Direct Cash Transfer Through Aadhaar Economics Essay

3276 words (13 pages) Essay in Economics

5/12/16 Economics Reference this

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Direct Cash Transfer can be a important part of social policy for the future, declining poverty, economic instability income inequality, while boosting economic growth in low income areas. This year 2013 started with the announcement of the first phase of Direct Cash Transfer Scheme rolled out in 20 districts of the country. Now it only covers 7 schemes. Previously decided for 51 districts. The implementation of scheme has generated a debate in the country on the impact of this scheme & its implementation. The scheme in different forms has been implemented in many countries in the world. The cash transfer has existed in India too as in case of payment of scholarships, old age pension. But the importance of the step lies in the fact that the government has for the first time decided to experiment this scheme to keep check on corruption. There will be transparency in the system.

Close to 25-30% people in India live under poverty who need economic support. However, social programmes which are now intricately linked to economic sustenance of the poor & ensuring health & education to all through inclusive growth is in danger due to leakages & corruption in getting benefits to the real ones who need it, not to the wrong ones. The Direct Benefits Transfer (DBT) scheme is very much important because it has taken up the challenge of defining a new social security structure, & has high potential. It would be incorrect that the implementation of DBT indicate cutting down jobs in the public services. On the other hand, it would free up resources which can be used for the provision of more extensive & better quality public services. National Institute of Public Finance & Policy(NIPFP) has done study & estimated that linking of AADHAR with DBT for major programmes of the government such as MGREGS, Food & Fertilizer subsidy, SARVA SHIKSHA ABHIYAN can lead to huge savings which can be used for other programmes.


The DBT is the real tool against corruption & that keeps check on corruption if it implemented properly. Our nation has many social welfare schemes but problem is in its implementation. If this scheme implemented properly, there will be definitely chances of unwanted money spending & it can be used for other schemes. The Government of India has announced DBT initiative with the aim of ensuring better & more timely delivery of benefits to the people. This mark a paradigm shift, where the State is explicitly taking responsibility to ensure that welfare schemes & basic entitlements reach the intended beneficiaries much more effectively than at present.

Functions Of DBT-

The DBT programme aims that entitlements & benefits to people can be transferred directly to them through biometric based Aadhaar linked bank accounts, thus reducing several layers of intermediaries & delays in the system. The system will allow actual disbursements to take place at the doorstep of the beneficiaries through a dense, interoperable network of business correspondents (BCs) using biometric micro ATM machines. Thus, the yardstick of success is not going to be that the money has reached a bank accounts, but that it has reached the hands of the intended beneficiary- a student, a pensioner, a widow, an elderly person, a disabled person, a poor family.


According to a study by National Institute of Public Finance & Policy (NIPFP) substantial benefits would accrue to the government by integrating Aadhaar with schemes such as PDS, MNREGS, Fertilizer & LPG subsidies, as well as housing, education & health programmes. The benefits arise from the reduction in leakages that occur due to identification & authentication issues.

The study estimates the leakages due to identification & authentication errors, i.e. the existence of duplicates & “ghost” beneficiaries. Any reduction in leakages is considered a benefit, the money can then be utilized for its real purpose, that is for the targeted beneficiaries, or if the reduction in leakages leads to a reduction in the overall government expenditure required for the respective scheme, it is a benefit because the money can then be utilized in other programs.

Public Distribution System (PDS)

The PDS system is envisaged to provide food to 65 million households. Studies report large leakages & diversions of subsidised food grains. According to reports almost 58 percent of the subsidised foodgrains issued does not reach targeted beneficiaries. One of the reason is identification errors in the PDS delivery system. These errors may be due to many reasons. Example, beneficiaries may be non-existent, or may be duplicates. This study relies on the conclusions drawn by the study conducted by the planning commission in 2005 concerning the PDS. It is estimated that diversion of subsidised grains to non-existent beneficiaries at 16.67 percent. It is assumed that utilising Aadhaar in PDS can help in combating this component only.

The estimate is adjusted downwards by 25 percent to account for improvements in the system that may have taken place since the report was published. Thus, the benefit through reduction in leakages assumed is 12.5 percent of the subsidy.

According to official data the total food subsidy for the year 2010-11 was Rs 58,500 crore. The value is adjusted downwards by 30 percent to account for subsidies in the form of back-end costs, which are not consumer subsidies, for which exact data is not available.

The expenditure on kerosene subsidies in 2010-11 was around Rs 19,600 crore out of which 38 percent of PDS kerosene does not reach intended recipients. The estimated leakage is 11.1 percent of the subsidy. Again, the estimate is adjusted downwards by 25 percent to account for improvements in the scheme since the study was conducted. So, the benefit from integrating with Aadhaar is assumed to be 8.3 percent of the value of the expenditure on PDS.


