The newly formed Expenditure Commission would do well to comprehensively reject ancient Indian methods of poverty measurement, alleviation.
There was a lot of expectation that specific reforms would be announced in Budget 2014-15 regarding the operation of subsidies in India. There were none — indeed, the budget has been criticised by many for lacking any reforms on expenditure policy. Pointedly, many analysts have concluded that Budget 2014-15 is just another UPA-Chidambaram budget.
However, what was announced in the budget is that the government will create a commission to look into the entire nature of our expenditures, with specific emphasis on poverty elimination. And the biggest such item is the operation of the Public Distribution System (PDS) of foodgrains to the poor.
In a recent India Policy Forum lecture (“India: Changing Mindsets, Accelerating Growth, and Reduced Inequality”) I made the simple point that the mindset that has produced policies like the food security act, or FSA (which mandates that two-thirds of the Indian population are deserving of food subsidies), and NREGA — a jobs entitlement programme for all of rural India — needs to be junked before India can look forward to meeting its destiny of an 8 per cent growth economy and a major emerging power on the world stage.
The Sonia Gandhi-led UPA mindset was inconsistent with the belief that India can be anything but a poor country, not much different from the nightmare concocted by Swedish Nobel winner Gunnar Myrdal in the late 1960s (the 1968 three-volume Asian Drama, in which his contention was that Asia was doomed to be poor for ever). Myrdal can be forgiven for speaking too early, and being wrong, but what do you say about politicians and policymakers and their intellectual advisors who still believe in 2014 that Myrdal was right and that India is a forever-poor country?
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In 1968, India’s per capita income was around $100 per person per year. When the food security act was passed last year, India’s per capita GDP was 15 times higher. Yet our mindset was to pursue the same policies as 50 years earlier — indeed, to expand them. The PDS system has been in operation since 1942, when it was introduced to counter famine conditions in Bengal.
It was expanded over the years and became a full-fledged all-India operation around the time of Myrdal’s book. The food/ cash-for-work programme was first introduced in 1973 in Maharashtra, and introduced primarily to provide incomes to very poor people during conditions of drought. In 2005, Sonia Gandhi’s government introduced an act of Parliament to make it a right of every individual to have 100 days of work. The effectiveness of this programme (NREGA) in achieving its noble objective of providing incomes to the poor will be explored in a subsequent article.
A good documentation of our ancient mindset is provided by the Indian discussion on poverty and its alleviation. A new report on measurement of poverty, commissioned by the UPA a year ago, has just been released (the Rangarajan, “Report of the Expert Group to Review the Methodology for Measurement of Poverty”). There is nothing different (forget new) in this report from the first poverty line report produced in the mid-1960s. (Note how things literally haven’t changed since the 1960s.) The report then also (mistakenly in my view) based poverty on caloric intake.
This method was demolished by nutrition expert P.V. Sukhatme in 1973, but our mindset is not bothered by any evidence contrary to one’s ideological predilection. So entrenched has the poverty industry been in India, mostly in Congress-led governments that feel it is in their political interest to perpetuate the notion that India is poor, that it has published four reports since the mid-1960s study and all of them (including, obviously, the Rangarajan report) have stuck to the same outdated, and false, notion of absolute poverty.
So much has happened, but our knowledge-proof poverty experts remain oblivious. The calorie obsession has to do with notions of nutrition. Sukhatme pointed out that there was so much inter-individual variation in body metabolism that caloric consumption intake was a highly misleading indicator of nutritional well-being. Recent research has emphasised sanitation (read toilets and open defecation) as a major contributor to nutrition, thus further reinforcing the conclusion that measuring poverty via caloric intake borders on the nonsensical.
Should we not, as a society, be much more concerned with effective targeting of the poor population and methods to best deliver incomes to them? For sure, all the answers are not known, but enough is known to suggest that cash transfers is the best transfer system. Do the transfer in cash rather than a very indirect in-kind method (the latter is much like catching your nose by circling your hand behind your neck — most can’t reach it).
When I presented my findings regarding PDS “efficiency” at the IPF lecture (see chart), one sceptical economist wondered aloud as to what data could substantiate such absurd (?) findings. As is well known to most observers of Indian policy, the National Sample Survey Organisation collects detailed data on the various items of consumption. This exercise is undertaken every five years but sometimes the gap is less than five. The detailed questionnaire asks separately for the quantity and price of food items bought from the market or bought from the PDS ration shop. As such, there is fairly complete information available on the PDS received by each household in the economy.
In 2011-12, NSSO data shows that average consumption of cereals was about 10 kg per person per month, and that the poor received less than a third of their consumption via food subsidies. The food subsidy bill in 2011-12 was Rs 73,000 crore. Only half of the foodgrains ostensibly sent to government shops (called off-take) actually reached the shops. Where did this other half go — rotted and sent to liquor manufacturers (“rotting” fermenting grain is good for alcohol consumption), or sent to food mills for later entry into the market, or… You can fill in the blanks. The fact remains that less than 50 per cent of foodgrains meant for ration shops ever reaches them.
Once food reaches PDS ration shops, 40 per cent of the poor do not receive any subsidy. The net effect is that, of every Rs 100 spent by the government, only Rs 15 reaches the poor. Or the poor got only Rs 12,200 crore of food subsidies of the Rs 73,000 crore meant for them. BJP, Narendra Modi, Expenditure Commission — are you reading, and will you change the system to maximise governance and reduce corruption?
The writer is chairman of Oxus Investments, an emerging market advisory firm, and a senior advisor to Zyfin, a leading financial information company