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A win-win budget, sans populism

With Modi backing Aadhaar, government can save Rs 1.6 lakh crore in wasted subsidies and cut tax rates.

Perhaps the biggest  impetus to a new enlightened policy has  come from Narendra Modi’s support for the Congress initiative of Aadhaar. Perhaps the biggest impetus to a new enlightened policy has come from Narendra Modi’s support for the Congress initiative of Aadhaar.

There is a lot of (noisy) talk about too high expectations from the budget, and about how there is bound to be severe disappointment because of inconsistent and high hopes. It appears as if the old-fashioned economists and analysts want to be the first to say “I told you so.” Often, among forecasters, there is a tendency to go against the herd for the big story. If you get it wrong, you are lost in the din; if you get it right, you are a hero, at least till the next big mistake.

I disagree with this forced pessimism. Realistically, the bountiful mistakes of the Sonia Gandhi-led UPA have provided the BJP with an ideal platform for a win-win, relatively painless budget. A budget in which it is possible, and extremely feasible, that taxes are reduced, subsidies are reduced, the fiscal deficit is reduced, and the bottom half of the population is substantially better-off.


How can this impossible trinity be achieved? The policy answer is straightforward. Perhaps the biggest impetus to a new enlightened policy has come from Narendra Modi’s support for the Congress initiative of Aadhaar. History will judge Aadhaar to be the best policy ­introduced by the Congress in the last 10 years.

It is Aadhaar that will make possible a major change in how India conducts its anti-poverty policies, that is, it makes possible a large shift to cash transfers as the form of income redistribution. Aadhaar can substantially reduce leakages in redistribution due to faulty targeting.

Much improved ­identification of the beneficiaries can reduce costs and increase benefits. At present, the multitude of public transfer schemes (for example, the public distribution system (PDS) of foodgrains, NREGA food-for-“work” programme, LPG cylinders at subsidised rates to the middle class, etc) rely on spreading the net wide, involving tons of middle men and bureaucrats, and praying to an equal multitude of gods that somehow a large fraction of the intended beneficiaries will be caught in the net.

The ­reality, as study after study has revealed, is doubly distressing — the ­system ensures that a large fraction of the poor escapes the net, and those that are lucky, receive precious little of the benefits. As documented by many, and for many policies, the poor rarely ­receive more than 15 paise out of every rupee meant for them.

Even though the technology of Aadhaar is of very recent vintage, cash transfers have been prevalent in most parts of the developing world for the better part of the last decade. Why have cash transfers not been popularly accepted in ­India? One important reason is the outdated mindset of Indian poverty intellectuals (think Sonia Gandhi’s National Advisory Council, or NAC).

Briefly, these NAC interventionists believe they know better, and have a ­paternalistic main hoon nah approach to the poor. These policymakers believe in a direct approach rather than the ­“impersonal” approach of cash transfers. And a large part of their understanding stems from the belief that the poor, and especially poor men, are good for nothing sorts, who will fritter away any “extra” cash transfer money on liquor.

This belief is so deep-seated that even in an alcohol-banned country like Pakistan, the cash transfer programme is mandated to give money only to the women in the household!

How accurate are these biases and prejudices against poor men? One of India’s leading economists, Raj Krishna, coined the evocative phrase that Indian politicians and policymakers (and he very likely was also targeting India’s left intellectuals) were “knowledge proof”. This phrase was coined some 40 years ago, but shockingly, still holds true today. In other words, no matter how much contrary evidence is provided, the left policy intellectuals will continue to see the world with eyes wide shut.

A damning bit of evidence confirms the presence of the knowledge-proof bias in India. According to the 2011-12 NSSO data on consumption expenditures (and for NSSO data for the last 30 years), liquor consumption is unaffected by the presence or absence of food ­subsidies.

According to the 2011-12 ­survey, there were 250 million Tendulkar poor, out of which just a little more than half, 130 million, received some form of food (rice, wheat or sugar) at subsidised (PDS) prices, with the ­remaining 120 million receiving no food benefits from the state.

The average food subsidy, for the poor who were lucky to receive it, was around Rs 45 per person per month; and the average liquor (paan, tobacco and intoxicants) consumption in these households was Rs 18 per person per month. However, for poor households without food subsidy, the liquor ­consumption declined by a statistically insignificant Rs 3 per person per month.

In other words, the poor did not change their liquor behaviour at all, once given a transfer of about 6 per cent of their ­total consumption (Rs 45 out of Rs 700). In the name of this insignificant ­increase, India has followed poverty-­reduction policies where the premium is on benefiting the middleman. In the ­interim UPA 2014-15 budget, Rs 2,80,000 crore was budgeted to ­reduce poverty via programmes like NREGA, PDS and kerosene, LPG, ­fertiliser and diesel subsidies.

What kind of results can be accepted with an Aadhaar-facilitated cash-transfer scheme? The table provides some suggestive calculations. Going by the principle that the poorer population should receive larger transfers, Indian states have been divided into three ­categories; the “richest” states have an average Tendulkar poverty rate of 12 per cent, and the poorest states have an average poverty rate of 32 per cent.

At 2014-15 prices, perfect but impossible targeting would entail a cost of Rs 60,000 crore (Rs 0.6 lakh crore, or approximately 0.5 per cent of the GDP). At present, the government is spending Rs 2,80,000 crore, almost five times the amount “needed”. Both with leakage and extra ­income to the poor (and many ­non-poor), it is possible to make the poor considerably better-off, with the average poor ­person receiving Rs 2,600 a year.

The number of poor who can receive this ­average cash transfer is half the ­Indian population! Total cost of the cash transfer ­package, including administration costs: approximately Rs 1,60,000 crore. This will entail a saving of Rs 1,20,000 crore from the budgeted Rs 2,80,000 crore. If the government were to remove tax surcharges, education cesses, and other tax nonsense like the Corporate Social Responsibility Act, etc, it would “lose” about Rs 60,000 crore in tax revenues.

So the recommended combination of cash transfers for the poor and lower taxes for the middle class and the rich would result in a net saving to the budget of Rs 1,00,000 crore or 1 per cent of GDP.

All this cannot happen in the ­remainder of this fiscal year. But the government can set the roadmap, and start travelling in a non-Congress direction. If this cannot happen, you have to tell me why. You have to tell me who loses with the above cash transfer recommendations. Or that I am mad to expect non-ideological rationality. But you ­cannot claim both.

The writer is chairman of Oxus ­Investments, an emerging market ­advisory firm, and a senior advisor to Zyfin, a leading financial ­ information company.

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