The MNREGS programme is envisaged to provide 100 days of employment to all rural households. The cost of wages under the scheme constitutes about 70 percent of the total scheme expenditure. In 2011-12, the wage expenditure bill of the government was to the tune of Rs 24,864 crore. In order to ensure that this money reaches the intended beneficiaries, the MNREGS guidelines stipulate various transparency & accountability measures in the form of measures in the form of issuance of job cards, maintenance of muster rolls, monitoring & implementation systems & regular social audits. Despite these measures, studies indicate that implementation problems have been encountered in various states.

A key problem with the implementation of MNREGS is diversion of funds, through ghost beneficiaries & inflated/ fake work records. Using data from various surveys, it is estimated that a leakage of approximately 12 percent is being caused to the government on account of ghost workers & manipulated muster rolls. Study assumes that 5 percent of leakages can be plugged through wage disbursement using Aadhaar enabled bank accounts & 7 percent through automation of muster rolls.


Sarva Shiksha Abhiyan (SSA) & Mid-day Meal Scheme (MDM) are the government’s flagship programmes in the field of primary education. Under SSA, the government pays for schooling, teacher’s salaries, textbooks & uniforms for children. The MDM programme addresses the nutritional requirements of the students through provision of cooked meals. The allocation of benefits under these schemes is on the basis of enrolment figures provided by each state.

The introduction of MDM & SSA is noted to have contributed greatly to improved enrolments in schools. But the government has to face losses in the form of wasteful expenditure & leakages arising due to inflated enrolment data. Aadhaar can help address this concern by providing a robust tracking mechanism to monitor the enrolment & attendance of students. On the one hand this will help address the problem of inflated enrolments of fictitious students & on the other, it will allow for real-time monitoring of the benefit distributions using attendance records. The study assumes that the integration of Aadhaar with MDM scheme in the manner contemplated above will enable the government to save approximately 10 percent of costs that it currently incurs on the schemes.

To estimate the benefits of integration with Aadhaar, the expenditure for teacher’s salaries, books & uniforms is taken as Rs 16,491 crore in 2011-12 & for MDM, it is taken as Rs 9,128 crore in 2010-11 of which 85 percent of the value is accounted for administrative expenses.


The government prescribes the maximum price at which fertilizers will be sold. Those prices are usually lower than the cost of fertilizers or the cost of importing them. In 2010-11, the entire subsidy bill for fertilizers amounted to about Rs 62,301 crore.

The task force on Direct Transfer of Subsidies on Kerosene, LPG, & Fertilizer has proposed a three phase process of moving towards direct transfer of subsidies into the bank accounts of the beneficiary farmers. Once this process has been implemented, it should be possible to directly transfer the subsidy amount into the bank account of the farmer, when the farmer buys the fertilizer. There are no comprehensive studies on the losses due to leakages & inefficiencies in this subsidy schemes. Using the estimates for PDS & MNREGS as benchmarks, the study assumes that using such an Aadhaar enabled system would result in a benefit of 7 percent of the total value of subsidies.


The government subsidises the rate at which LPG cylinders are sold to household consumers. The subsidy is not meant for commercial use. There are reports of widespread diversion of LPG cylinders towards commercial use & other forms of leakages in the system. The total subsidy bill for the government in the year 2009-10 on LPG was Rs 16,071 crore.

Though there are reports of raids finding extensive use of subsidised LPG cylinders for commercial purposes. There are no comprehensive studies documenting the extent of leakages & diversion. But study assumes that use of Aadhaar would result in a benefit of 10 percent of the value of subsidy.


Since the transfer of benefits for scholarships, pensions etc takes place through bank & post offices accounts in these cash transfer schemes, the study assumes that Aadhaar-enabled accounts will result in a benefit of 7 percent of the value of the transfer.


A number of the scholarships scheme have been put in place by the government to support meritorious students belonging to disadvantaged backgrounds. Disbursing payments through Aadhaar-enabled bank accounts will make the process more efficient & prevent funds from being diverted to bogus bank accounts. The aggregate government expenditure of Rs 4,519 crore on various scholarship schemes has been used to compute the cost savings through integration with Aadhaar.









Roll out(%)
























































(Rs Crore at constant prices)

As one can see, the data (although it is projected ) shows that if Government will implement DBT , there will be transparency, keeps check on corruption & most important The beneficiary gets his/her RIGHT. That means AAPKA PAISA , AAPKE HAATH.


The direct transfers to the poorer section of the society to meet the basic necessities such as food, health, education etc in life will certainly bring down poverty & inequality in India. There are evidences of success of conditional cash transfers in Latin American countries, particularly in Brazil & Mexico. The DBT programmes in Latin America have been lauded & followed in other developing countries.

Already there are studies (such as Veras et al, 2007) showing that cash transfers in Brazil through Bolsa Familia programme DBT had substantial impact in reducing poverty & inequality between 1995-2004. The study reports that cash transfer welfare scheme led to increased income of 80 percent Bolsa Familia households during this period.

Money in hands of poor people will enable them to buy from markets & may widen their choices of goods & services. It is also argued that the money flowing to rural areas will create its own market & economic activities. Though initially the administrative cost would be huge in putting together the proper infrastructure required for DBT to be effective, the experiences of cash transfer schemes in Brazil & Mexico reveal that the cost would substantially decline in subsequent periods. The best part of DBT would be less corruption as there is hardly involvement of middlemen in the process.

