Cash transfers

Topic: Government Budget, Fiscal Policy and FRBM · NCERT: Class 12, Ch 5 "Government Budget and the Economy"

Meaning

A cash transfer is money the government pays directly to a beneficiary in place of a subsidised good or service. For example, it can put money in a bank account instead of selling cheap rice through the ration shop.

It matters because India spends a large share of its budget on subsidies, and how that help reaches people decides how much is lost on the way. Cash transfers are argued to be cheaper to run and to leak less than in-kind transfers such as the Public Distribution System (PDS).

Explanation

How a cash transfer works

• In-kind transfer: the government gives goods, such as foodgrains sold cheaply through the PDS.
• The state must buy, store, transport and sell the goods.

• At each step, some goods can be lost, stolen or sold in the open market. This is called leakage.

• Cash transfer: the government pays money directly to the beneficiary.

• The beneficiary buys what they need at the market price.

• There is no storage or transport for the state to manage, and fewer middlemen touch the benefit.

• DBT (Direct Benefit Transfer): India's main cash transfer system. It pays benefits straight into the beneficiary's bank account. It was launched on 1 January 2013.

Why cash is argued to be cheaper: the PEO finding

• The Planning Commission's Programme Evaluation Organisation (PEO) studied the "Performance Evaluation of the Targeted Public Distribution System".
• It found the government spent ₹3.65 to deliver ₹1 of food subsidy to the poor through the PDS.
• Note that this ₹3.65 figure measures the cost of the in-kind PDS. It is the main argument for moving to cash.
• Worked example:
• Goal: put ₹100 crore of food benefit in the hands of the poor.
• Cost through the PDS: 100 × 3.65 = ₹365 crore.
• Lost on the way: 365 − 100 = ₹265 crore, through storage and transport costs, leakage and diversion (grain sent to the wrong place or wrong people).

The JAM trinity: the delivery pipe

• The Economic Survey 2014-15 proposed the JAM trinity as the way to deliver DBT well:
• J – Jan Dhan: a bank account for every household, so there is a place to send the money.
• A – Aadhaar: a biometric ID (based on fingerprints and iris scans) that proves who the beneficiary is.

• M – Mobile phones: used for payment alerts and for mobile banking.

• How JAM cuts leakage:

• Aadhaar seeding (linking a scheme's list to Aadhaar numbers) removes ghost (people who do not exist) and duplicate names.
• The money goes straight to the bank, so no middleman takes a cut.
• Less leakage means the same benefit costs the budget less.

Limits of cash: the case for in-kind

• Inflation risk: food in hand keeps its value when prices rise. A fixed cash amount buys less when prices go up.
• Access: cash needs a working bank and a market close to the beneficiary. Remote areas may have neither.
• Exclusion errors: Aadhaar authentication can fail because of worn fingerprints or poor internet, so eligible people get nothing.
• Inclusion error means benefits go to ineligible people. Exclusion error means eligible people are left out.
• Tighter targeting usually cuts inclusion errors but raises exclusion errors.
• Worked example: 100 people are eligible, and a scheme reaches 120 people, of whom 90 are eligible and 30 are not. Inclusion error = 30 ineligible people covered. Exclusion error = 10 eligible people missed.

In India

• Scale of DBT:
• Cumulative DBT transfers reached about ₹53.26 lakh crore (as of September 2026) [3].
• A BlueKraft Digital Foundation assessment of 2009-2024 data estimated cumulative savings of ₹3.48 lakh crore from plugging leakages [2].

• The same study found that subsidies fell from 16% to 9% of total government expenditure after DBT [2].

• Major cash-transfer schemes:

• LPG PAHAL: the consumer buys the gas cylinder at market price, and the subsidy is paid into their bank account.

• PM-KISAN: ₹6,000 a year paid to farmers.

