co-founder of the non-profit, Project DEEP, and Varun Aggarwal is the founder of 'The Change Engine', an innovation ecosystem builder)