The cash versus in-kind subsidy transfer (e.g., food, fuel or fertiliser subsidy)[i] has generated much debate all around the globe. However, there is no clarity on which method should be adopted going forward – cash or in-kind subsidies. While both cash and in-kind transfers certainly have an important role in addressing food security, there is no consensus over whether one is better than the other. There are a number of studies that compare in-kind and cash transfers: however, the results are inconclusive. Some studies suggest that in-kind transfer is better as compared to cash transfers, while many others advocate cash transfers.

A cursory look at the issue shows that proponents of cash transfers argue that leakages/inefficiencies are reduced, procurement difficulties are avoided, as are storage and transportation costs, and targeting can be much more focused. While those advocating in-kind subsidy transfers believe that people will consume adequate amount of food grains under an in-kind transfer programme and express concerns related to cash diversion (buying alcohol or putting cash to other uses) in cash transfer programmes. Other reasons cited include inadequate rural banking infrastructure; transaction costs, which are invariably borne by recipients; two trips (at least!) – one to withdraw money and another to buy food grains; inadequate market infrastructure in rural areas; and fluctuations in prices of essential commodities, etc.

In many developing countries, governments are increasingly willing to make direct payments to poor people. Countries such as Indonesia, China, Brazil, Mexico, and South Africa have expanded their cash transfer programmes. India has also introduced cash transfers in schemes on a pilot-basis such as the Targeted Public Distribution System (TPDS), which aims at providing subsidised food grain to low-income families and aims to introduce cash transfers in many other schemes.

The Government of India, on August 21, 2015, issued the Cash Transfer of Food Subsidy Rules, 2015. These lay down the mechanisms for providing cash subsidy instead of supplying food grains through the Public Distribution System (PDS). Under the National Food Security Act (NFSA), the Union Territories (UTs) of Chandigarh and Puducherry rolled out Direct Benefit Transfer (DBT) pilots in September 2015. MicroSave conducted three rounds of assessments (baseline, mid-line and end-line) of DBT in PDS pilots in the above-mentioned UTs.

Beneficiary preference for in-kind subsidy

69 per cent and 80 per cent of the sample respondents[ii] in Chandigarh and Puducherry, respectively, do not wish to continue the ongoing cash transfers, and prefer food grain distributed through Fair Price Shops (FPS). Based on our research, we found the following reasons for such preference:

Insufficiency of subsidy amount: The current subsidy amount provided for grains does not reflect local market rates. For example, the market price of rice in Puducherry is Rs. 35 per kg while the subsidy extended under the cash transfer programme is Rs. 23 per kg. In Mahe (Puducherry), people were concerned about inflation (caused by local traders or otherwise). In Malar (Puducherry) they felt that “prices might increase after the government decides the sum of money’’. Aarti in Chandigarh said, “Prices will not be stable in the market. It will be very difficult for the government to give us the appropriate amount.’’

Transaction expenses:  Current subsidy amount does not take into account the costs involved in accessing cash from banks, including transportation, particularly for the old and infirm, and the opportunity cost of wage loss due to travel times and long waits at bank branches. Our field research in Chandigarh and Puducherry showed that the average time spent commuting to the bank and waiting for a transaction is between two and three hours. This adds up to a total cost of Rs. 145 if one were to add opportunity and direct costs.[iii]

Awareness: Low awareness about the rate of subsidy (including its calculation) and the entitlement per individual/family – which causes confusion and anxiety.

‘‘I don’t know what I am getting and what should I get, I just know that I get money every month.’’– FGD respondent, Chandigarh

Self-contribution: People tend to overlook the cost incurred by them while buying subsidised grains from the Fair Price Shop. Mentally, they do not add the amount (typically Rs. 3 per kg for rice and Rs.2 per kg of wheat) to the cash subsidy they receive, as they procure grains from the open market.