• Cash for food (pilot): the food subsidy has been paid as cash instead of PDS grain in Chandigarh and Puducherry (since September 2015) and in urban Dadra and Nagar Haveli (since March 2016) [5].

• Food is still mostly in-kind:
• The food subsidy is ₹2,27,629 crore in the Union Budget 2026-27 (BE, or Budget Estimate) [4].

• PMGKAY gives free foodgrains to National Food Security Act (NFSA) beneficiaries. It was extended for five years from 1 January 2024.

• Universal Basic Income (UBI): the most ambitious form of cash transfer.

• The Economic Survey 2016-17 costed a UBI of about ₹7,620 a year per person for 75% of the population.

• Cost: about 4.9% of GDP.

• Unconditional cash transfers by states: many states pay cash to groups such as farmers and women. The 16th Finance Commission has called for rationalising unconditional cash transfers, meaning cutting them back and targeting them better.

Don't confuse with

• In-kind transfer: the government gives goods (such as PDS rice), not money. The PEO's ₹3.65-for-₹1 finding is about the cost of this in-kind system, not about cash.
• DBT: the delivery mechanism (money paid straight into a bank account, since 1 January 2013). A cash transfer is the type of benefit. DBT can carry many kinds of cash transfer.
• Universal Basic Income (UBI): an unconditional cash payment to everyone that replaces many targeted subsidies. An ordinary cash transfer is usually targeted at one group and tied to one scheme, as PM-KISAN is for farmers.
• Implicit subsidy: a benefit hidden in the under-pricing of public services such as health or power, with no separate budget line. A cash transfer is explicit: it is a visible payment.

Prelims Hooks

• PEO (Planning Commission) study of the Targeted PDS: ₹3.65 spent to deliver ₹1 of food subsidy. It is an argument against in-kind delivery.
• DBT was launched on 1 January 2013. The JAM trinity (Jan Dhan, Aadhaar, Mobile) was proposed in the Economic Survey 2014-15, not in a Budget speech.
• Pilots of cash in place of PDS grain: Chandigarh and Puducherry (September 2015) and urban Dadra and Nagar Haveli (March 2016) [5].
• UBI (Economic Survey 2016-17): ₹7,620 a year, 75% of the population, about 4.9% of GDP. It is "quasi-universal" because the richest 25% are left out.
• Trap: an Aadhaar authentication failure that denies an eligible person their benefit is an exclusion error, not an inclusion error.
• LPG PAHAL: the cylinder is bought at market price and the subsidy goes to the bank account. Its subsidy was only 2.6% of the Union subsidy bill (2026-27) [4].

Mains Points

• Efficiency vs security:
• DBT and JAM have cut leakage. Estimated savings are ₹3.48 lakh crore, and subsidies fell from 16% to 9% of expenditure [2].
• But in-kind food protects the poor against inflation and suits remote areas with weak banking.

• A hybrid, choice-based model, where the beneficiary chooses cash or grain, is safer than a sudden full switch.

• Targeting trade-off:

• Aadhaar-linked cash transfers remove ghost and duplicate beneficiaries (lower inclusion error).
• But authentication failures and outdated lists can shut out the poorest (higher exclusion error).

• Grievance redress, offline fallbacks and regular list updates are needed (GS-II: welfare delivery and governance).

• Fiscal sustainability:

• Unconditional cash handouts announced close to elections, often paid for by borrowing, squeeze capital spending and raise state debt.
• This links to FRBM targets, RBI warnings on state finances, and the 16th Finance Commission's call to rationalise unconditional cash transfers.
• Transfers that build human capital (nutrition, schooling, health) should be kept apart from pure "freebies" (GS-III: fiscal policy).

Related concepts

• Subsidy
• Targeting errors
• JAM trinity
• Universal Basic Income
• Freebies
• Performance budget
• Outcome budget
• Zero-based budgeting
• Gender budgeting
• Green budgeting

Read more

• Spending better: subsidies, DBT and budgeting innovations