The Cash Crusader

The Direct Cash Transfer scheme is a superior alternative to a virtually dysfunctional and a chronically corrupt public distribution system in India.  It has the potential to usher a new era and emerge as one of the most successfully targeted welfare measure in India with a unique ability to foster a social change through conditional cash transfers.  The triumph of this internationally celebrated scheme depends entirely on its focussed, intelligent and phased implementation and continuous monitoring at the grass root levels.  One must also note with caution that this act of cash evangelism should be seen as complementary and not as an exoneration or substitution to the responsibility of a welfare state.

1.                  The Tale of a failed Public Distribution System:

The Former Prime Minister Rajiv Gandhi is said to have made a statement that “out of every one rupee allocated for the rural areas only 15 paise reaches the true beneficiary”.   In the statement he referred to administrative cost of delivery of services and the huge leakages (including rampant and pervasive malpractices) that has become a strikingly and a sordid feature of virtually all public welfare systems in India.

Though more than two decades have passed since this rather politically incorrect statement was made His words are still true today and are largely supported by the following research data with facts that speak for themselves:

·                     There are about 500,000 fair price shops in India for universal social welfare which are universally engaged in unfair practices.  This ranges from administrative malpractices, to clandestine substitution of stock with inferior quality, to selling the produce to retailers with large number of bogus cards and to finally ‘large stock disappearances’ that puts a history sheeted burglars to shame.

·                     Even going by the records with a Planning Commission, a study released in March 2008 shows that only about 42% of subsidised grains issued by the central pool even reach the target group.

·                     Poor supervision, lack of administrative control and non-existent accountability have given a rise to a new ‘ration stock business’ in the market.  Large number of middlemen consume a large proportion of the stock meant for the poor.  Lack of clarity on the eligible beneficiaries leads to genuinely poor being excluded whilst the ineligible get several cards.

India has the largest stock of grain in the world besides China, the government spends Rs. 750 billion ($13.6 billion) per year, almost 1 percent of GDP, yet 21% remain undernourished and over 400 million people sleep hungry every night. 

So what should one do to correct the monumental inefficiencies and pervasive corruption in the Public Distribution system in India?

One answer is reforms.  Reform Everything.  But then Reforms are a costly business.  Surely any reforms like better administrative control to PDS, better supervision, end to end computerisation, tracking online stock levels would all have huge capital and revenue costs associated with it which again dilutes the benefit to the poor by increased cost of delivery.  Then there is also no assurance of it not being circumvented or abused in future.

A cheaper and a faster alternative is to deliver the equivalent cash right to the bank account of the beneficiaries by exploiting the colossal power of information technology using biometric identifications.  Enter the Direct Cash Transfer Scheme (‘DCTS’)

2.                  Direct Cash Transfer Scheme (‘DCTS’) through ‘Aadhar’

International organizations and experts from United Nation Development Programmes and International Labour Organization and economists had always argued that the Cash Transfers are better than transfers in kind given the administrative bottle necks, malpractices and leakages that prevail in the developing economies.

The thematic foundation for the DCTS was laid in the Economic Survey 2009-10 which delineated a radical shift in the governmental thinking that the poor can be helped directly by cash than indirectly through subsidising the market prices of procured food grains.  Food Prices it said “are best left to the market” and that subsidies and price reduction need not go hand in hand to help the poor.

Therefore the government came up with the DCTS scheme which is also planned for fuel and fertilizer subsidies in the future apart from food subsidies.  As per the scheme the beneficiaries will receive cash based on their Unique Identification Cards aka Aadhar Cards directly into their bank accounts and monies can be withdrawn through normal banking channels like ATMs or through Banking Correspondents in villages where banks do not exists.

By direct transfer of monies to the beneficiaries, the DCTS promises to promote efficiencies, improve targeting, control administrative expenses and facilitate reforms as its stated goals.  The Government as per the recent media reports intends to introduce this scheme on ‘a war footing’ by kick starting large scale ‘openings of zero balance bank accounts’ using Aadhar cards thereby seeking to prevent falsification, duplication, forgery and nepotism in delivery of monies to the poor thereby using IT to fight Poverty.

3.                  It has Potential for effecting Radical social change through conditional transfers

One of the most pleasant features of the scheme is the potential of fostering a radical social change thereby leading to rapid development of human capital.  The Government can link pre-conditions or a desired social objective for DCTS scheme.  for eg, the government can mandate that attendance of the child in school (especially the girl child) is mandatory pre-condition for cash transfers or that vaccination of child is compulsory for every household desiring to receive benefits under DCTS scheme.

Linking conditional cash transfers with fulfilment of desired social objectives is said to be working very well in Mexico, Brazil and Nicargua.  In Bangladesh, Pakistan, and Turkey, where school enrolment rates among girls were lower than among boys, the conditional cash schemes is said to have helped the cause very well.

