Conditional Cash Transfers: Proposed Policy Reform for Aid to Reach the Poor

February 20th, 201112:00 pm @


India’s social sector spending accounts for nearly 40% of the government’s total annual budget. Despite this significant investment, the number of poor—estimated by the central government to be 65 million people—has stubbornly remained the same for some years now. Not only is reaching down to these poor people difficult due to the sheer scale and size as well as gaps in the system, it is also very expensive. According to government estimates, it spends INR3.65 (~US$0.80) for every rupee it reaches down to the final beneficiary.

The Indian government is planning to address questions about the efficiency of development programs and the lack of tangible impact by piloting the conditional cash transfer (CCT) approach. CCT involves transfers of aid in the form of cash to the poor, subject to their meeting specified conditions. The Indian government will emulate several international CCT examples – Brazil and Mexico among them—in an effort to reduce the high cost of reaching aid to the poor and to ensure that the poor actually receive this aid.

The CCT proposal, currently in the pilot program stage, will replace one of the cornerstones of India’s development programs, the public distribution system (PDS), which provides poor Indians with basic food and fuel at subsidized rates. The new CCT proposal has attracted serious debate on whether such a plug-and-play approach will improve the impact of aid.

Gaps in the Current PDS

In 2008-09, food subsidies accounted for49% of the government’s spending on safety nets. If the entire amount spent on food, fertilizer and fuel subsidies were apportioned equally to all poor families in India, according to a study in Down to Earth, the poor would receive a transfer that is over the official rural poverty income line and nearly 70% of the urban poverty income line.

The PDS has been weak for several reasons. The poor receive their share of the subsidized food and fuel upon presentation of a ration card. Since 1997, the government, in a bid to make subsidies more targeted, divided people into those with above-poverty-line (APL) cards and below-poverty-line (BPL) cards. Only the latter could avail of the subsidized ration. Tampering of the BPL list is rampant, with rural and urban poor having to pay bribes to government officials to be recognized as BPL. As per one study, only about 39% of poor people have BPL cards. Without this designation, the poor cannot avail of subsidized food and fuel, often leading to malnutrition and even starvation. Other reasons for a weak and inefficient system include pilferage and theft.

Conditional Cash Transfers and the PDS

India has several public programs that work on the conditional cash transfer approach, including hospital delivery, sending children — particularly the girl child — to school and discouraging early marriage of girls. These CCT programs have been effective to some extent, and have helped the ruling party during elections. According to analysts, the government’s incentive for a girl child joining the ninth standard in school – INR2000 (~US$44) to purchase a bicycle and INR700 (~US$15) for uniforms – resulted in higher turnout of women voters during elections as well as significantly lower dropout rates of girls in the 11-14 age group in Bihar, which went from 17.6% in 2006 to 6% in 2009.

The CCT approach is being proposed as a solution to the problems in PDS. The government plans to transfer the subsidy component (market price minus PDS subsidized price) as cash to the poor through smart cards under the Aadhaar Unique Identification (UID) Program. According to the Planning Commission, this amounts to about INR8.5 (~US$0.20)per month per beneficiary.

The government’s proposal to replicate the same approach to PDS has several benefits that have an instinctive appeal. Significantly lower cost and lower administrative burden coupled with better targeting sums it up. On-ground reality, however, indicates several flaws.

The poor might appreciate cash-in-hand, but considering they are more often than not over-indebted, this money may go towards paying off a loan and not necessarily towards food. Secondly, the poor often do not have access to traditional banking systems. The cash transfer is proposed to take place through banks.  Finally, cash transfers could intensify gender bias. Male members in poor households find it easier to take control of cash and use it for activities that might not benefit the family – the women and children. Food grains and fuel are more the domain of the women, who tend to prioritize care of the family.


Fundamentally sound, this proposal aims to reduce administrative costs and corruption down the line. It has been positively received from several government departments and state governments—a coming together of views which is very rare and, therefore, indicates higher chances of the program’s success.

Digging deeper, this proposal works on the premise that the poor can decide the best use of development aid, and releases the state from responsibilities like inclusion or welfare of the vulnerable poor, such as women and children, once the cash transfer is done. Even if the cash transfer is done in the form of coupons that the poor can encash when purchasing food from fair price or government-designated stores, an informal trade of coupons for cash by the poor is very likely. Further, an inaccurate or tampered with BPL list weakened the PDS, but Aadhaar is unlikely to fix this problem. So if the new proposal is going to work with an inaccurate list, will targeting be any better and will more poor people climb out of poverty?

Cash transfers are also inflation insensitive. With the food inflation that India has seen in the past year—and is likely to do so for some time, as no steps have been taken to address them—cash transfers might not be as effective as subsidized supply of necessary food grains.

These issues point to the fact that international examples of successful cash transfer programs had certain preconditions that India must re-create. These include a strong system of identification of the poor, deeper and wider penetration of bank networks, high quality and accessible public services which can then be accessed by the poor against the cash transfer, and a strong local and community government. In the absence of these preconditions, it is likely the cash transfer program might go the PDS way – expensive, poorly targeted and low impact.

This story originally appeared in the February 2011 edition of the Searchlight South Asia newsletter created by Intellecap for the Rockefeller Foundation.

The opinions expressed on the Searchlight South Asia site are solely those of the authors and do not necessarily reflect the positions of the Rockefeller Foundation.