Cash may yet be king

Author - Baijayant 'Jay' Panda

Posted on - 6 June 2011

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This article was published on ‘The Indian Express’ on 6th June 2011





For years there has been a growing debate in India about replacing hugely inefficient subsidies with cash or vouchers transferred directly into the hands of the poor,who could then procure goods and services from the open market — for example food,fuel,and education. Many eminent economists support the concept and there are successful experiences from other countries; yet the political will has been slow to gather steam. There are broadly three objections,either explicit or implicit. First,an underlying distrust of market mechanisms; second,doubts about the beneficiaries’ ability to make good choices with the money they will get; and third,the logistics of fair disbursement.

Even now,with India on the verge of becoming the world’s fastest-growing large economy,it would be a mistake to underestimate the distrust of markets. Jawaharlal Nehru is reported to have told J.R.D. Tata that he considered profit to be a dirty word,even in the context of the public sector. Perhaps it was his revulsion towards capitalism that moulded the country’s attitudes. Or perhaps he was only reflecting the mood of a young republic that had just shaken off centuries-old colonial rule that had its roots in trade and commerce. In any event,even after two decades of economic liberalisation,modern India continues to be ambivalent towards markets and market mechanisms.

That should not be surprising,considering the egregious examples of crony capitalism that this country has repeatedly thrown up. And it is not just the gigantic national scams dominating the headlines that reinforce this suspicion; it is also the many mid-size scandals that routinely come to light at state and city levels; and most of all it is the billions of little frauds,the daily profiteering by district and village-level crony capitalists,which adds to the scepticism.

Free market mechanisms like lowered entry barriers and increased competition have contributed immensely to economic growth and consumer benefit. Think of the burgeoning millions of Indians who can now afford such things as scooters,cars,phones,air travel,etc. And yet,the average Indian citizen’s experience of markets continues to be coloured by such examples as the crony contractor who builds bad village roads,the crony NGO which skims off governmental spending,and indeed the crony PDS dealer who cheats the poorest of people.

Harnessing the power of markets for the public good will be crucial if India is to improve the lives at the bottom of the pyramid. There is no other way to do it efficiently,at an affordable cost. This is already well-recognised and made more palatable by couching it in constructs like public private partnerships,at least for large projects. But it will take many success stories at the village level before the aam aadmi will trust the system. The irony is that while the government lags behind in helping create these successes,those who can afford it are voting with their feet. One example is the success of private rural schools,which are delivering far better results than their much better funded government alternatives.

The second concern,about the ability of the poor to make rational choices,is not just a patronising attitude from a feudal past. Massachusetts Institute of Technology professors Abhijit Banerjee and Esther Duflo — two celebrated young economists who famously pioneered randomised field studies in their discipline — give examples of seemingly irrational choices made by the poor in their seminal new book,Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty.

Their analysis shows these to be linked to lack of information,beliefs,procrastination,and the toll taken by very demanding lives. But they also conclude that these choices are dramatically impacted by even small incentives. This is corroborated by the success of conditional cash transfer schemes in Latin America,where the stipulations have included children’s school enrolment and basic preventive healthcare.

Moreover,Banerjee and Duflo have also demonstrated that even non-conditional cash transfers tends to generally improve outcomes. The lesson seems to be that various approaches need to be combined,including respecting some of the choices made by the poor as well as structuring incentive based transfers.

Finally,there is the question of how to reliably disburse cash transfers. A quarter of a century ago,Rajiv Gandhi famously accused the notoriously leaky government machinery of gobbling up 85 per cent of the funds spent on poverty alleviation programmes,leaving only a paltry 15 per cent for the actual beneficiaries. Not much has changed since then. The solution is not to try and improve this machine — which is further complicated by intertwined networks of political patronage — but to bypass it as far as possible.

Technology holds the promise of that possibility. This is the one area where significant progress is being made,both by way of governmental initiatives like the UID programme,as well as the stupendous penetration of cellular phones,which has set the stage for potentially ubiquitous banking access. Put together,they make for a revolutionary combination: an inexpensive delivery mechanism and,critically,relatively easy beneficiaries’ audits.

There is no consensus yet on any of these issues: whether to have cash transfers at all; if yes,then whether vouchers,conditional transfers or unconditional transfers; the mode of disbursement,and so on. But for one significant clue,it is possible to dismiss all the chatter on this subject as premature.

The giveaway is that politicians are finally catching on to the potential of this issue. In the 2009 elections,at least two of them — Chandrababu Naidu in Andhra Pradesh and Vasundhara Raje in Rajasthan — aggressively championed cash transfers. Next time around,it is highly likely that they will have plenty of company