According to economists and researchers, it is better that the monies must be transferred to women of the household rather than men leading to women empowerment in patriarchal society and better control and monitoring of household expenditure and preventing squandering of cash.

4.                  Eliminating Bottlenecks in the Scheme

However there are many bottlenecks to the introduction of these scheme.  In a survey conducted by the National Federation of Indian Women (NFIW) and the Right to Food Campaign, in Delhi slums. 91% of them wanted subsidized food grains to continue and did not opt for cash.  The reasons are not too difficult to understand, the poor tend to look at ‘Ration cards’ as a valuable asset and have an irrational fear that losing ration cards tantamount to giving up a substantial benefit in favour of a small monthly amount that may not last long or can stop anytime. 

The fear is also that a price raise in future can potentially dilute the value of money leading them into double jeopardy.  Opting for the cash scheme in lieu of ‘ration card’ is seen as akin to cutting the proverbial goose that laid the golden eggs.  This is because there is a lack of reliable information and support centres available to them to explain the scheme in detail.  Therefore it is necessary to ensure that a comprehensive plan for dissemination of information of the scheme be also setup for an informed choice to be made and to clarify queries of the poor.

A second Bottleneck of the scheme is said to be the problem of financial exclusion that exists in India.  It is said that only 40-50 percent of the Indians have bank accounts and not all people (especially in  the rural areas) have access to banks or banking system and therefore the scheme is palpably ignorant of ground realities and that its implementation is a lofty goal.  One solution is to link it with post office bank accounts and use the services of 1.5 lac post offices of India which are deeply pervasively, widely distributed and ubiquitous in all villages in India or which are at least within travelling distances of all rural areas.  The other solution is to use banking correspondents from villages who ensure banking services reach to the masses.

5.                  Role of a welfare state cannot be substituted by Cash Evangelism

The frontline in December 2012 edition notes “Any dismantling of PDS would also mean an end to food grain procurement which forms an important institutional support to india’s peasantry” thereby leading to chaos in the food grain market and utter destruction of India’s peasantry.  The fears are well founded only if the government intends to suddenly implement the scheme all at once.  However if a phased and gradual method of implementation is chosen, the market tends to self-adjust and self-correct itself and absorb the produce in the long run.  The governmental purchases of the stock are substituted by private purchasers and increased demand from cash rich rural households leads to adequate demand and supply in the open market.

It is also pointed out that cash is a fungible commodity and it cannot assure that a quantity of food grain can be purchased by a household if the market price rise further.  The increase in inflation can decisively defeat the scheme.   One must note with caution that DCTS should be seen as complementary and not as an exoneration of the responsibility of a welfare state.  Therefore the role of the welfare state in continuously monitoring and controlling inflation is in no way exonerated by doling out cash to the beneficiaries.

Concluding thoughts

finally efficient delivery of welfare in the world’s largest democracy is understandably a task of monumental proportion.   Research suggests that a multi-pronged approach towards poverty eliminations and social welfare always works better.  Economist Esther Duflo notes
“It is not easy to solve the problem of poverty, a little bit of well-targeted help can have sometimes a surprising effect. A push on the right lever can make a huge difference but it is often difficult to know where that lever is.  Above all what is clear is that no single lever can solve every problem”

The Cleansing of Indian Retail

(FDI in multi-brand retail is the most progressive and the most radical reform in the economic history of India since the opening up of economy in 1991.  The Advent of FDI in Retail will lead to a definitive churning in the Industry.  The supply chain systems shall be subjected to trial by fire, to instil discipline, efficiency, productivity and technology which will bring significant and enduring benefits for all those who add value to the system.  Contrary to popular belief this will not obliterate and destroy the kiranas, who will also co-exist just as KFCs and Pizza Corners do with the roadside eateries both serving their own patrons)

The Government finally comes up with the Boldest Economic reform of all, nothing less than the Opening up of FDI in Multi Brand Retail itself.  There is a raging and furious debate (with sweeping generalisations and vacuous polemics) which seems to be focussed only on Traders and Middlemen in the system.  The correct way to debate would have been to consider the other players in the Retail Space as well.  One must be debating “what is benefit or otherwise of FDI to Indian Retail Industry, Consumers and Supply chain system as a whole?”  Sadly, the unprecedented benefits that FDI in Retail can have on Consumers and Producers have been largely ignored or dishonestly disregarded in these very intellectual discussions.

To understand the issues involved, let us first look at some simple facts to appreciate the enormity of the beast that we are dealing with

• India is short by 10 million tonnes of cold storage capacity due to which over 30 percent of agricultural produce goes waste every year.  
• Atleast 20% of food grain that India produces annually is eaten by rodents resulting from improper storage facilities.
• India, the world’s second largest fruit and vegetable producer encounters a waste of close to 50% worth of produce
• India is the largest producer of milk in the world.  However, the amount of Milk that it wastes each year is said to be equal to the total Milk produced in the European Union.

