India's Cash Transfers for the Poor Face Early Hurdles
By AMOL SHARMA
DOHAKATU, India—Officials in this impoverished eastern Indian village have a message for local residents: the government wants to give you a bank account and plop money in it—now.
India is embarking on a dramatic shift in how it delivers welfare benefits to its hundreds of millions of poor citizens. The program, which officially begins in January and will be rolled out nationally by the end of next year, will transfer up to $58 billion in cash into the bank accounts of some 90 million households. Beneficiaries will withdraw the money using a high-tech system that verifies their identities using fingerprint scans.
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Krishna Pokharel/The Wall Street Journal
In Dohakatu village, Jharkhand, a local banking representative helps a woman retrieve her cash benefits.
Indians who now must get welfare payments at post offices—enduring waits of days or weeks and sometimes paying bribes to get entitlements—will get direct deposits in their personal bank accounts for everything from old-age pension to scholarships to salaries for public works projects.
Poor households will also get cash deposits to buy basic commodities like kerosene and cooking gas at market rates. That would replace subsidies that currently go to distributors, who are supposed to offer discounts—a system that critics say is plagued by waste and fraud.
The new payment approach doesn't create any new entitlement programs for the poor. But the ruling Congress party has trumpeted it as a signature anti-poverty initiative, hoping it will prove a masterstroke ahead of national elections in 2014. Party leaders say direct deposits will ensure entitlements get to beneficiaries instead of being siphoned off by middlemen, and are touting the slogan "Your Money in Your Hands."
Dohakatu is a village of subsistence potato and rice farmers in Jharkhand state. Its residents largely depend on government handouts to survive and it is among the handful of regions that participated in early trials of cash transfers and have a head-start in the rollout. People here are already getting direct cash deposits for a range of benefits.
"We are quite confident the cash transfer scheme will create magic in the next election," said Shahzada Anwar, a Congress party official in Jharkhand who was in Dohakatu village recently to watch locals withdraw cash.
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India's huge amount of welfare spending is a major contributor to its shaky public finances. The nation's budget deficit was 5.8% of gross domestic product in the year ended March 31. The government says the new cash deposit program can generate much-needed budget savings by eliminating corruption such as people using fake identification documents to get the same benefit twice.
To withdraw money under the program, beneficiaries must present a 12-digit unique identification number that every Indian is gradually being issued—220 million people have them so far. Then, they must scan their finger on a portable device known as a micro-ATM, which validates their identity in a national biometric database.
In Dohakatu village, Jharkhand, a local banking representative helps a woman retrieve her cash benefits."No one can falsify their identity and get away with it," Finance Minister P. Chidambaram told reporters recently. He said the efficiency gains are "incalculable."
But at least in the early going, the cash transfer project will actually be a financial drag, with $1.2 billion in estimated net losses for the exchequer through March 2015, according to a recent study by the government-funded National Institute of Public Finance and Policy. The expected savings will come in the following six years and will total about $14.5 billion, or 15% of the budget deficit in the latest fiscal year, the report says.
Transferring cash for 29 government welfare programs will be a massive administrative undertaking. The first challenge is to open bank accounts quickly in places like Dohakatu: only 40% of India's 1.2 billion people have bank accounts, and only 36,000 of India's 600,000 villages even have a bank branch. There are plans to open 73,000 new "ultra small" bank branches of about 100 to 200 square feet apiece and hire one million banking employees in rural areas, according to minutes from a government committee overseeing cash transfers.
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The micro-ATM machines depend on creaky wireless connectivity with speeds on par with the standard a decade ago in the U.S. Getting the system to work requires the intricate syncing of databases by managers of the national unique ID program, government agencies dispensing benefits, and banks. Banks have to be equipped to process a flood of new transactions in their networks. Cooking gas-related transactions alone could number 1.7 billion per year.
"The magnitude is just staggering," said R.S. Sharma, director general of the Unique Identification Authority of India that runs the national "Aadhaar" identification program. "If you start transferring money into people's accounts and don't create a distribution network, then you are in for big trouble," he said.
India took inspiration for its new approach from other big emerging economies, including Brazil, Mexico, Turkey and South Africa, which have started cash transfer programs to combat poverty and social inequality. India is targeting a far larger number of households than those countries. But its program is different because it isn't linking benefits to specific social goals. Brazil's program, for instance, gives 12 million low-income households about $30 a month on the condition that they show their children have an 85% school attendance rate and have received medical checkups and vaccinations.
About 2,000 people are participating in the Jharkhand cash transfer program now. In Dohakatu, part of Ramgarh District, locals were streaming into a ramshackle community center on a recent afternoon to withdraw cash. Among them was Riman Devi, a 51-year-old widow.
Her salary for digging wells and ponds as part of the government rural jobs program was deposited directly into her first-ever bank account that was created last month. Rather than go to a distant bank branch to access it, Ms. Devi approached an official and uncertainly handed over a card with her 12-digit ID number printed on it. He keyed the number into a micro-ATM. She scanned her finger to check her balance, and then again to withdraw her week's salary: 400 rupees, or $7. Everything checked out. The official reached into his pocket, pulled out a wad of bills and paid her. (He, in turn, gets reimbursed by the government.)
Ms. Devi said the new system beats the old approach of getting government payments from the local post office, which often wasn't open or would run out of money. "Sometimes it took two to three days to get the money. It was very difficult. It's faster here," she said. She spent some of the cash that afternoon on edible oil, spices and vegetables at a local bazaar.
