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OPINION: Can Basic Income Cash Transfers Transform India?

Since the 1990s, on average the Indian economy has been growing at over 6% a year. Yet hundreds of millions remain mired in poverty, and inequality has grown steadily. For decades, although there are 1,200 centrally-funded social policies on the statute books and hundreds more at state level, successive governments have relied largely on the Public Distribution System (PDS) to redress poverty.

The PDS subsidises consumers via subsidised grain, rice, sugar and kerosene if they have a Below Poverty Line (BPL) card or something similar. Producers of many goods receive huge subsidies as well. Altogether, subsidies eat up 7% of GDP.

They do not work. The system is wasteful, inefficient, market-distorting, regressive and deeply corrupt. Rajiv Gandhi famously said that 85% of subsidised food did not reach the poor. The Deputy Chair of the Planning Commission said in 2009 that only 16% of it reached them. Others have estimated that for every Rupee spent 72% is lost in transit.

While continuing with the PDS, in 2005 the Congress Party, long regarded as the bastion of Indian democracy, launched a grandiose National Rural Employment Guarantee Scheme (NREGS), supposedly guaranteeing every rural household 100 days of labour a year at the minimum wage. Huge numbers have supposedly benefited, vast sums spent, many eulogies uttered.

In reality, ghosts have been resurrected, recorded as having done labour. Most rural people have had few if any days of labour under the scheme (renamed to give it the status of having Gandhi’s name preface it). Much of the money has gone into local bureaucrats’ pockets. One study estimated that only 8% of recipients had been employed for 100 days in one year. Another suggested that only a minority of projects had been completed, another that it has not reduced rural poverty at all. Corruption is endemic. The scheme only awaits a journalist to write a book entitled The Greatest Social Policy Scam in History.

Meanwhile, something remarkable has been brewing. A radical alternative has been gaining ground. In 2009, led by SEWA (the Self-Employed Women’s Association), we launched the first of three pilot cash transfer schemes. The principle is simple: Give people cash, a basic income, instead of subsidies or make-work labour. And do not attach conditions, directing people how to spend the money; they can work that out for themselves. We do not claim credit for what has happened since, for other factors have contributed. But the pilots have proved timely.

The first, financed by UNDP, took place in a low-income area of Delhi, where hundreds of households were offered the alternative of continuing with the subsidised items or receive a monthly cash transfer of equivalent value. Many initially chose the cash. Later, when we did the evaluation, many more wished to do so. Although a political campaign was organised, involving physical violence towards our women fieldworkers, the results have been very positive, with improvements to living standards.

Meanwhile, with financial help from UNICEF, we launched a bigger pilot in the state of Madhya Pradesh. In eight villages, for eighteen months, every man, woman and child has received an unconditional monthly cash transfer. Over 5,500 villagers have been recipients. We have been evaluating the effects by comparison with people living in comparable villages, in a so-called randomised control trial.

Such pilots take a long time. Politics does not wait. Suffice it to note that the results of this and the third pilot in tribal villages are heart-warming. Even though the amount paid is very modest, about 30% of bare subsistence, we have observed improvements in nutrition, school attendance and performance, women’s status, economic activity and sanitation. Many villagers have told us they want a substitution of cash for subsidies. More have come round to that as experience has been gained.

What seems to happen is that the cash provides liquidity and a sense of security that infuses confidence and gives people a greater sense of control over life. So the positive effects exceed the value of the transfer.

It is what has happened back in Delhi that is so intriguing. In the past few months, we have been asked to brief senior officials, and they have been emboldened to push cash transfers into the centre of national debate.

In November, the Prime Minister went on television to announce the government is to launch a cash transfer scheme, rolling it out to 51 districts in 2013 by raising the price of kerosene and compensating people by cash paid into bank accounts. Not to be outdone, on December 15, Delhi’s Chief Minister launched an unconditional cash transfer scheme in her state for those omitted from the cap put on BPL card holders. A torrent of media comment has followed.

The Congress Party has been converted. Earlier this month, its leader Sonia Gandhi, the Prime Minister and several Cabinet colleagues descended by helicopter on a village and announced its cash transfer policy to a crowd of 30,000.

Indian social policy is at a crossroads. Opposing cash transfers, a group of diehard supporters of the PDS have been promoting a Right to Food bill that would universalise the PDS and subsidised food. They have also organised hostile protests. They claim cash benefits would lead to abandonment of public social services.

They are being Canutish. The PDS is literally rotten, as Delhi’s Chief Minister has admitted. Often grain comes in sacks that contain numerous small stones to make up the weight; often the grain and rice are stale; often villagers travel long distances only to find the rations are not there. All this is ignored. Let them be supplicants, say the paternalists in effect.

