What Happens When You Replace Food Aid With Cash Payments?

A program in India is trying to give its participants more choice and eliminate corruption by giving them checks to spend as they want. But will this be better or worse for the country’s poor?

What Happens When You Replace Food Aid With Cash Payments?
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India has recently started a high-stakes social experiment. If it works, it could efficiently feed up to 90 million of India’s poorest people, provide them with bank accounts, and perhaps even eliminate government corruption.


If it fails, India’s poor may be far worse off than they are today.

India’s Public Distribution System (PDS) is a large and bureaucratic system of providing food and other basics to the poor. Currently, people below the poverty line receive a ration card, through which they can purchase grains at lower prices. Critics say the system is inefficient and riddled with corruption, or “leakage”: middlemen siphon grains, shop owners overcharge, ration cards are traded for money, and more. For every dollar the PDS spends, some estimate that the poor get as little as $0.05 worth of food.

In several states, officials are beginning to experiment with some of the basic infrastructure that would be required, by using electronic payments instead of cash in pension and stipend programs. want to replace the PDS with a cash transfer program, in which people will receive money instead of low-price food. The program, which 20 Indian districts have been testing since January, is adapted from successful systems in Mexico and Brazil. India’s finance minister, P. Chidambaram, has called cash transfers “nothing less than magical,” since they will ensure people can reap the benefits of government programs.

In addition to reducing inefficiency, many economists say cash transfers eliminate the “paternalism” inherent in food subsidy programs. Instead of the state encouraging people to purchase grains, people can spend cash however they see fit. And in fact, well-designed cash transfer programs have been linked (PDF) with better childhood nutrition, improved living standards, and reduced child labor. Importantly, few recipients spend more on vices like alcohol, as cynics often contend.

However, to what extent can the Indian state deliver these theoretically impressive gains? Can a cash transfer system eliminate–or at least minimize–the corruption found in the PDS? More importantly, can it improve the nutrition of India’s poor?

To answer some of these questions, Reetika Khera, an economist at the Indian Institute of Technology in Delhi, ran a survey across nine states. She asked PDS recipients how they would feel about receiving cash instead of food subsidies. Two-thirds of respondents wanted to continue receiving food, and the only state in which people preferred cash was Bihar, which has the highest leakage rate in the country.


To be sure, Paul Niehaus, director of the nonprofit GiveDirectly, cautions that stated preferences often depend on survey design. Actual preferences need to be tested through more rigorous experiments, such as ones his team is conducting.

Even so, A.K. Shiva Kumar, a development economist and member of India’s National Advisory Council, said he would expect people to prefer food to cash, especially given “the extent of hunger, malnutrition, and poverty” in India. To that end, a survey respondent told Khera she preferred the PDS primarily because “food can only go in one place, in our stomachs.”

Survey respondents seemed especially concerned about what cash transfers would mean for the availability and price of food. For instance, said respondents, would cash transfers allow them to purchase enough food for their families? If food prices increased over time (due to inflation or otherwise), would the amount transferred increase as well? What if private dealers started overcharging for grains, knowing customers have no other option?

Beyond food security, survey respondents were worried about logistics of cash transfers. Currently, only 40% of Indians have bank accounts. “Opening a bank account is a nightmare in India,” said Kumar, particularly for the poor. Many banks are short-staffed and pay little attention to poor customers, who typically open unprofitable “no-frills” accounts. And accessing accounts can be challenging for people in distant villages.

For people living in rural areas far from bank branches, banks are developing a network of “banking correspondents” (BCs) who travel to villages with cash. Ideally, the BCs will act like human ATMs, authenticating the customer’s identity, giving customers money from their accounts, and electronically validating the transaction. In practice, however, some experts caution that banking correspondents could become “all-powerful intermediaries” who charge rent to withdraw money (it should be noted that there is little evidence to back this concern).

More fundamentally, many Indian academics do not think the PDS needs to be dismantled. “If you say the system is beyond repair, that’s a frightening proposition,” said Kumar. “Let’s fix the system.”


It seems some states have done just this. The eastern state of Chhatisgarh, for instance, once had a 50% leakage rate in its PDS. Through sustained political will, local computerization, and other measures, it reduced the leakage rate to 10%. The Supreme Court has asked other states to study and emulate its model.

The PDS, Khera said, is a “lifeline for many” in a country with few public services and 350 million people living below the poverty line. “We know the system is broken,” she said, “but we also know it can be fixed.”