Is the solution to poverty as simple as giving a little bit of money to a large number of people? We may be about to find out. On New Year’s Day, India, the world’s largest democracy, launched what may become the most ambitious anti-poverty program in history. Called the Direct Benefit Transfer (DBT), the initiative will directly provide cash to poor families — at first more than 200,000 people, then potentially hundreds of millions — via the banking system. India’s finance minister has described it as “nothing less than magical.” While there is no “magic” solution to development, DBT could revolutionize assistance to India’s roughly 350 million people living on less than 56 cents a day, the country’s official poverty line.
The move to a cash benefit program comes after decades of hand-wringing about India’s huge and wasteful system of in-kind subsidies. The government spends roughly $14 billion a year, or nearly 1 percent of its GDP, to buy food, fertilizer, and petroleum and distribute them to stores, where the eligible poor can purchase them at discounts, or to government offices, where products are handed out.
This outdated and inefficient system has been used for decades, largely because most of India’s poor lacked proper identification or bank accounts. But confusing rules on eligibility, poor administration, and corruption have made it a failure. A 2010 Asian Development Bank study found that not only did the subsidies bring little reduction in poverty, but shockingly, 70 percent of the beneficiaries were not even poor. A 2008 study by the University of Pennsylvania’s Devesh Kapur found that if the money spent on in-kind transfers in India were transferred directly India’s poor, it would lift them all out of poverty for that year.
And India’s poor really do need the leg up. In 2001, 54 percent of all Indian children were stunted; despite a decade of rapid economic growth that saw per capita income expand from $460 to $1,489, this number has only dropped to 48 percent. Twelve percent of children work. Roughly a fifth of girls are married by age 15. India’s long-term economic growth cannot be sustained without improving living standards for the poor.
Opposition politicians, however, are complaining that the government is moving too quickly. Sharad Pawar, the minister of agriculture and president of the opposition Nationalist Congress Party, mentioned problems with eligibility regarding outdated poverty lists; his party allies have said that because the documents are “based on old lists, half the poor will be written off.” Others accused the government of enrolling beneficiaries only in districts that support the ruling party. The government has very slowly started phasing out parts of the in-kind subsidies program, but the current scale of the DBT might be too small to generate the bureaucratic momentum and visibility necessary for lasting policy change.
The new system will nonetheless be a huge improvement over the old. The simplest reason: Direct cash transfers work. In diverse settings, poverty-targeted cash benefit programs have been proven to reduce poverty, improve child nutrition, increase school attendance, and increase the purchase of productive assets such as fertilizer and tools. Evaluations of large cash transfer programs in Ethiopia, Kenya, and Malawi show that the programs can be effective in increasing consumption, schooling, and nutrition. And a soon to be published study by Tufts University professor Jenny Aker shows that cash transfers in the near anarchic Democratic Republic of the Congo are both cheaper and better spent by the poor than in-kind subsidies.
While cash benefit programs are not perfect, innovations introduced around the world have boosted their success rates, and India’s new biometrics-based ID system makes a cash-based benefit program especially promising. The system assigns a unique number to Indian residents based on physical traits. Unlike many national identification projects, India’s does not require proof of citizenship or an application fee — barriers to entry that can exclude the poor. As of December 2012, 240 million Indians have received an ID number that allows cash-transfer payments through the banking system. It’s unknown what percentage of that group qualifies for assistance (and only 21 percent of Indian poor currently have bank accounts), but as expansion continues it will reach more and more of the country’s poor.
– Jordan N. Hunt