Case for Direct Cash Transfers

Context: With state governments increasingly disbursing ‘freebies’, debates have emerged regarding their economic implications on fiscal discipline. While RBI has raised concerns on rising revenue expenditure, the role of government in redistribution of resources cannot be overlooked.

Relevance of the Topic: Mains: Direct Cash Transfers, Subsidies and Freebies- Impacts

Role of the State in Redistribution of Resources

• As defined in public economics, the role of the state is to bring about effective redistribution of resources. 
• The principles of taxation envisages a progressive tax structure where the more affluent pay higher taxes. 
• The revenue earned is used in social welfare and in building social and economic infrastructure. 

Approaches of Redistribution of Resources: 

• Social Infrastructure development:
  • One form of redistribution is by creating hospitals, schools, roads, irrigation facilities, etc. which benefits people. 
  • Normally, these facilities would not be used by people in the higher income groups, and hence there is matching of expenses with the beneficiaries.

• Subsidies:
  • The other approach to redistribution is through the subsidy schemes. These include subsidies on food, fertilizer, housing loans, etc.
    • Loan waivers help farmers when crops fail. 
    • Subsidised meals in certain States benefit street vendors, drivers, etc. 
    • Freebies like cycles, laptops and sewing machines have been given to girls/women to empower them.
  • These forms of transfers have helped improve the living standards of people.

• Cash Transfers:
  • The PM Kisan Samman Nidhi scheme gives ₹6,000 a year to every farmer. 
  • MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act, 2005) programme gives employment for 100 days at an average wage of around ₹250 a day. 
  • Free power and irrigation is given to farmers by State governments. 
  • Cash transfers to women are also done in some states. (E.g., Mukhyamantri Majhi Ladki Bahin Yojana, Maharashtra)

Arguments Supporting Cash Transfers:

• Multiplier Effectson the Vulnerable Groups:
  • Consider the case of cash transfers to women or free travel facilities.
    • Socially, women have been empowered with such transfers and are able to lead a more dignified life. 
    • Free transport encourages women to take up jobs and girls to attend school. 
• Increases Consumption Expenditure:
  • The free food scheme (PMGKAY) of the Central Government releases considerable resources of the poor population, which they can use for buying other goods. 
  • As per NSSO Household Consumption Survey, people were spending less on food and moved up the ladder. This was possible as basic food was provided by the government. 
  • Even in the case of the PM Kisan scheme, the cash given is used exclusively for consumption. 

Also Read: RBI asks States to sustain Fiscal Prudence 

Way Forward: Balancing Welfare and Fiscal Responsibility

• Targeted allocation: To ensure benefits reach the most deserving segments.
• Conditional cash transfers by linking handouts to social objectives, such as education and employment.
• Fiscal Prudence: By monitoring expenditures to prevent unsustainable fiscal deficits.

Also Read: Do new schemes ahead of elections amount to ‘voter bribes’? 

Freebies, if well-targeted and fiscally sustainable, can serve as effective redistribution tools. Governments must balance welfare spending and capital investments to ensure inclusive and sustainable development.