In cash or in kind?

On 1 January 2013, the Government of India started an ambitious direct cash transfer experiment in 20 districts spread across 16 states, countrywide. As part of this scheme, the government transfers cash into the bank accounts of beneficiaries of a number of welfare schemes, including educational scholarships for marginalised groups and pensions for widows. Subsidies on food, fertilisers, diesel and kerosene have been kept outside this experiment's ambit for the time being. However, there are proposals from influential quarters that cash transfers substitute the present in-kind payments in the Public Distribution System (PDS), which covers food grains and other items essential for survival. But what are the reasons for and implications of replacing food subsidies with direct cash transfers?

This move towards targeted direct cash transfers is part of a worldwide trend. Since the 1980s, developing countries have seen a shift away from universal and unconditional government-supported welfare schemes. Governments in many Latin American countries, in consultation with multilateral lending institutions like the World Bank, introduced Targeted and Conditional Cash Transfer Programmes (TCCTP) as part of larger poverty alleviation schemes. In India, the first major change in providing welfare was introduced in 1997, when households benefitting from the PDS were split into two groups – those living above the poverty line (APL), and those living below it (BPL). This was the beginning of India's targeted PDS.