Home / Opinion / Online Views /  Re-imagining the Indian welfare state

The UPA government’s decision to roll out cash transfers has led to a fierce debate on the move. UPA ministers have in recent days called the move a ‘magical’ step and a ‘game-changer’. Critics have pointed out that cash transfers are not a panacea for all the ills that plague India’s welfare schemes, and they do have a point.

The idea of direct income support to deserving beneficiaries that cuts through reams of red tape is extremely appealing given the familiar failures of the conventional state apparatus. But direct cash transfers can actually be game-changing only if the government initiates complementary reforms.

The government’s attention, for now at least, seems to be on the low-hanging fruit: scholarships and pension schemes. These are existing cash-transfer schemes with low targeting errors. The real test will lie in targeting the three Fs—food, fuel and fertilizer subsidies—that form the bulk of indirect transfers by the government, create the greatest distortions, and are prone to maximum leakages.

Here are five key steps that could help the government fulfil the big promise of cash transfers in reforming the Indian ‘welfare’ regime:

1. The first step will be to fix a simple non-discretionary criterion to effectively identify the beneficiaries. India has a pathetic record in identifying the poor; below poverty line (BPL) lists often leave out the most deserving and include the affluent. Unique biometric identity cards can at best eliminate bogus names but deciding who is poor among the genuine list of citizens is almost an insurmountable problem. So, it makes sense to follow what a wide section of economists have advocated: provide income transfers to everyone except an easily identifiable set of the affluent (such as income-tax payers, government employees and owners of motor vehicles).

2. The second key step will be to rationalize government expenditure. The government must fix a timeline to close many of the state-sponsored welfare schemes that have been launched over the years with noble intentions, only to generate ignoble outcomes because of poor design and monitoring difficulties. Conditional cash assistance projects such as the Indira Awas Yojana, where the cash provided is rarely used for the intended purpose, also need to be disbanded. The funds saved can provide for public goods such as health, education and rural infrastructure and add to the corpus for direct cash transfers--which can gradually become a near-universal income support program rather than piecemeal alternatives to subsidies.

Among the three Fs identified earlier, the case for dismantling fuel and fertilizer subsidies is much clearer than the case for food. Both fuel and fertilizer subsidies are extremely regressive, benefiting the affluent disproportionately, and lead to ecological excesses. It might be practical to devise separate cash transfer schemes for each of the subsidies initially before they are merged but even such schemes can be designed to generate more progressive outcomes. Transfers in lieu of fertilizer subsidies to the rural poor can, for instance, be independent of how much land one owns so that rich farmers do not get excessively subsidized.

3. Food subsidies deserve special treatment and the third step will be to deal with food support in a flexible way. The opposition to dismantling food subsidies stems from three main reasons: the fear that providing cash might lead the poor to misallocate their expenditure on ‘unnecessary’ products (such as alcohol) rather than on food, the absence of well-functioning food markets in less-developed regions, and the hope that the public distribution system (PDS) can be revamped to minimize leakages.

Economic theory does not provide clear answers to these issues and the empirical evidence too is quite mixed. While there are states such as Chhattisgarh and Tamil Nadu that have reformed PDS, it might be too optimistic to expect all Indian states to replicate their successes. Some states such as Madhya Pradesh are already moving to a food-stamp system.

It will be wise to let individual states choose among the three alternative food subsidy regimes: in-kind transfers (through a reformed PDS), a system of food stamps, or cash transfers. The Centre should only make it clear whom it will not subsidize (the excluded category). While urbanized states may opt for cash transfers, less urbanized ones may choose to continue with the PDS for a while. Some states could also leave the choice to consumers, allowing the different delivery systems to compete for patrons in the initial phase, as was the case, in a year-long pilot project on cash transfers conducted by SEWA in Delhi.

4. Fourthly, it might be worthwhile to pay close attention to successes elsewhere. Most of the global successes in cash transfers such as in Brazil and Mexico were in the areas of health and education, using conditional cash transfers. These nations first fixed their supply-side problems in these two sectors and then used conditional transfers as demand-side nudges to promote the use of their expanded public services. India currently has a surfeit of welfare schemes unlike those nations but once the welfare programme gets leaner, it would make sense to prioritize spending and energy on the key thrust areas to make our social infrastructure more robust. Conditional cash transfers can come in handy at that stage for India as well.

5. Finally, the government must lay out a transparent mechanism for indexing cash transfers to inflation numbers and design an exit strategy for transfers that will be eventually discontinued or merged with the basic income support. Transparently laying out the contours of the government strategy together with a detailed fiscal plan to fund such a strategy will help pre-empt needless controversies and politicking during the transition to the cash transfer regime.

So far, the UPA government’s move towards cash transfers seems bereft of any strategy; instead it appears motivated purely by electoral calculations. The government also received a rap on the knuckles from the Election Commission for making premature announcements about the move. Nonetheless, there is still time for the UPA to correct course and make the move towards cash transfers part of a package deal to reform public delivery systems. For Manmohan Singh, it is probably the one and only chance to save his legacy. Long years ago, when he first took charge as India’s prime minister, Manmohan Singh had indicated that administrative reform will be among his key priorities.

It is high time he redeemed that pledge, “not wholly or in full measure, but very substantially", to borrow a phrase from India’s first prime minister.

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