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8/13/2019 Chakravyuh Expert Amateurs

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[Document Title]

Experts Amateurs

Kunal Delwadia

[email protected]

8191898029

Varun Kumar Srivastava

[email protected]

8191898125

Chanchal Chakrachattari

chanchal.pgp2013@iimkashipur.

ac.in

8191898083

IIM Kashipur
mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


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Confluence 2013, IIM Ahmedabad 2

Expert Amateurs

IIM Kashipur

9thNovember 2013

Aap ka Paisa aap ke haath: A Step in Right Direction?

In present age, technological advancement and innovations are playing increasingly important role in our day-

to-day lives. But, in the mean time, governments move to link the technology to transfer cash directly into

beneficiaries account has sparked much debate. Some people argue that Direct Cash Transfer (DCT) will

fundamentally benefit the below poverty line population bringing more transparency and reducing leakages in

economic cycle in India, many contend that if this is the governments prime objective, planning should start

from grass-root level and not otherwise. Dr Manmohan Singh on 19 thDec 2012 quoted: The twin pillars for

the success of the system of Direct Cash Transfers that we have envisioned are the Aadhaar platform and

financial inclusion. If either of these pillars is weak, it would endanger the success of the initiative. (Money

life Article)

UID (Unique Identification Number) project started under the leadership of Mr. Nandan Nilekani with many ifs

and buts. First came the proposal for the drastic cut in budgetary allocations for the UID from Rs7500 crore to

Rs 4500 crore, which meant only 10 crore UIDs will be possible against 60 crore planned. Moreover, lagging

experience of invisible hands of GOI (External Agencies), safety parameters assumed for biometric, insufficient

infrastructure facilities and methodology had been making the process of the UID Project relatively slow.

Although, GOI launched DCT successfully in selective districts in January 2013, it may not be indicative of the

same performance in the remaining non-literate geographical areas.

On the other hand, to support direct cash transfer, Congress-led UPA II steps in financial inclusion of over 40%

of the Indias 25 crore population, which still do not have any dealings with banks under the banking network.

Moreover, theres a lotof pressure from the government on the banks in semi-urban and rural areas to open

accounts within the timelines to support DCT, in order to escalate the process and gain political trust among the

people for the general election to be held in 2014. DCT scheme is a faster way to implement the government

and banks goal to cover unbanked villages. Alongside, RBI has opened another flank in the assault on banking

and financial inclusion by making it mandatory for banks to have 25% of their branches in unbanked areas.


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Although, RBIs definition of financial inclusion mandates a bank to offer at least four services such as saving

account with an overdraft facility, business loan, remittance facility and an insurance-cum-retirement benefit

product, today, for the purpose of cash transfers, banks are offering merely a bank account. At present, only 5%

of no-frill account holders access more than two banking products, the most common being savings account

and remittances. The financial inclusion program is different than polio campaign because banking has two-

way relationship with several changing dimensions. Despite the prevalent issues such as lack of banking

network, delay in Aadhar UID project, lack of infrastructure, inadequate fund allocations, lack of experience

etc. DCT scheme has a huge hope and impact on Indias economy and fiscal consolidation.

Source: Cash Transfers: Merits and demerits, The Economic Times, 26thFebruary 2013


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Under the DCT, the difference between the market price and subsidized price is directly transferred into the

beneficiaries account in the form of cash in proportion to the quantity uplifted from the market. In the union

budget 2011, the GOIs announcement had a drastic departure from the existing indirect or price subsidy

system wherein subsidies are routed through manufacturers who are required to sell goods below the market

rate. The changes in policy will address the issues related to current indirect subsidy policy such as dual

pricing, market distortion, unresponsive attitude towards customer needs, poor targeting of BPL population,

diversion and leakages, and under-recovery of Oil Manufacturing Companies (OMCs). This would help poor

people access to basic goods by reducing demand constraints.

Moreover, manufacturer, retailers and petroleum product manufacturer will sell on market rate, which will

encourage competitive market space and open the doors for private player. OMCs will be able to address losses

on their balance sheets. Therefore, by reducing the black market of these petroleum goods, more accountable

and taxable money will pump in to the economy, and hence a healthy economic climate and liquidity will be

created for the growth of the country. In addition, it will eliminate the middlemen from the picture and will

show governments intention to address corruption issue. It is learnt that the government can save up to Rs

20,000 crore a year as it will plug the porous distribution system that helps the middlemen. Hence, government

of India will gain political trust from the society.

The scheme, once nationally rolled out, envisages transferring as much as Rs 32,000 in cash on an average into

the bank account of each beneficiary family or a total of Rs 3.2 trillion per annum.

Secondly, DCT scheme will also definitely help the government to consolidate fiscal deficit due to heavy fuel

Subsidy burden (Petroleum products such as Petrol, diesel, kerosene etc.). And this fiscal consolidation will

help to revive the Indias economic growth.The new system is expected to reduce the cost and

subsidy bill through better targeting (Reaching out to the real beneficiary through AADHAR card). In

addition, GOIs target is to keep subsidy under 2 pc of GDP and under 1.75 pc of GDP in next 3 years.

Moreover, government endeavours to scale up and roll out Aadhar card enabled payments for various

government schemes in at least 50 districts within 6 months. PSU oil manufacturing companies have launched

transparency portals by introducing KYC (Know Your Customer) norms into the system to improve customer

services and reduce in leakages.


