It is considered a "game-changer" policy and is taking place 18 months ahead of elections.
Finance Minister P. Chidambaram, speaking before the start of the direct cash transfers on January 1, said 20 out of India's 629 districts would change over to the new system with a further 23 to follow in February and March.
In all, money for 23 separate welfare schemes – mostly education funds which were previously disbursed to third parties by the central government – will now be paid into the bank accounts of an estimated 200 000 beneficiaries.
"This is a game-changer for governance … this is a game-changer in how we account for money, it is game-changer in how the benefits reach the individual," Chidambaram told a press conference on Monday.
For example, scholarships for higher education for low-caste students which were previously paid to a university would instead be transferred directly to the individual who would then pay for his or her studies.
The advantage is that the government can confirm the money has reached the intended claimant, without them having to pay bribes to secure their due or officials diverting the funds for other purposes.
Critics counter that the government has been too quick in pushing forward a pet project and is bound to face enormous implementation problems because of the complex technology and public administration required.
Chidambaram said that there was no intention at this stage to start handing out cash in place of subsidised food, fuel and fertiliser – three key benefits for the poor included in India's $61-billion annual welfare budget. "There will be glitches. There will be a problem here or a problem there.
These will be overcome by our people standing out in the districts," added Chidambaram, who said the cash scheme would be rolled out nation-wide.
Mexico and Brazil are considered the world leaders in cash welfare schemes, using their Progresa/Oportunidades and Bolsa Familia programmes respectively to target the poor. – Sapa-AFP