22 Feb Governments as cash counter
The BJP government headed by Narendra Modi plans to transfer 6000 Rupees per annum to the account of small farmers. Rahul Gandhi has offered to make a cash transfer to ensure a minimum income to all poor households. This seems to be the time of a money-order or online-transfer governance.
People and politicians perceive that the government machinery that delivers public services is inefficient and corrupt. They think that even 5 percent of the money that is spent by the government does not reach the intended beneficiaries. Hence there is this urge to transfer money directly. The availability of Adhaar card, the increase in the number of bank accounts for poorer people and online (and mobile) payment systems may facilitate this cash transfer. There are international economists and national techies who argue for such a cash transfer as a way to solve the problems of governance in the country.
I am not against direct cash transfer. I have advocated cash-transfer in specific cases. One such case was the subsidy for farmers in Kerala. There the farmers are capable to decide what is good for themselves, and hence they don’t want to cultivate paddy. However the government and sections of society want to continue with paddy cultivation. This is possible only when the government provides a compensation to farmers. This can be transferred directly to farmers. The cost of distributing subsidy through panchayat-level agricultural offices could be higher than the amount of subsidy. Hence there could be certain cases where such a direct-transfer of subsidy makes sense.
However, there are other cases and situations, where cash-transfer is not the appropriate solution. Hence my point is that the embrace of such a policy prescription without understanding the real social problem and the nature of the required governmental intervention in a particular context is not going to be helpful (or it could be even harmful). Before getting into the merits of cash-transfer, there is a need to note another undesirable tendency here.
The leaders ruling the central government think that it is their job to solve all problems in society and economy. The actions based on such a thinking can lead to the wastage of resources. The allocation of responsibilities between different tiers of governments has a certain rationale. There are valid reasons for allocating an important role to the state and local government in poverty eradication, education, health care and so on. The tendency to transfer money directly to the people by the central government would upset the delivery of those services expected from the state and local governments.
Why is the root cause of poverty in India? Is it because some people have become poor or fallen below the poverty line? Is it easy for such people to get over the poverty line? Or have they been remaining poor for generations? What makes the situation of farmers vulnerable? All these questions are important in deciding the appropriateness of cash transfer.
There are people who cannot earn their living by working. These include older people, and those who are seriously sick, physically or mentally challenged and so on. These people need financial support from society (if their family cannot extend such support). It is these people who can benefit from cash transfer, if there are ways to ensure that the money is received by the intended beneficiary or used for the intended purpose (if others get the money on behalf of the beneficiary). A well designed cash-transfer scheme with appropriate precautions would be useful in this regard.
What about those men and women who have the capacity to do work but don’t have jobs? They need employment, and here the focus should be on the generation of employment. This may require the government to ensure that these people have appropriate skills (and capital) and there are enough economic activities that require such workers. If markets or private firms do not generate enough employment, then the rural employment guarantee scheme of the government should work for a minimum number of days. Allocating enough resources for this scheme, and making governance work (at the state and local levels) to see that there are enough jobs to do socially useful work should be the priority here. Cash-transfer is of little use in this case.
What if some people are poor, because the family size is higher, women can’t take up paid work, and the wages of those who work are too low? These problems require different kinds of strategies. There is a need to increase the productivity of people and these may require them to get skills and education. Women should be encouraged to take up paid employment. They should have enough supporting facilities for that purpose. There should be a strong persuasion to reduce the family size. All these require the provision of well-functioning schools and public health-care systems, and social engineering. Direct cash transfer is of little use here too.
What if people become poor due to sickness and consequent medical expenditure? This cannot be addressed by an insurance scheme. The presence of a set of well-functioning government hospitals at the district and sub-district level is unavoidable. This is necessary to see that even private hospitals provide services at competitive rates and do not indulge in malpractices. We were quick to learn from the USA on how to fix our health-care! It would have been much more useful to learn from developing societies which have a reasonably functioning health-care system.
What about the vulnerability of farmers? Is it due to that they don’t get a decent price for their products? If that is the case, can we solve this problem on a sustainable basis by giving them 6000 rupees per annum? There may be a need for many other actions to solve their problem: Need help and facilities for storage, transport and marketing so that their products can be sold at places and seasons where/when the prices are higher. What if the vulnerability of farmers is due to lower incomes (due to the small size of the farm and the low productivity)? That may require another set of strategies including the encouragement of the younger generations of farmers to move out of agriculture. What if farmers get into debt trap due to their struggle to marry off daughters by paying dowry and sending sons to higher education? 6000 Rupees per annum is not going to address any of these challenges. Moreover by paying this much money to the millions of farmers, the government reduces its capacity to provide public goods or take other actions that are necessary to reduce the difficulties of these farmers.
I think the strategy of cash-transfer is good for those who cannot work and for those whose income fall below a minimum for a relatively shorter period. Such a poverty is likely to see in relatively developed economies. Hence it is not incidental that the advocacy for cash-transfer come from people who are exposed to the socioeconomic conditions of the developed economies. On the other hand, it is obvious that the poverty in India is due to structural reasons. People do not have assets, skills, and education. Their limited assets and capabilities do not give them an adequate income. Not enough public services are available to enhance their productivity and incomes. Under such conditions, direct cash transfer is not going to address poverty and vulnerability on a sustainable basis.
What about closing down all government schools, and transferring an amount so that people can use it for the education of their kids? What about asking all public universities to charge a cost—based fee, and students get scholarships from governments? What about closing down all public hospitals and providing insurance support to patients? It is easy to have many more cash-counters, which collect money from people as taxes, and distribute or disburse payments.
Ensuring that public services of appropriate quantity and quality are provided to see that people get basic education and health-care, or have access to a public distribution system, or that there are enough roads, irrigation-systems, storage facilities, research and extension to improve agricultural productivity, and so on, is a tough task. Governments are not wiling take serious efforts in that direction. These have to take place at the state and local levels. Instead of pursuing and encouraging these actions, the leaders of the central government use magic bands such as `direct cash transfer’ to make India `developed’.
Narendra Modi sees (correctly) that the loan waiver offer of Rahul Gandhi and Congress as a populist policy which is harmful for the country. However he cannot avoid the distribution of money to farmer’s accounts, instead of using it for solutions that lead to a sustainable impact. The intensification of the competition in politics forces even Modi to follow similar policies, and that is good in one sense. However, the competition among these national politicians to come out with one or other magic bullet may not lead to a sustainable improvement in the life of people.