More for the Poor and Less for and by the State: The Case for Direct Cash Transfers

There are few countries where the state and the policy and intellectual community have been as committed to poverty eradication—both in terms of rhetoric and through a range of subsidies and an array of targeted poverty reduction programs—as India. In 2006–07, there were at least 151 centrally sponsored schemes (CSS), entailing annual expenditures of about Rs.72,000 crore. Of this, about Rs.64,000 crore, i.e., almost 90 percent, were allocated to thirty schemes. In the 2008–09 budget, these thirty schemes (now reduced to twenty seven due to consolidation) have been allocated nearly Rs.79,000 crore, i.e., an increase of 23 percent over two years. This is even without including other CSS that masquerade as additional central plan assistance, such as the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the Backward Region Grant Fund (BGRF). A similar amount is budgeted for food, fertilizer and fuel subsidies. Rs.32,666 crore has been allocated to the Food Corporation of India (FCI) for procuring and distributing foodgrains through the public distribution system (PDS), and Rs.30,986 crore for fertilizer subsidies (not including any fertilizer bonds that will have to be issued). If we add to this the budgeted PDS expenditure on kerosene and LPG of Rs.2,700 crore and Rs.21,554 crore of oil bonds that were issued until December 2007, the total amount of these subsidies is nearly Rs.88,000 crore. Once one adds the remaining CSS and the oil bonds for the last quarter of FY 2007–08, total expenditures on CSS and subsidies will comfortably exceed the Rs.178,765 crore that is the states’ share of central tax revenue. Is this enormous expenditure through centralized mechanisms the best way of improving the welfare of India’s poor and achieving India’s development objectives? For instance, if these budgetary trends continue, these expenditures will soon be sufficient to transfer Rs.1 crore annually to each panchayat—more than an order of magnitude of what they receive today. Might that be a better way to achieve these goals?