Subsidy diversion: Women expressed concerns about diversion of cash subsidy by men – the issue is pertinent to Puducherry, where a majority of transfers (> 70%) were made to the bank accounts of male heads of households. With inexpensive and easily available alcohol[iv] in Puducherry, the perception is strong that men spend a significant part of the subsidy amount for buying alcohol. This is reflected in our assessment; respondents reported that only 34% of the cash subsidy was utilised for buying food grains.

“At least if the money comes to me, I will manage the budget. If he has to withdraw it, I can be sure that part of it will go to drinks since the shop is just next to the ATM”   Female FGD respondent, Karaikal, Puducherry.

In addition to these, we also identified other beneficiary behaviours associated with cash transfers:

  • There is always opposition to and distrust of change. In this case, beneficiaries have to navigate a significant change in the way the state provides them food subsidy – there is resistance to this. This is compounded by teething challenges in the shift from in-kind to cash transfers, and the inconvenience this has caused the beneficiaries. This reflects Status Quo Bias.[v]
  • Beneficiaries tend to avoid options for which they have less or no information. In case of DBT in PDS, many beneficiaries did not know the purpose and entitlements under DBT in PDS. This gap in information flow makes them apprehensive and some of the dislike for cash transfers is driven by the lack of information – highlighting the Ambiguity Effect.[vi] For instance, in Chandigarh, many of the respondents did not know their entitlements under DBT; they were unaware of even the purpose of DBT.
  • Beneficiaries do not consider benefits of cash transfers and tend to forget the problems (of inferior quality and delivery of less quantity than allocated; long queues; and bad behaviour of FPS owners) faced under the earlier system of food grain distribution through FPS. The issues under cash transfer seem larger even as challenges of the earlier in-kind system seem to be forgotten – a classic case of the Recency Effect.[vii]
  • 69 per cent and 87 per cent of the sampled beneficiaries in Chandigarh and Puducherry, respectively, say that the current cash transfer is insufficient to purchase 5 kg of food grains per family member. While this points towards a subsidy calculation system that appears to be flawed, it also points towards some interesting behavioural aspects of clients. Beneficiaries tend to ignore cash contribution that they had to make in the earlier in-kind system, to buy grains. This shows Tunnelling.[viii]

Some of the above-mentioned challenges – real or just perceived, can be addressed through improvements in service quality of the DBT delivery mechanism and raising beneficiary awareness on scheme features. However, it is imperative for beneficiaries to have access to a regular market close to their residence if cash transfer for food is to be successful. Most of the concerns for cash transfers are because of lack of/less information, and poor rural banking infrastructure. These concern areas need to be worked upon effectively so as to gain wider reach and acceptance for cash transfers.

[i] Targeted Public Distribution System (TPDS) is an Indian food security system. It distributes subsidised food and non-food items to India’s poor. This scheme was launched in India in June 1997. Major commodities distributed include staple food grains, such as wheat and rice, sugar, and kerosene, through a network of fair price shops (also known as ration shops) established in several states across the country.

[ii] MicroSave undertook a study to better understand the implementation of DBT in PDS for the MoCAFPD and sampled 3,805 beneficiaries in Chandigarh and Puducherry.

[iii] Based on focus group discussions in Chandigarh (calculated off Chandigarh’s minimum wage of ~INR 340 for 8 hours of work).

[iv] Puducherry figures in the Top 5 amongst biggest beer, wine and refined/ foreign liquor drinking states and UTs nationwide, as published in 2011-12 consumption data from National Sample Survey Office, India, and quoted as “India’s biggest drinkers”, in a report published in The Hindu, August 23, 2014.

[v] Status Quo Bias: The tendency to defend the status quo. Existing social, economic, and political arrangements tend to be preferred, and alternatives disparaged sometimes even at the expense of self- or group-interest.

[vi] Ambiguity Effect: The tendency to avoid options for which missing information makes the probability seem “unknown”.

[vii] Recency Effect: The tendency to weigh recent events more than earlier events.

[viii] Tunnelling: Devoting a great deal of bandwidth to a single scarce resource, while neglecting other things to make space for the focus.

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