The pot-holed road

Thoughts about India, the United States, and occasionally, the world at large.

The problem with direct cash transfers

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The recent Budget has talked about moving away from subsidies to direct cash transfer as a way of eliminating leakages and better targeting. Rupa Subramanya Dehejia has a post in WSJ that examines the case for direct cash transfers as an alternative to the subsidy route. The article “The Case for Direct Cash Transfer” is available at this link:

This is a comment I have posted wherein I point out the obvious problem with direct cash transfers.

  • 5:46 pm March 7, 2011
  • Ranjan Sreedharan wrote:

Here is one problem with the direct cash transfer that has not been talked about so far. Entitlements that put income into the hands of beneficiaries without simultaneously making a claim on their time (in other words, money that comes in for free, without doing anything, even going through the motions of work) would more likely end up in unproductive uses.

Take the example of Kerala. In the last five years that the communists have been in power, government spending on welfare has shot up and so has alcohol consumption. Figures from the State Beverages Corporation (the government liquor monopoly) show that sales have more than doubled during this time. And you only have to look at the profile of the people queuing up in front of these stores to figure out that much of this increased consumption comes from the poorest.

Similarly, a comparison of the alcohol consumption figures in the US with Europe would indicate that alcoholism is much more rampant in Europe than America, and I believe this would have strong link to the higher levels of welfare handouts in Europe. Easy money always gets spent more easily and there is nothing “paternalistic” about this common observation.

Interestingly, by this logic, the NREGA, for all its flaws, would work better because the money here has to be “earned” and to that extent, it is a check on profligacy.


Written by Ranjan Sreedharan

March 7, 2011 at 6:21 pm

Posted in Uncategorized

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