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Who’s the aam aadmi?

Why s/he will be well-served by direct cash transfers instead of the current subsidies

Written by Bibek Debroy |
May 29, 2009 11:49:53 pm

Reports are appearing about a budget focus on the “aam aadmi”. That’s understandable,since the Congress hand is for the “aam aadmi”. The Lok Sabha is the counterpart of the House of Commons. Therefore,the Lok Sabha should be interested in the common man. “The object of government in peace and in war is not the glory of rulers or of races,but the happiness of common man.” That’s a quote from William Henry Beveridge,who set up the welfare state in Britain and we are on our way to setting up our own welfare state. Beveridge may have been almost forgotten in Britain,but we need to resurrect him. After all,he was born in India (actually Rangpur,now in Bangladesh). With the Left out of the way,we should perhaps quote American presidents,not Fabian

socialists. Abraham Lincoln said,“God must love the common man,he made so many of them.” Herbert Hoover said,“When we are sick,we want an uncommon doctor; when we have a construction job to do,we want an uncommon engineer,and when we are at war,we want an uncommon general. It is only when we get into politics that we are satisfied with the common man.”

Why is the common man important? In Oxbridge,commoners are those who don’t get scholarships. In India,commoners are those who should get scholarships,that is,subsidies. There are subsidies and there are Centrally-sponsored (and Central sector) anti-poverty schemes. Within subsidies,there are explicit and implicit ones. Within explicit subsidies,at the Centre,the most important are food and fertiliser. Quantitatively less important are those on petroleum products and subsidies on interest. There have been studies ad nauseam,documenting leakage,corruption and high administrative costs of delivery in present subsidy schemes. For instance,for the most documented one,the PDS,then-Finance Minister P. Chidambaram told the National Development Council in December 2007 that the cost of transferring one rupee of benefit to the poor was Rs 3.65. Studies by assorted economists show that if subsidies are replaced by direct cash transfers,there shouldn’t be any BPL (below poverty line) households left,an argument that becomes stronger if all anti-poverty expenditure is included,not just subsidies. The transfers are revenue neutral. They are also efficient because they don’t distort market prices. Techno-logy now permits direct electronic transfers to bank accounts and all NREGA beneficiaries now have accounts with post offices or banks. This reduces administrative costs of delivery too,other than making subsidies transparent,more amendable to third-party and public scrutiny.

But for this to work,the common man (read the poor) has to be defined and one can’t resort to R.K. Laxman. Several (around 15,not only Brazil,Mexico and Indonesia) developing countries have experimented with cash transfers,both conditional and unconditional. Conditional transfers are contingent on BPL households attaining some developmental outcomes — sending children to school,immunising children,obtaining skills training. Often,there are paternalistic responses in opposition to unconditional cash transfers. The poor are irresponsible — they will spend money on cola,cell phones,liquor. They shouldn’t have unrestricted right to choose. Accordingly,conditional transfers also have this paternalistic element,usually linking subsidies to human capital investment. Interpreted thus,coupons or vouchers (food,education,health,fertiliser,kerosene) are also conditional transfers,since they can only be used for specific

purposes. But they do introduce elements of choice,competition and efficiency. Whenever cash transfers (conditional or unconditional) are mentioned,three counter-responses are encountered. First,giving money is demeaning. It’s like doles and charity. It’s far better to give jobs instead. That’s a strange argument. As with NREGA,no one is forcing beneficiaries to receive subsidies. It’s a voluntary system.

Second,we don’t have resources. That’s a strange argument too. Cash transfers are revenue neutral. No one has suggested there should be cash transfers while retaining present subsidies. Third,we don’t have administrative delivery mechanisms. That’s a stranger argument. In any targeting,there are problems of exclusion (not including deserving poor) and inclusion (including non-deserving non-poor),especially if proxy and collective (community,geographical location,religious or caste background) indicators are used instead of individual means-testing. But is it the case that present subsidies don’t have these problems? On the contrary,there is enough evidence to show the present mechanisms are riddled with these problems. If anything,cash transfers should reduce these problems.

The problem is elsewhere. Accepting cash transfers is equivalent to recognising the non-poor won’t receive subsidies. It requires pinning down the “aam aadmi”. To take liberties with Lincoln,political parties love the common man and have made so many of them. If a hand no longer feeds,voters may bite it,instead of kissing it. In cross-country reviews of developing-country transitions to cash transfers,one lesson stands out. The replacement of classic subsidies with cash transfers works best when the government comes clean and uses the media to communicate the reasons for doing what is intended.

It’s not very obvious we want open government and transparency. Food stamps (on a pilot basis in select districts) were promised in the first UPA-I budget. What happened to that idea is not public domain information. In August 2006,the finance ministry prepared a cabinet note

on coupons/ vouchers,to be implemented by March 2009 and an expert committee was to be appointed to prepare road-maps. What happened to that is not public domain information. So far,there is evidence UPA-II will increase social sector expenditure. But there is no evidence it will try to improve efficiency of public expenditure. Cash transfers were promised by the TDP in Andhra Pradesh and the TDP lost. The JD(U) has proposed cash transfers in Bihar. The JD(U) may have delivered,but UPA-II doesn’t need JD(U). Rather oddly,cash transfers have become identified with non-UPA parties. If UPA-II desires,implementation of cash transfers (conditional or unconditional) should be easier now,with NREGA,SSA (Sarva Shiksha Abhiyan),BPL and AAY (Antyodaya Anna Yojana) databases,spliced with multi-purpose national identity cards (MNICs).

The MNIC website still says it is under construction (it has been that way for several years). But since 2008,that initiative has been subsumed under the National Authority for Unique Identity (NAUI),housed in the Planning Commission. The home minister has just told us we will have to wait for Census 2011 for MNICs to be available. It’s not clear why. If we are serious about using MNICs to facilitate cash transfers to poor,how about starting pilots in metros and not border

districts? With 300 crorepatis in the Lok Sabha,how about giving them MNICs and accepting they are non-poor? If we are serious,we begin somewhere. And if we aren’t,we muddle along,with all the fiscal consequences.

The writer is a Delhi-based economist express@expressindia.com

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