ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Beyond Introductory Theory

A Review of Cash and In-kind Transfers in India

Introductory models in public economics find cash transfers as welfare-maximising policies. However, a large body of literature finds support for in-kind transfers in the context of the developing world. Focusing on India, this article intends to outline two streams of thought on how welfare programmes can be structured for the maximisation of welfare, both from an empirical and theoretical basis. By synthesising the two streams, this article finds the optimality of policy design to be linked with specific contexts and shows that a blanket policy may lead to suboptimal results in India and other developing countries with similar characteristics.

Cash transfers refer to transfers by donors (in this context, the state) to beneficiaries for the purpose of increasing the latter’s purchasing power. In-kind transfers refer to the direct distribution of specific goods to beneficiaries. Both transfers can be conditional (that is, the transfer is subject to the fulfilment of a condition) or unconditional (beneficiaries may use the cash any way or may receive an in-kind transfer without any task fulfilment). For example, a cash transfer to parents only if they vaccinate their children is a conditional cash transfer, while a bag of lentils to parents only if they vaccinate their children is a conditional in-kind transfer. Another axis for such transfers is whether they are universal (that is, available to all) or targeted (specific to certain demographics or groups such as children, women, extremely low-income groups, and so on).

Introductory economic theory states that cash transfers are preferable to in-kind transfers as policy interventions (Barreto nd). The central argument follows the idea that in-kind transfers (or subsidies for goods) decrease the real prices of a commodity for a consumer, which distorts their optimal consumption choice, whereas a cash transfer simply has a shift effect on the budget constraint for a consumer maintaining optimal consumer budget. A basic microeconomic treatment shows that an expenditure of one unit of currency on a cash transfer will typically provide higher welfare than the expenditure of one unit of currency on a subsidy.

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Updated On : 4th Dec, 2023
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