Cash Transfer schemes which are quite successful in Brazil & Mexico cover very limited population to be covered. Moreover, the total population of Brazil & Mexico together is around

1/3rd of India’s population. Infact, the targeted population under cash transfers scheme in India is much more than the total population of both countries. The conditions & necessary infrastructure in these Latin American countries & in India are very different. For example, bank branches per one lakh population in Brazil & Mexico are 14 & 15 respectively where as it is 10 in case of India. The success of cash transfers depends on the literacy & educational level of the people. The adult literacy in Brazil & Mexico is 90 percent & 95 percent respectively where as it is 75 percent in India.

Brazil has introduced Bolsa Familia cash transfer system since 2003. Though the impact numbers vary from study to study, the achievements in reducing poverty & inequality is substantial. The cash transfers with conditions such as attending school & children vaccinations have substantially improved school attendance & reduced infant mortality. Brazil spends only 1 percent of GDP on cash transfers which serves many purposes such as improving education, health & reducing poverty. Since the payment is made directly to the beneficiary’s bank account, substantial money is reaching the poor.






Size & frequency of transfer

The cost of program was US $ 2.3 billion (excluding the organizational & administrative cost), around 25% of the amount saved from subsidy reduc


The reform act stipulated that at least 50% of the savings from removal of subsidy be used to compensate households for the price rise.

The amount of transfer varies depending on the status of the recipient households.

Transfer is made every 2 months.

Energy component was added in the scheme in 2007 & amount was US $ 4.6, which is 18.4% of the energy expenditure of beneficiaries


Energy compensation card issued-

Payments were made in 2 instalments

The disbursement was either directly or through community leaders.

Post offices used for delivering transfers

Transfers were made directly into specially created bank a/c s

Banking infrastructure was expanded & upgraded to facilitate transfer.

Transfers were initially made in cash through dedicated distribution centres. Later programme shifted to debit cards.

Transfers are made to feamale head of households.


Cases of illegal diversion of funds towards no eligible beneficiaries were reported.

Absence of dedicated complaint registration unit for the programme

No formal model introduced, but there seems to be a proactive response from government in addressing problems

Presence of independent impact evaluation protocol in the OPORTUNIDADES program.

Rapid assessment have been carried out at key stages


Indonesia –

The government had a public relations campaign alongside the introduction of the programme in 2005.


Regular publication of question & answer by the media.


The government has a communications strategy that includes regular publications of questions & answers.

India for First time

Social Ad campaign

Use of TV & Radio as the medium because of their reach to the masses

Publications by Government


Direct delivery of cash benefits

Reform of the existing cash transfer schemes to send the money through Aadhaar-enabled bank account. This kind of reform requires the beneficiaries to have easy-to-accesss bank accounts, & the scheme’s management needs to align itself with bank’s transaction processing system.

Direct delivery of non-cash transfers

Transfer of non-cash benefits using Aadhaar based authentication. This type of reform requires development of Aadhaar based authorization at all outlets, & integration of back-end databases.


Centre- State coordination

Most of the schemes have the state governments playing main role in implementation. To ensure there is adequate coordination between the reform plans & state-wise implementation is a significant challenge. There is a possibility for states to make changes to what the centre might propose.

Partial coverage of Aadhaar

Till date, Aadhaar numbers have been provided to a quarter of population. If there are parts of nation where DBT are implemented , but Aadhaar enrolment is not universal, some beneficiaries get excluded. This we have to overcome.

Inadequate development of the banking channel

Wherever direct cash transfer is involved, the main role of delivering the transfers is played by the banking channel.

Challenges in that-

Only about half the population has bank accounts, & the coverage of the banking channel is far from adequate. Majority villages do not have conveniently located banking service points to transact. Reserve Bank Of India (RBI) has done some reforms to ensure that since traditional bank branches are not viable in most rural areas, business correspondents of banks be made available universally. RBI has also pushed for zero-balance no-frills accounts.

There are infrastructure gaps that impede the development of banking networks in some remote geographies.

Connectivity is poor, cash movement is risky, & it is difficult to ensure timely delivery of benefits.


With political polls around the corner, that is 2014 election,

UPA 2 has taken decision to implement this Direct Benefits Transfer scheme to woo AAM AADMI. Whether it will be beneficial for UPA 2 to again win the confidence of common people. But Congress party has denied all allegations saying this Direct Cash Transfer was in the manifesto of 2009 elections & at this time they have played their part.

Yes, this scheme will be of great importance as todays world is of Technology, obviously we as a nation has to keep pace with technology, that’s beneficial for a country to progress. As we see information / data from other countries which are implementing this scheme definitely proved beneficial to reduce poverty. The biggest advantage will be corruption reduction & there will be transparency in the system. Also Nation will save much money if it is implemented properly. And that money will be useful for other social purpose.

That’s why this the Most ambitious scheme for all of us.


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