The new way of paying has hardly solved Ms. Devi's problems. Her only income comes from occasionally selling homemade bamboo baskets for 50 cents apiece. She doesn't qualify for a widow's pension because the government doesn't classify her as below the poverty line. A local official says that is a mistake that will be corrected when the central government does a new poverty survey. Ms. Devi lives with her son in a mud-walled house with a bedroom that doubles as a rice-storage area. "Winter is coming and we don't have warm clothes," she said.
Sitting nearby in the village center was Vasudev Pahan, an 80-year-old whose family lives mainly on subsistence wheat and potato farming. Collecting his $7 monthly pension—which goes to low-income senior citizens—used to be an ordeal. He'd squeeze into a car with 14 people to go to a government office in a nearby town. Then he would wait in a line of as many as 400 people. Sometimes the office would run out of money or close before he could get his cash, so he'd have to return a few days in a row.
Now Mr. Pahan walks 20 minutes to the micro-ATM in the village center and withdraws cash in minutes from an account where the government has deposited his pension. "People who are getting it this way are happy," he said.
A few local Congress party officials arrived at the Dohakatu center to take stock of the action and take credit for what they already proclaim as a signature achievement. Mr. Anwar, an affable, mustachioed man with a thick shag of black hair, shook hands with some villagers before plopping into a plastic chair. "This is the strongest weapon for us," he said of the political benefits of the new program. "No one can give opposition to this."
Leaders of the Bharatiya Janata Party, Congress's main opposition in New Delhi, have criticized the Congress party for over-politicizing the initiative, but haven't attacked the idea of the new direct payments.
Glitches in technology were on display in Tigra, a group of farming villages 12 miles west of Ranchi, Jharkhand's capital. Some 39 people signed up to participate in the new program in October, but 30 of them weren't able to take out cash from the mini-ATM despite trying several times. The main problem, authorities said, was that their new bank accounts at state-owned Bank of India weren't "seeded" with unique ID information for beneficiaries—so it was impossible to verify people's identities.
On a recent afternoon, Mahmood Alam, the local banking representative in Tigra who handles micro-ATM transactions—known as a "business correspondent"—believed the problem had been solved and was setting up to give out cash to a few dozen locals. He set up his micro-ATM machine not far from men and women threshing rice crop and goats wandering in the fields.
He tapped with his stylus to enter the details of Teju Gope, a 71-year-old pensioner who has a new account with Bank of India. "Place your finger for processing," a message on the screen said. Mr. Gope swiped his finger. After a few seconds came a disappointing reply: "UID (unique ID) blocked/inactive/wrong."
Mr. Alam shook his head. "It's still not working," he said. He said he's optimistic about the new program but acknowledged the government's rushed approach has resulted in some errors. "It looks to me like everything wasn't totally ready," he said.
A.K. Pathak, assistant general manager of Bank of India, said the Tigra payments snafu is an isolated incident that has been resolved. He said the Jharkhand trials overall have gone well.
The Jharkhand government is racing to expand the program. About 19 million of the state's 32 million people still haven't gone through the sign-up process to get biometric ID numbers. In Ramgarh district about 60% of the 950,000 residents don't have unique IDs. The government is trying to prioritize people who will be getting cash transfers.
"This is a huge task for us—a technological leap forward is happening," said Amitabh Kaushal, Ramgarh's deputy commissioner, the top local bureaucrat.
Local officials say the use of biometric identification will weed out people who used aliases or fraudulent documents to get the same benefit twice. In one block of villages in Ramgarh, the government used to have 43,801 claimants in the rural job program as of the last official figure in 2006. But after a recent sign-up drive with biometrics, there were nearly 9,000 fewer people on the rolls. Mr. Kaushal said it isn't clear yet whether that discrepancy is a result of fraud removal or the normal transition of some people off welfare.
New Delhi officials are counting on the biggest savings to come from countering fraud in the subsidy programs for commodities like kerosene and cooking gas. Critics say the current system is rife with corruption. Dealers siphon off goods and sell them on the black market. People fake their way into getting benefits they don't deserve.
Food subsidies are the government's biggest welfare expense, accounting for $13.3 billion in spending in the year ended March 31. But the government left food out of the cash transfer program, wary that it is too complex and too sensitive to do now. A survey of 1,200 households last year by the Indian Institute of Technology in Delhi found that two-thirds of respondents were strongly in favor of keeping the status quo of picking up food grains at government ration shops rather than going to stores to pay market rates.
The biggest limitation of the cash transfer project, critics say, is that it won't solve the most fundamental problems in India's targeting of welfare subsidies. Biometric screening ensures that people trying to get benefits are who they say they are—and eliminates duplicate subsidies. But if a person is being excluded from benefits now because they aren't classified as below the poverty line, or is wrongly classified as eligible for benefits, nothing in the cash transfer program will detect that or change it.
Meanwhile, there are limits to the program's ability to stamp out corruption. There is no reason a micro-ATM operator can't ask for a kickback when giving people their money, just as a postal worker might, the critics say. "If you're getting arm-twisted today, you'll get arm-twisted tomorrow," said Reetika Khera, a development specialist at the Indian Institute of Technology in Delhi.
From a political standpoint, putting cash into the bank accounts of the poor would seem like "manna from heaven" for the Congress-led government, says Ravi Srivastava, a development economist who has studied cash transfers. But he said it would be "incredible folly" for the government to underestimate the challenges of executing the project, especially in such a quick time frame.
"This whole thing has raised expectations to an unrealistic level, both within government and within the Congress party," he said.
—Rajesh Roy and Krishna Pokharel contributed to this article.
Write to Amol Sharma at amol.sharma@wsj.com
A version of this article appeared December 27, 2012, on page A9 in the U.S. edition of The Wall Street Journal, with the headline: Tapping Benefits GetsEasier for India's Poor.
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