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Mainstream, VOL LI, No 10, February 23, 2013

Direct Cash Transfer: Who Does It Benefit?

Tuesday 26 February 2013, by S G Vombatkere


The following article was written sometime back but could not be used earlier due to unavoidable reasons.

Direct Cash Transfer (DCT) of subsidy to domestic LPG consumers starts on February 15, 2013, when LPG agencies will supply LPG refills on upfront cash payment of the full (unsubsidised) cost of the refill. The subsidy amount will be credited to the consumer’s bank account based on the consumer’s UID-Aadhaar number provided to the LPG agency and the bank. DCT is enabled by implementing the IT regime, centred on the UID-Aadhaar project.

The main problem with DCT is that low-income, hand-to-mouth people, who have difficulty finding ready cash even for the subsidised cost, cannot find the cash to pay the unsubsidised cost upfront on delivery of the LPG cylinder, unless they obtain a loan from some source. When the cost of Rs 950 per cylinder is a whopping 10-20 per cent of their monthly income, their source of ready cash is their employer or the local moneylender or the slum lord, all of whom extract extra work or heavy interest or some other liability from them. Thus the DCT scheme does them little, if any, good. On the contrary, having to make multiple trips to the bank to verify the subsidy credit, withdraw the amount and repay the loan, means time away from work that they can ill-afford. [Note 1]

Hitherto, when consumers paid only the subsidised cost on delivery, the oil marketing corporations (OMCs) accounted for the subsidy in their books. But with the introduction of DCT, the cash subsidy passes through the banking system. The hand-to-mouth segment, which had no use for banks because they had no money to invest (and banks had no use for them for the same reason), is now sucked into the banking system by the DCT scheme.

Kalpana Pathak reporting from Mumbai, “Tracking your subsidised cylinder” in Business Standard, September 19, 2012, puts the total number of domestic LPG connections at 144 million in 2012, of which 41 per cent used six or less cylinders per year. Assuming that it is this 41 per cent segment that is low-income and that the subsidy per cylinder is Rs 500, the total subsidy that they would utilise would be Rs 17,700 crores (41 per cent of 144 million x 500 x 6). Thus annually, Rs 17,700 crores per year of “fresh” DCT money will circulate through banks. DCT also ensures that the subsidy provided to the other 59 per cent segment, which was already within the banking system, circulates through banks. Thus roughly, a total cash injection of Rs 4,32,000 crores (144 million x 500 x 6) into the banking system is due to DCT for LPG subsidy.
The DCT scheme, when expanded into other areas like the MGNREGA, will bring really enormous numbers of mini-micro “investors”—operating zero-balance accounts opened on the strength of their (compulsory) Aadhaar enrolment —into the banking system. The loss borne by them in terms of time and cost of travel to operate their bank accounts is obviously not a factor in the DCT system.

DCT brings enormous funds into the banking system as the “contribution” of the poor to enhance the government’s liquidity. Increased liquidity can provide funds for infrastructure projects, and loans to industrial and business corporations which will win contracts in
those projects. However, infrastructure projects (mines, irrigation projects, hydel projects, thermal and nuclear power plants, factories, roads, power transmission lines, harbours, airports, etc.) are increasingly at the cost of land and livelihood of the very poor, even of those within the DCT scheme. The DCT scheme is the logical outcome of the UID-Aadhaar project, purportedly designed to ensure that the government benefits reach the poor. The reality is that this kind of “inclusion” makes use of the poor without really empowering them.

Note 1. For an illiterate, a visit to the bank to withdraw a small sum (the subsidy) using the withdrawal slip is humiliating and time-consuming. It would take at least 30 minutes at the bank. Adding at least 120 minutes travel time from the workplace to the bank and back in urban areas, the absence from work is around three hours, not accounting for the fatigue that even well-heeled (“valued”) bank customers experience. In suburban and rural areas that have poor public transportation, the time taken may be half-a-day. The cost of travel (bus or local train) is an additional burden. Borrowing and repaying the short-term loan taken for the LPG upfront payment with usurious interest is yet another matter that only one who has lived those regular experiences will understand, but it cannot be dismissed as hypothetical.

Major General S.G. Vombatkere retired as the Additional Director General, Discipline and Vigilance in the Army HQ, New Delhi. The President of India awarded him the Visishta Seva Medal in 1993 for distinguished service rendered over five years in Ladakh. He holds a Ph.D degree in Structural Dynamics from IIT, Madras. He is an Adjunct Associate Professor of the University of Iowa, USA, and is a member of the NAPM and PUCL. He writes on strategic and development-related issues. He can be contacted at sg9kere@live.com

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