In order to reduce the high school dropout rate, especially among rural children, the Karnataka Government has decided to offer free passes to students up to seventh standard all over the state on all its buses for a distance of 50 km. For girl children, the passes will be issued at a discount of 25% till they reach tenth standard. This is a classic example of a subsidy tailor made for being delivered as a Conditional Cash Transfer (CCT).
The Karnataka government's proposal suffers from two major deficiencies. First, a free (or differential) bus tariff distorts the market, opening up opportunities for misuse and free riding which cannot be regulated. Second, apart from the targetting problem, it does not provide for any direct link with the desired outcome of getting children to school. There are other administrative problems related to estimation of the amount to be reimbursed to the State Road Transport Corporation.
Here is another way to transfer the subsidy. The student will have to pay the full bus fare, but will be reimbursed to the extent of his or her attendance. The money can be transferred, once a quarter, to an account opened in the name of the child or the parent. In order to dovetail this scheme with other social objectives(like formation of Self Help Groups (SHGs)), the payments can be transferred to the account of the SHG of which the students' mother is a member.
This arrangement is economically efficient and ensures better targetting of the subsidies. The market in bus travel is now freed of any incentive distortions. Besides, the subsidy is transferred conditional to the achievement of the desired social goals/objectives.
The logistics of opening masssive numbers of bank accounts and transferring the amounts periodically, is not as difficult as it seems, and is not without precedent. Welfare Pensions and National Rural Employment Guarantee (NREG) scheme are two recent successful examples of such cash transfers. Further, opening of bank accounts for everyone is in keeping with governments' objective of achieving Total Financial Inclusion (TFI). In any case, these accounts can be used for transferring cash directly in other CCT schemes.