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On the other hand, some section of the population argue that the government should be efficient in dealing with

the fundamental issues of targeting the BPL population by clearly stating the definition of below poverty line so

that there could be proper identification of intended beneficiaries, in order to effectively subsidize the price of

fertilizers and kerosene, once the market price is determined keeping into account the fluctuations prevalent in

the international market. Devising a methodology to transfer the cash subsidy to the poor also remains an

important issue to be focused upon.

Last but not the least, the GOI must participate and encourage state governments to indulge in taking up

fundamental reforms required in public distribution system. There is a perception that majority of the male

member of these beneficiaries householdsare alcoholic; therefore, money transfer through DCT will be wasted

to buy alcohol. However, the issue can be sorted out by transferring the cash into the female beneficiary of the

household, so that the money is not used for gambling and drinking habits of the male beneficiaries.

However, to successfully implement the DCT, selection criteria should be broadened as well as inclusive, and

should refer to some successful models already implemented in countries similar to us such as that of Brazils

Bolsa Familia Program. Below are few of the points which could be implemented for the smooth

implementation of the project:

1) The prices can be averaged out yearly based on forecasts.

2) Government should allow flexibility in cash subsidy to choose the commodity for the beneficiary.

3) The amount of subsidy must be calculated on the basis of the actual household rather than assuming average

household beneficiary.

4)Bank accounts should be opened for one member per household to limit the time constraints on the project

completion.

5)The withdrawals can be done at ATMs and branches through the business correspondent model using smart

cards, PoS devices etc.

All in all, it is increasingly challenging days ahead for the government which includes increasing the

technological interface in rural and semi urban areas, proper implementation of public distribution system,

eradication of poverty from India, reducing the subsidy burden on petroleum products and most significantly to

bring the fiscal deficit within the desirable limit to revive countrys GDP (Gross Domestic Product) growth rate


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and attract foreign fund to invest in India. In recent times, government has shown some sign to address these

issues by introducing the direct cash transfer scheme. It is taken as a positive signal by the financial credit

agencies, economists and the equity market. Hence we firmly believe that the government is on the right side of

the road map to increase the growth of the country.


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Works sited

http://www.moneylife.in/article/will-the-direct-cash-transfer-scheme-benefit-the-common-man/30575.html

Accessed on 8, November 2013, 9.32 PM

http://articles.economictimes.indiatimes.com/keyword/cash-transfers,accessed on 9thNovember 2013, 3.30 PM

http://www.slideshare.net/youthkiawaaz/direct-cash-transfer-scheme,accessed on 8thNovember 2013, 9.50 PM

http://www.kpmg.com/in/en/issuesandinsights/articlespublications/kbuzz/pages/gov.aspx,accessed 9th

November 2013, 4,32 PM.

http://www.thehindu.com/news/national/direct-cash-transfer-will-not-lead-to-misuse-

montek/article4765816.ece,accessed 8thNovember 2013, 5 PM

http://www.thehindu.com/news/national/13-central-schemes-under-dbt-for-direct-cash-transfer-

minister/article5048840.ece,accessed 8

th

November 2013, 9 PM

http://forbesindia.com/article/real-issue/direct-cash-transfers-what-money-can-buy/35525/1,accessed 8th

November, 10 PM

http://economictimes.indiatimes.com/topic/direct-cash-transfer-scheme, accessed 8thNovember, 11 PM
http://www.moneylife.in/article/will-the-direct-cash-transfer-scheme-benefit-the-common-man/30575.htmlhttp://articles.economictimes.indiatimes.com/keyword/cash-transfershttp://www.slideshare.net/youthkiawaaz/direct-cash-transfer-schemehttp://www.kpmg.com/in/en/issuesandinsights/articlespublications/kbuzz/pages/gov.aspxhttp://www.thehindu.com/news/national/direct-cash-transfer-will-not-lead-to-misuse-montek/article4765816.ecehttp://www.thehindu.com/news/national/direct-cash-transfer-will-not-lead-to-misuse-montek/article4765816.ecehttp://www.thehindu.com/news/national/13-central-schemes-under-dbt-for-direct-cash-transfer-minister/article5048840.ecehttp://www.thehindu.com/news/national/13-central-schemes-under-dbt-for-direct-cash-transfer-minister/article5048840.ecehttp://forbesindia.com/article/real-issue/direct-cash-transfers-what-money-can-buy/35525/1http://forbesindia.com/article/real-issue/direct-cash-transfers-what-money-can-buy/35525/1http://www.thehindu.com/news/national/13-central-schemes-under-dbt-for-direct-cash-transfer-minister/article5048840.ecehttp://www.thehindu.com/news/national/13-central-schemes-under-dbt-for-direct-cash-transfer-minister/article5048840.ecehttp://www.thehindu.com/news/national/direct-cash-transfer-will-not-lead-to-misuse-montek/article4765816.ecehttp://www.thehindu.com/news/national/direct-cash-transfer-will-not-lead-to-misuse-montek/article4765816.ecehttp://www.kpmg.com/in/en/issuesandinsights/articlespublications/kbuzz/pages/gov.aspxhttp://www.slideshare.net/youthkiawaaz/direct-cash-transfer-schemehttp://articles.economictimes.indiatimes.com/keyword/cash-transfershttp://www.moneylife.in/article/will-the-direct-cash-transfer-scheme-benefit-the-common-man/30575.html

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