Big numbers, small impact? Understanding the effect of the Centre’s $400 billion welfare spend on monthly consumption
PM Modi's welfare initiatives are central to his re-election campaign. However, critics argue that the true benefits of these schemes are overestimated
$400 billion — this is how much Prime Minister (PM) Narendra Modi has said his government spent for the welfare of hundreds of millions of poor and lower middle-class Indians since coming to power in 2014. As he seeks a third term as PM in India’s ongoing general elections, Modi has highlighted his government’s commitment to its unique brand of welfare in his election rallies.
“The poor people who spent their lives waiting to get the benefits of government schemes are seeing a meaningful change today. The government is reaching the doorsteps of the beneficiaries and proactively providing the benefits,” Modi said in January this year while interacting with welfare beneficiaries via video conferencing.
Since 2014, Modi’s government has put in motion what former chief economic advisor Arvind Subramanian has called “New Welfarism”, where the Indian state prioritised providing goods such as cooking gas, toilets, free grains, electricity, piped water and cash transfers over public services such as health and education. Research has shown a correlation between welfare and voting preference. “New Welfarism’s calculation is that there is rich electoral opportunity in providing tangible goods and services, which are relatively straightforward to deliver, measure, and monitor,” according to Subramanian.
One question economists have been grappling with is how to measure its effectiveness. One statistic in the latest Household Consumption Expenditure Survey (HCES), conducted between August 2022 and July 2023, throws some light on it. The estimated monthly per capita consumption expenditure in rural India and urban India was ₹3,773 and ₹6,459, respectively. However, after factoring in the value of free items received as part of government welfare schemes, the monthly per capita expenditure was ₹3,860 for rural India and ₹6,521 for urban India. In other words, a difference of only ₹87 and ₹62 per household per month for rural and urban India, respectively.
The National Sample Survey Office (NSSO) uses a statistical method known as imputation to arrive at an approximate figure in the absence of data. To reach the estimated values listed above, the imputed value of items such as rice, wheat, jowar, bajra, maize, ragi, barley, small millets, pulses, gram, edible oil, laptops, tablets, mobile handsets, bicycles, motorcycles, clothing (school uniform) and footwear (school shoes) received free of cost by the households, were considered. However, the HCES did not contain imputed values of health, education and other provisions such as gas cylinders and toilets. The NSSO did not provide any explanation for this in the factsheet.
“The impact of free transfers of some goods like food shows up as being negligible. Partly, because it is probably confined to things like food grains or specific state-specific schemes (like bicycles for schoolgirls). In the case of food grains, remember that the households accessing the free food were already paying only ₹2/3 per kg, so the difference would not be great. And the other schemes are quite small in volume and value,” said Jayati Ghosh, a professor of economics at the University of Massachusetts Amherst.
According to Ghosh, the difference in households’ expenditure after government transfers is marginal and indicates that welfare spending is not as big as it is made out to be.
Critics point to data gaps in the Centre’s welfare schemes
In January 2023, the State Bank of India’s research department tried to put a monetary value to various government welfare schemes — in other words, what is the worth of welfare benefits received by India’s hundreds of millions of beneficiaries?
“Schemes like PM KISAN, MGNREGA (average wage 182), MGNREGA wage increase, Ujjwala Yojana, and PMGKAY are increasing the per person per month rural income by ₹437,” noted the SBI in its findings, PM KISAN is the government’s cash transfer scheme for landholding farmers; Ujjwala Yojana provides concessional LPG connections to families in rural India that are below the poverty line; Mahatma Gandhi National Rural Employment Guarantee (MGNREGA) provides guaranteed employment for 100 days every year; and the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) is the free food grain programme.
Josh Felman, head of the Washington DC-based JH Consulting, who also led the International Monetary Fund's (IMF) India office in the mid-2000s, said we cannot compare SBI’s findings with the HCES. “Most of the programmes mentioned in the [SBI’s report] are transfer programmes. They augment household income. But this is a survey of expenditure. So one cannot make any direct link between the two.”
Ghosh said that the SBI’s report is misleading. For instance, she pointed out that only 60 million households got work under MGNREGA in 2023-24, and only 52 days of employment were provided on average. “That is less than two months’ worth of daily income increase – how can that be extrapolated to the whole year?” Ghosh said.
Similarly, the government’s Ujjwala scheme — currently covering 96 million households — provides free gas connections and one free cylinder (recently another free cylinder was provided as pre-election sop). However, all the other cylinders have to be paid for at a higher rate than before, Ghosh pointed out. “So on what basis is the SBI claiming that there was this much increase in the monthly income of average rural households?” she added.
“It's difficult to arrive at any conclusion,” Felman said, citing data gaps and lack of imputation of free items such as toilets, electricity, piped water supply and gas cylinders in the HCES. “The HCES doesn't really capture the concept of New Welfarism.”
One of the most popular government welfare schemes is the provision of free food grains to about 800 million poor households in the country — the PMGKAY. In November 2023, Prime Minister Modi extended the scheme for another five years, noting that “for the next five years, the stoves of 80 crore people in my country will keep burning. This is Modi’s guarantee.” Poor households receive five kilograms of grain and one kilogram of pulses per person per month on top of five kilograms of subsidised grains under the National Food Security Act (NFSA).
However, according to the HCES, which imputes the value of free food grains more than other items, the difference in consumption expenditure after government transfers is just ₹87 per family per month in rural India, where a majority of the poor live. “This is pretty small. As far as I can see the main imputed item is the grain under the Public Distribution System (PDS). If I am right, then this is saying that the average person doesn't receive that much from it. Seems a bit hard to believe,” Felman said.
“The impact of free transfers of some goods like food shows up as being negligible,” Ghosh said. Se added that welfare schemes are more about the fulfilment of citizens’ rights in a democracy rather than being touted as gifts from the government, which she noted has been the case under the government’s “new welfarism.”
Even after ten years and $400 billion worth of welfare spending, economists do not have plausible means to measure the economic impact of these schemes on millions of India’s poor households, an exercise which carries pressing urgency at a time when rural India is under the throes of an economic distress and income inequality in the country remains high.
The government’s “New Welfarism” approach has prioritised provisioning tangible goods over traditional public services such as health and education - and this trend shows up in budgetary spending as a proportion of gross domestic product. However, in the absence of a statistical measurement of the effectiveness of “New Welfarism” goods on households, slashing spending on health and education could become a risk as the country seeks to reap its vast demographic dividend.
As Yamini Aiyar, former president of the Centre for Policy Research, recently told Phenomenal World—“No country in the world has been able to become an economic powerhouse without serious public investment in core public and merit goods that the state is obligated to provide its citizens, like education and health.”
