In the context of the subsidies regime in India, there is an ongoing debate on the suitability of cash transfers. With the much talked about JAM trinity – the Jan Dhan zero-balance bank accounts, Aadhar and mobile phones, it certainly appears that the state-sponsored welfare system is set to see a significant shift. While this shift may well fall short of being transformative, we could still expect an improvement in how benefits are delivered with reduced leakages to recipients. The use of the JAM model to extend the welfare net and to improve its efficiency implies a decisive move towards cash transfers, and therefore, one may be closer to settling the debate, at least in terms of favoured government policy.
But the argument in favour of cash is not new. I recently came across a 1986 United Nations University WIDER paper by Amartya Sen where he elegantly outlines five arguments in favour of direct distribution of cash in times of food crises. In this paper Food, Economics and Entitlements, Sen tackles this question in the context of a famine. First, Sen demonstrates how even in contexts where aggregate food output is plentiful, the ability of the poor to acquire this food is a whole different matter. Localised food shortages and famine-like situations can arise due to various reasons – at times when the prices of staples rise sharply, or when the prices of products the poor sell fall sharply. However, this isn’t obvious to policymakers as long as they view food sufficiency through the lens of per-capita food production alone.
When famines manifest themselves, there could be multiple policy response options. Sen talks of direct food distribution as the favoured method in those times. Three decades down the line, food relief continues to be popular in times of distress, even as direct cash transfers (as described above) are gaining ground as a favoured instrument of social welfare policy. Policy responses in these times is meant to enhance the ability of those affected, to ‘acquire’ more food. Both market-based solutions that begin with greater availability of cash, and direct distribution are potential paths to this end.
In this column, I summarise some of Sen’s key arguments, and restrict myself to one side of the debate. From the paper, here are the five advantages in distributing cash in contexts of famine, according to Sen:
- First, where state capacity is either weak or misdirected, and as a result, cannot be relied upon to distribute food efficiently, in Sen’s opinion, cash may work better by stimulating markets. In dire humanitarian contexts, resource-strapped governments (national or sub-national) may be resource strapped and not have the ability to organise the task of aggregating, transporting and distributing food.
- Second, Sen provides examples of famines (Wollo, 1973; Bangladesh, 1984; Irish famines of the 1840s) where even when food was locally available to begin with, it moved out to other areas due to a fall in local demand. Direct distribution of cash in such contexts will help enhance local demand and therefore, counter-act the external flow of food.
- Third, Sen’s claim is that cash distribution could increase demand for local trade and transport, which can set the local economy on the path towards long-term regeneration.
- The fourth point, related to the one above, is that people can use cash for productive investment that can stimulate the local economy.
- Finally, Sen makes the point that if the affected families received cash transfers, the disruption to their normal economic activities could be minimised. This would help in speedy rehabilitation of households, once the spell of economic distress blows over.
Taken together, this is a compelling argument from Sen on the advantages of using cash transfers in contexts of humanitarian distress that holds true even today. One must question the exact mechanisms through which cash transfers might lead to productive investments, especially in public goods like roads, schools or clinics. But in terms of responding to humanitarian crises, cash transfers should grow to become a prominent response strategy.
Globally, the extent of humanitarian distress continues to mount. According to the UN Refugee Agency (UNHCR), in 2014 there were 60 million people forcibly displaced due to conflict, who required humanitarian assistance. International aid budgets are stretched, and there is an urgent need for more efficient policy interventions. A recent report of a high-level panel organised by the London-based think-tank Overseas Development Institute (ODI) makes a strong case for cash transfers in tackling humanitarian disasters. They advocate for every humanitarian intervention to be benchmarked against cash transfers, thereby having to answer the questions ‘why not cash?’ and ‘if not now, when?’
This argument is also salient for India where a large part of the population continues to depend on agriculture, even as agricultural productivity and its share of national income continues to fall. By many accounts, small and marginal holders constitute 85% of India’s farmers. As a previous Mint column pointed out, the only sustainable solution to rural distress over the long run is job creation in manufacturing and services, and barring that, the largely poor and marginalised agrarian population will continue to face periods of economic distress. As Sen reminds us, a hunger crisis can occur even with our steadily increasing agricultural production and our record stockpile of food-grains, as long as our social welfare policy suffers from blind-spots of localised distress.
Cash transfers definitely have their place in the design of effective safety nets for the poor. They are probably neither miracle nor mirage, but should be seen as a work in progress. The political economy of social welfare policies mean that key questions around targeting and the levels of assistance need to be worked out and iteratively modified to suit the emerging context. Ultimately, what we should look forward to is a model of inclusive social policy that can truly operationalise the slogan of ‘sabka saath, sabka vikaas’.
This blog originally appeared on Suvojit Chattodhyay's personal blog.
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Photograph by Ray Witlin/World Bank