Now these are serious issues but how does one solve these problems of wastages at a scale that perhaps has no parallel anywhere in human history? It is clear that the Government has no money to make these investments.  The Indians don’t have that kind of money too.  Therefore the government opened FDI in Cold storage facilities but it attracted no response as there is little money to be made in it.  The Government then realised that unless a profitable venture is coupled with the creation of these permanent facilities in India, perhaps it will never be created.  So what do we do?  The answer comes in the form of a simple brilliant idea of Multi-brand FDI.  Let the foreigners create these permanent facilities and also earn money from them. Even if 50 per cent of the above loss can be translated into savings, the benefits to the nation and the Retail Industry as a whole are nothing less than “significant and spectacular”.

Secondly, one must also note that the Farmers will benefit hugely from this scheme.  According to a recent report by CII and Boston Consulting Group, an Indian farmer of tomatoes earns 30 per cent or less of the final price whereas in the developed countries, the farmer can receive as much as 70 per cent.  This scheme therefore would be a game changer and significantly increase farm incomes.

Thirdly, many claim that large retailers with the power of finance and volume on their side would adopt predatory pricing that would eliminate the other players in the field.  However there is no empirical evidence to support this claim; at best it is a sweeping generalisation.

Contrary to popular belief, the profits made by Wal-Mart or any organised retailer are not due to large volumes alone.  The volume game has serious limitations.  The boom and bust of the Chennai Retailer Subikhsha is a shining example to understand this simple economic truth that one cannot use economies of scale alone to lead oneself into the road of profitability and growth.
 
In reality, profits in organised retail are made from super-efficient supply chain systems and food handling technology that cuts down costs by eliminating non-value adding processes, wastages, avoiding decay and by increasing shelf life in stores etc.  Efficiency is the name of the game in the modern retail.  By calculating the inventory of a store on a dynamic basis the reporting of the stock levels happens in real time systems leading to sharply accurate purchases.  Advanced cold storage systems with standardised grading & quality checks lead to better produce for the consumer and savings for the Retailer.  These benefits to Indian retail cannot be ignored.  Again, a large organised retailer can be easily scrutinized by the regulatory agencies for monopolistic tendencies than many unorganised retail rulers in the present setup.

To those who speak of job losses of unprecedented scale to the trader population, firstly it must be said that there is no evidence to suggest the same.  The research study done by Indian Council of Research in International Economic Relations (ICRIER) has come to a conclusion that investment by large corporates and FDI in the retail sector would in the long run not harm interests of small, traditional retailers.

Even if we ignore the study and grant concession that this would be partly true, it is those who do not add value to the system that will be removed.  The removal of inefficiencies is inevitable part of any business system which the economist Joseph Schumpeter describes as a process of “creative destruction”.  This should be looked as a positive phenomenon which provides opportunity for middle men to change their roles, re-model and add value to the system rather than demand that the system should not change to protect their inefficiencies.

In 1992 China opened up its FDI in retail under incessant protests, by 2001 in a span of 9 years the share of employment in retail doubled from 4 % to 7%, the number employed almost doubled from 28 million to 54 million and the small stores also grew from 1.9 million to 2.5 million.  Thus it was one of the most promising economic decisions in the Chinese history which led to commendable rise of employment levels and enormous increase of their country’s GDP.  This successful empirical evidence from Chinese experience clearly demonstrates that the incursion of the International Retailers does not necessarily mean a death knell to the kirana stores and a fall in retail employment levels.  Both can co-exist serving their own patrons like KFC’s and Pizza corners co-exist with roadside eateries.  
Lastly we must also remind ourselves that an FDI in retail is no substitute for investment in Basic infrastructure by the state. Without the active support of the state the FDI can fail to achieve its objectives, for eg, the Wal-Mart can invest in large and technologically advanced cold storage warehouses but it is for the state to provide continuous electric power to run them. Tesco can bring in large modern freezer trucks to transport their produce from warehouses to its stores but it is for the state to build good roads to support that. What India needs is massive investments in its crippling infrastructure but let’s make a beginning somewhere through the process of FDI.

FDI in multi-brand retail is here to stay, sooner or later it had to come and radically change the Indian Retail space and transform the supply chain systems.  The process has now begun.   To quote from Victor Hugo whose words were echoed by Dr Manmohan Singh when he started it all in 1991 Budget Speech.  "No power on earth can stop an idea whose time has come".
References and Citations:
1. Study of Foreign Direct Investment in India’s Retail Bazaar: Opportunities and Challenges Paper by Anusha Chari (University of North Carolina) and T.C.A. Madhav Raghavan (Indian Statistical Institute)
2. Discussion Paper on FDI in Multi Brand Retail Trading from Department of Policy and Promotion
3. Research study done by Indian Council of Research in International Economic Relations (ICRIER) on Effect of FDI on small trader and unorganised retailers