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For rich or for poor?

india Updated: Nov 10, 2011 21:19 IST
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'Food subsidy is a massive burden…if so much is spent on subsidies, what is left for development?' agriculture minister Sharad Pawar recently asked. It is a legitimate question that is on the minds of many but seldom gets asked for fear of appearing callous. Are we prematurely trying to be a welfare State? In the developed world, safety nets like food stamps are regarded as humanitarian obligations toward the poor. In the West, the poor are not so poor as to be deprived of a basic minimum level of nutrition and education and any subsidy to them is unlikely to impact the average human capital of the State. An expenditure on any subsidy to the poor in such societies has to be considered 'consumption' rather than 'investment'. Can we say the same about food subsidy in India?

We feel that food subsidy in India is not charity but an investment. Our intent is not to defend the public distribution system through which subsidy is delivered. Alternatives, including direct cash transfers, must be tried. What we would like to defend here is the role of food subsidies in the process of development.

What do we know about the process of development through which the societies once poor became rich enough so that even the poorest of their citizens could live like human beings? Well, development has always been a process of productivity improvement and that, in turn, has come about either through innovation by their own citizens or through a diffusion of knowledge from other societies. To a great extent, one who adapts the ideas and knowledge from elsewhere should also be considered an innovator.

Innovation does not mean a bunch of PhDs in white coats working in labs. It means taking a small step to do the existing task better. Societies on the rise are experiencing innovations in all walks of life. Farmers are trying out new methods of cultivation or using market information to switch to more lucrative crops; industrial entrepreneurs are trying out new methods of production; local governments are trying to experiment with organisational forms; banks are trying out new methods of issuing credit to those without collateral.

Every society has individuals with potential to innovate. However, their potential remains dormant as long as they lack access to credit, education, safety and the freedom from the anxiety about where their next meal will come from. An essential function of a government in a developing country is to widen the pool of potential innovators. Yes, it must create infrastructure, education and healthcare institutions to make this possible. But it must also try to ensure that if at all it is possible, the next generation doesn't grow up with under-developed brains due to malnutrition. The wealth of our nation depends on their creativity. Food subsidy to the poor is not a luxury we cannot afford; it is a necessity for development that we cannot afford to cut back on.

This picture of innovation is pertinent for India. The strong growth in India that the world has taken notice of has occurred due to the productivity growth in a few high-tech service sectors and a few manufacturing sectors that employ a tiny part of India's massive labour force. Over 90% of India's labour force makes a living in the informal sector that includes agriculture, cottage industry and retail shops. Yet this is not the sector that is part of any discussion on productivity growth. What will bring about a rise in its productivity?

The informal sector is a highly labour intensive sector. It uses little capital and power and the main source of productivity in this sector is the improvement in its human capital — a daunting task for the very poor. Their poverty is self-perpetuating. It prevents them from trying new things by limiting their access to credit and it results in malnourished children who end up doing a lot worse at school than they might otherwise have, thereby lowering the potential for intergenerational improvement. An income transfer to the poor would relax some of their constraints and induce at least some of them to take tiny steps to improve their own productivity.

Many people are betting on India having a bright future on the basis of its demographic dividend. The idea is that when there are more net producers (young) and fewer net consumers (old), the country can have higher incomes, higher savings and higher investment. The presumption here is that the young are indeed productive. A malnourished, undereducated young population will contribute little demographic dividend. Given that the population growth is higher among the poor, there is a real chance that this opportunity of reaping the demographic dividend will pass us by.

The wealth of a nation is the productivity of its people. A development strategy that enables only a small minority of the nation's population to experience productivity gains while leaving the rest stagnated must be considered deeply flawed. All it does is to create a small rich country inside a large poor one with the rich coming to believe that food subsidy or any poverty alleviation measure is a sort of foreign aid to this other poor country. In their minds, it is also clear that a food subsidy is only consumption rather than investment and hence unaffordable.

Ashok Kotwal is professor, University of British Columbia; Milind Murugkar is policy analyst, Pragati Abhiyan, Nasik; and Bharat Ramaswami is professor, Indian Statistical Institute, New Delhi. The views expressed by the authors are personal.