This Article is From Apr 11, 2020

Cash Chorus Is Flawed. Use “Odisha Model” Instead

Two days ago, in Bhind (Madhya Pradesh), women who came to withdraw relief money, Rs 500 from their Jan Dhan Yojana account, were detained for violating social distancing rules. Reports from elsewhere - including India's financial capital, Mumbai - suggest that banks are struggling with crowd management.

This is just one difficulty associated with relief in the form of a cash transfer. Yet, many economists and other commentators, who have risen in a chorus-advocating cash transfers (along with other relief measures), anticipated none of the implementation issues.

At a time when earnings have evaporated for millions in the informal sector, cash support is necessary. Yet, a relief strategy that depends too heavily on cash will not serve the purpose. 

Not just cash

Reports of disruptions in the supply chain, panic buying even among online shoppers, have been coming in. Hoarding and price-gouging have also been reported. Price inflation, though not widely reported yet, is a real possibility in the coming weeks.

In such a situation, inflation can erode the value of cash transfers. This is one reason why cash transfers need to be supplemented with in-kind food transfers. Some relief has already been announced for those with ration cards, but that leaves out a third of the population, some part of which is in desperate need of food aid.

Looking beyond the PDS, better communication, down to the constable on the street, about what constitutes essential goods and services is needed to protect suppliers and buyers. In the past, when the price of onion or pulses were very high, central and state governments supplied them at regulated prices. This needs to be done now, say, through Safal in Delhi, Hopcoms in Bangalore, etc. Along with releasing more foodgrains, such measures will ensure that cash transfers remain meaningful.

Withdrawing cash

How will people withdraw cash? In spite of all the hype around it and the rapid growth in digital payments, the usage figures for the rural population are sobering. According to the Global Financial Inclusion Index 2017, just over a quarter of young adults (aged above 15 years) in rural areas had a debit card or used digital payments. Only 4% used their mobile or internet to access their account. One percent had a mobile account.

In rural areas, people primarily rely on withdrawing cash from a bank branch. Density of bank branches in rural areas is lower than in urban areas. Given the restrictions on people's mobility, lack of public transport in rural areas especially now with fear of harassment by the police, means it's even tougher for people to reach their bank branches. 

Even in normal times, bank branches are overcrowded. During the lockdown, formally or informally, they're working at reduced capacity. If mass cash transfers are made, early reports suggest that banks will not be able to handle the volumes. Withdrawing cash through a bank counter is not trivial - think of the last time you returned happy after a visit to your own bank branch. And rural residents get pushed around much more.

In more recent times, some of the pressure on banks has been eased through 'banking correspondents' (BCs) who disburse cash closer to people's homes, often/always using biometrics for last-mile authentication. (Sometimes, they charge an unofficial 'convenience' fee, but let us ignore that for now.) In these times of viral infection, using biometrics is risky. Like bank officials, BCs are likely to be nervous about being in crowded spaces and using biometrics to authenticate payments.

Finally, some of the recent 'innovations' in the banking system, especially the Aadhaar Payment Bridge System, have created hitherto unheard of problems: misdirected payments, rejected payments, failed payments, etc.

The Odisha model

For these reasons, it may be worth reverting to cash-in-hand for mass cash payments, at least for the duration of the crisis. Odisha's pension payments present a tried-and-tested and popular option. In spite of pressure from the centre, the state government, recognizing the limited reach and capacity of its bank and post office branches, continued to disburse pensions as cash-in-hand.

This is the way it works: on the 15th of every month, the panchayat secretary goes to the Gram Panchayat office and sets up a desk, often in an open space. All the elderly, widows and single women and persons with disabilities gather at the Gram Panchayat. The Panchayat Secretary calls out the names listed in the pension register, the pensioners come forward, sign or put their thumbprint in the register, he hands them their pension (Rs 500 per month, of which Rs 200 comes from the central government), and its done.

A no-fuss exercise.

What about corruption? Cash disbursements were vilified for being prone to corruption. Indeed, corruption has been a serious issue. The Odisha model offers two protections: one, because cash is disbursed in a public place, in the presence of so many others, it is not easy for the Panchayat Secretary to underpay anyone. Two, the levels of awareness and literacy in the family have risen. Both are strong safeguards against corruption.

To minimize crowding while disbursing cash, the state governments can reduce the catchment area - for instance, by disbursing cash at anganwadis - so that fewer people gather. A combination of the anganwadi worker, the Sarpanch, Panchayat Secretary, etc, can be entrusted with this task to ensure adequate scrutiny.

The discussion here still leaves the biggest questions of 'who' and 'how much' unanswered. The government's first announcement gives too little (Rs 500 for three months) to female Jan Dhan Yojana account holders (who tend to be middle class rather than poor).

With the lockdown now extended, more relief needs to be announced immediately. Such an announcement must start by releasing FCI's obscenely large foodstocks to those without ration cards, and be supplemented with more cash relief for the poorest.

(Reetika Khera teaches at IIM Ahmedabad.)

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