The risk now is that, in the rush to operationalize cash transfers across the country, design faults and excessive politicisation will put back the cause for years. Here we have a lesson for government. In the villages receiving the basic income, the payments have been an extra, not a substitute for something. We asked everybody to open a bank account within three months of receiving their first payment. There were predictable teething problems. But soon, everybody had accounts, with help from our colleagues. In that time, suspicions were allayed and support for cash transfers strengthened.

The government is doing it the wrong way. It is raising the price of a subsidised item, kerosene, telling people they will be compensated through a bank and by means of an identity card, the Aardaar. But, as the government’s pilot has shown, many will lose in the short-term since they do not have accounts and cannot obtain the cash. This risks a backlash.

The solution must be based on realising that while villagers are always on the edge financially a government can take a medium-term perspective. If they rolled out their scheme to those 51 districts by offering extra money in the first year while stating that everybody must open a bank account in that time, the fiscal cost will be small. In the second year, they could phase out selected subsidies, sharing the gains by disbursing a third of the subsidy in additional payments while saving the fiscal coffers the other two-thirds. Remember that most money spent on subsidies does not reach the intended beneficiaries.

Will wisdom prevail? One cannot be optimistic. It is a pre-election year and Congress is set on making cash transfers what a leading politician has called “a game-changer”, an election-winning measure. This will galvanise opposition. Everybody would gain if only the politicians had the wisdom to de-politicise the reform. The Government should set up an independent Cash Transfers Commission to oversee the process and to ensure the level of benefits is set by economic criteria and not raised just before elections.

How much better it would be if unconditional, universal, individual cash benefits were rolled out slowly and quietly. We know they have made a great difference to the lives of those thousands of villagers in our pilots. We have heard their stories, seen their children and analysed the data gathered by our fieldworkers. There is a great chance of transforming Indian social policy. Let us hope the politicians take it.

Discussion

2 Responses to “OPINION: Can Basic Income Cash Transfers Transform India?”

  1. The idea of a basic income appeals on many levels, not least of which is the potential to release the creativity of people who otherwise would be forced to spend their lives producing widgets. It would also mean that the term “labour market” would have meaning. (without willing sellers it is not a market).
    Unfortunately I just cannot see how it can possibly work to reduce inequality. I can only see the reverse occurring. I can understand
    why the idea appealed to the likes of Napoleon, Friedman, Hayek, Samuelson. It’s an easy and glib response to the obvious equity issues created by their economic prescriptions and one that is market friendly and growth friendly. What I can’t understand is why it would be supported by somebody who clearly has such a clear insight into the workings of the world as yourself.
    Injecting cash at the base of an unfettered market economy can only enrich the rentier class, in our case the banking sector, and increase the cost of necessities.
    Boarding house rentals in Auckland are set just below state benefit levels. An increase in benefit levels produces an increase in rentals by the same level. Value of doss houses rises, more is borrowed. The net result is a transfer from taxpayers to banks.
    The same principle applies throughout the economy and in the market for all essential goods and services.
    You speak of the corruption endemic
    in India’s subsidy system but the corruption of a cash transfer system is more fundamental. A cash basic income system is inherently a transfer to the rentier class.
    It’s nice that the pilot scheme worked well in the villages. Nothing can be deduced about those because the scale was too small to distort the Indian economy. You have already described what happens when schemes are trialled at a national level. The price effect occurred even before cash was transferred.
    The fact is that equality cannot be reduced while we remain committed to organizing the world for the benefit of global finance
    (and measuring that benefit as GDP growth). In the recent past the social wage filled the function of a basic income. Governments considered it part of their core function to minimize the cost of essential services. We replaced that system with a religious devotion to the market and agreed that henceforth all essential services must be provided by private enterprise and that all private eneterprise must focus solely on maximising returns to investors. In such a world taking cash from the middle to feed to the bottom can only benefit the top.

    Posted by Hamish Sutherland | February 11, 2013, 9:03 pm
  2. 1. Hamish Sutherland: “In such a world taking cash from the middle to feed to the bottom can only benefit the top.” Why would the cash come only from the middle? Surely, from the outset, “the top” would be contributing too. And if the system further enriches them, then they should contribute more. Or is HS referring to the practical problem of taxing “the top”?
    2. I see the primary purpose of an unconditional basic income as reducing, if possible, eliminating absolute poverty. If it also reduces inequality, so much the better.
    3. Even where public services have been privatised or liberalised, most governments still consider “it part of their core function to minimize the cost of essential services” – though they may be going about it in the wrong way. In my view, an unconditional basic income should not replace this core government function, but complement it. I admit there is a danger that the introduction of such an income might tempt governments to let the price of public services rise. Another danger is that employers would be tempted to lower wages. But here again, unconditional basic income should not replace, but complement statutory minimum wages and free collective bargaining. Again, I would agree that there is a danger in considering a UBI to be a panacea.
    4. I like HS’s comment on the term of “the labour market”. I dislike the term too, but more on the ethical grounds that “labour is not a commodity”, an internationally recognised principle.

    Posted by Edward S | February 12, 2013, 3:18 pm

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