A post-Covid-19 social protection architecture for India
Stronger social protection led by an inclusive growth dividend will protect the vulnerable and drive India’s economic recoveryUpdated: Jun 11, 2020 12:39 IST
The lockdown to slow the spread of the coronavirus disease (Covid-19) has inflicted a heavy cost on India’s poor. Most have seen their incomes fall; many have seen their families uprooted; some have even lost their lives. On moral grounds alone, there is a strong case for augmenting spending on social protection for the poor, and the Government of India has taken some important first steps in this regard. However, more can and should be done, because spending on social protection is not only ethically desirable but also critical for driving the broader economic recovery.
A core theme in economics is that there is a trade-off between welfare programmes and efficiency. Yet, a growing body of research suggests that when people are very poor, there may be no such trade-off. Thus, a well-designed social protection architecture should not be seen as charity, but a key engine for economic growth. Schemes such as the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), public distribution system (PDS), and a modest universal income transfer can drive growth by boosting demand, correcting market failures, improving credit access, and providing the insurance needed for people to undertake risky investments to improve productivity.
The value of MGNREGS and PDS
These facts are evident in research on India’s two main pillars of social protection — MGNREGS for employment security, and PDS for food security (that cost 0.5% and 1% of GDP respectively). Many sceptics of MGNREGS (including myself) initially thought that the programme was not a good use of public funds. In addition to concerns about corruption and leakage, many economists were worried about the prospect of MGNREGS driving up wages without increasing productivity, thereby reducing market employment.
However, high-quality evidence using a large-scale randomised evaluation has found that improving MGNREGS implementation (by reducing leakage, payment delays and uncertainty) led to a substantial reduction in rural poverty. Importantly, only 10% of the income gains were from additional MGNREGS income. The majority of the impact came through an increase in both market wages and employment of the rural poor. One reason is that when employers have high market power (which we find evidence of), programmes such as the MGNREGS can correct pre-existing market failures and increase both wages and employment. We also find longer-term benefits, including increases in credit, assets, number of non-agricultural enterprises, and employment in these enterprises. Thus, improving wages and incomes of the poor, through social protection, can have large positive multiplier effects on the economy.
Similarly, recent research has found that PDS can insulate the poor from price fluctuations of food grains, and increase the proportion of the population that can reach minimum nutrition standards. Given the well-documented link between nutrition and productivity for labour-intensive tasks, PDS is likely contributes not only to food security, but also to boosting the productivity of the poor.
Thus, the government’s decision to increase the budgets for MGNREGS and PDS make a lot of sense since the benefits likely exceed the costs. Crucially, the existence of these two pillars provided the government with a rapidly implementable option for expanding social protection to mitigate the costs of the lockdown. For instance, phone-surveys in the last two months indicate that increased PDS allowances have been an important lifeline for those who have lost their jobs and income.
But economic recovery and India’s development will need more. The time is right to add a third social protection pillar, based on modest but near-universal income transfers that will promote both public welfare and an economic recovery.
A third pillar: An Inclusive Growth Dividend
There has been growing support for the idea of Direct Benefit Transfers (DBT) of income into beneficiary bank accounts, including a prominent call for a Universal Basic Income (UBI) in the 2016-17 Economic Survey. These calls have been amplified during the current crisis. A UBI-type approach will minimise targeting costs and exclusion errors, reduce administrative cost of implementation, and offer flexible benefits. Importantly, several studies have shown that income transfers help the poor greatly and that they spend the money productively (and not on alcohol or temptation goods as commonly believed).
Yet, the idea of UBI has not gained policy traction in India, in part because the amounts suggested have been prohibitively expensive (ranging from 3.5% to 10% of GDP). To make a poverty-eliminating UBI fiscally feasible, many proponents suggest replacing existing welfare schemes (including NREGS and PDS) with UBI. However, this is politically difficult and may not even be desirable given the benefits documented above. A more feasible option to deliver the social protection benefits of income transfers is to decrease the value of the transfer and implement it as a supplement rather than a substitute to existing programmes.
One concrete implementable idea that I have proposed in an essay with Paul Niehaus and Sandip Sukhtankar, and in a more detailed paper with Maitreesh Ghatak, is an “Inclusive Growth Dividend (IGD)” pegged at 1% of GDP (Rs 120/month at current levels). The amount will be paid as a monthly supplement to every Indian, with allowances for children paid into mother’s accounts. While this will take some administrative work, the investments in Aadhaar and Jan Dhan accounts in recent years make it feasible to implement IGD in the near future.
Though this is a universal income transfer, we called it an IGD because it differs from UBI in important ways. Unlike “basic income”, which connotes an amount that is enough to live on, “dividend” clarifies that this is one component of a portfolio of people’s income streams. “Inclusive growth” reflects the goals of universality, progressivity, and shared prosperity. Since the amount is the same for all citizens, the value of the IGD is much greater for the poor, but it is a shared benefit for the entire population that will grow with the overall economy.
An IGD could be transformative for India in several ways. Even at the modest value of Rs 120/month (or Rs 500/month for a typical household), it would meaningfully reduce poverty — augmenting consumption for the poorest 50% of the population by over 10%, and for the poorest 10% by 20%. Since mothers would receive allowances on behalf of their children, IGD would sharply improve female empowerment and agency — especially in rural India. It would directly contribute to universal financial inclusion by activating dormant Jan Dhan accounts, and allowing the poor to accumulate savings. It would also promote access to credit at lower interest rates (since creditworthiness will improve as a result of predictable cash flows), and increase the ability of the poor to make productivity-enhancing but risky investments (such as planting a new crop) by providing some consumption insurance.
An IGD also has many advantages relative to alternative designs that aim to deliver larger income transfers to fewer (poorer) people.
First, it avoids targeting costs and reduces the risks of mistargeting. Second, the IGD amount is meaningful enough to mitigate poverty, but too small to adversely affect work incentives. Third, targeted programmes have to be phased out as people earn more, which creates disincentives to work because of the loss of benefits. There is no such problem with an IGD. Finally, sociological evidence suggests that non-beneficiaries strongly resent welfare programmes that reverse the income ranking of people in a community. An IGD elegantly avoids the last two challenges by being universal and lifting all boats equally.
Successfully implementing an IGD will have the added benefit of augmenting both the capacity and credibility of the Indian State. Delivering an IGD every month will represent the first time that the Indian State has reliably delivered a benefit to every citizen. On its own, this will be a signature achievement. More importantly, the capacity to do so will dramatically increase the policy options available to the government to respond to future scenarios.
The current moment of nationwide economic hardship is especially appropriate for an IGD. Historically, times of economic hardship have been associated with an increase in social strife and conflict as people compete over a shrinking economic pie. An IGD can mitigate this strife and serve as a powerful symbol of social solidarity that all Indians experience together regardless of their station (an option for the wealthy to “give it up” could add to the solidarity).
Driving economic growth
In addition to protecting the vulnerable, a stronger social protection architecture will build the platform for a broader economic recovery. The government’s current economic strategy for businesses has largely focused on expanding credit access for micro, small, and medium enterprises (MSMEs). While the approach is fiscally prudent, this strategy is missing one critical element: Measures to boost demand. Even with credit guarantees, firms are unlikely to hire workers and ramp up production unless there is adequate demand in the economy.
Commentators such as Haresh Chawla and Rathin Roy have highlighted that India’s economic performance over the past two decades has been a top-down growth story. Specifically, the top 5-10% of the population earns enough to drive consumption. This demand trickles down to sustain the next 30-40% working in smaller (mostly informal) enterprises, while the bottom 50% leads a hand-to-mouth existence.
By putting more money in the hands of the poor, an IGD could help reverse this pattern and provide a bottom-up boost to the economy. Not only will it increase income, it will also provide predictability of future income — a key driver for demand. Recent evidence on unconditional income transfers provided to entire communities in Kenya finds an economic multiplier of 2.7. More generally, both theory and evidence suggest that a broader consumption base promotes economic development by allowing firms to recover the fixed costs of investing in more productive capital and technology. Thus, while the government may be wary of making additional fiscal commitments at a time of shrinking revenues, an IGD is likely to have a substantial multiplier effect on the economy by boosting domestic demand, and thereby deliver a high public return on investment.
Another way in which social protection can contribute to growth is through supporting migration. The heart-rending scenes of migrants travelling back to their villages have led many to call for reducing migration. Though well-intentioned, this will be a mistake because reducing migration hurts both workers and employers. Throughout the world, cities are engines of growth and migration to cities the most common pathway out of poverty.
Thus, the appropriate policy response to the migrant crisis is to build a stronger social protection architecture that is nationally portable. Having a portable PDS and IGD in place (and augmenting allowances before the lockdown) could have prevented the crisis of return migration by providing migrant workers means to sustain themselves during the job-losses caused by lockdown. The Government of India has correctly prioritised the implementing of nationwide PDS portability, which will strengthen this key pillar of social protection.
An IGD will add a crucial component of flexible income support — especially since PDS grains alone are not enough to survive with no other income. Research in recent years has shown that even modest income support to the rural poor can sharply increase their overall productivity and income by covering the search costs of finding better opportunities.
Thus, a portable IGD is likely to boost both incomes and aggregate productivity by empowering workers to seek the best possible livelihood in any part of the country.
Creating a win-win
The prime minister’s stated goal of “Sab Ka Saath, Sab Ka Vikaas, Sab Ka Vishwaas” is a laudable one. Yet, translating this ideal into practice is not easy. An IGD provides a practical and implementable way of doing so through its combination of universality (sabka saath; with everyone), promoting broad-based development (sabka vikaas; universal progress), and building public confidence in the government by credibly delivering a benefit to every Indian every month (sabka vishwaas; for everyone’s trust).
A key policy goal in responding to the hardship caused by Covid-19 and the lockdown imposed to slow its spread should be to both support the economy and the vulnerable in the short run, and promote long-term development goals. An IGD-led nationally-portable social protection architecture will do exactly this. It will support the poor, give them the means and confidence to migrate to better job opportunities, boost demand and productivity, help the economy recover, build social solidarity and state capacity, and lay the foundations for broad-based long-term prosperity.
Karthik Muralidharan is the Tata Chancellor’s Professor of Economics at UC San Diego. Vishnu Padmanabhan contributed to this piece.