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The invisible hand

It's a simple idea used by 40 countries: give the poor money instead of complicated schemes. India says it will too - but it isn't ready. Samar Halarnkar writes.

columns Updated: Sep 01, 2011 10:39 IST
Samar Halarnkar

For a man who serves as chief economic adviser of a nation currently obsessed with GDP and growth rates, Kaushik Basu has an interesting idea. Judge a country not by its GDP but by how much the poorest 20% of its population earns, says the Cornell University professor in his new book, Beyond the Invisible Hand: Groundwork for a New Economics.

It is an idea that should fit his government's mantra of lifting all boats in India's rising tide of economic growth. But how do you ensure inclusiveness in a nation beset by governance failures, corruption and leaks so severe that roughly Rs 50,000 crore - money enough to feed many countries - never reaches the poor?

One solution, propounded by Basu, was in the budget presented on Monday by his boss, finance minister Pranab Mukherjee. It is an idea so simple that it seems radical to India: Give the poor cash instead of complicated schemes. Regular payments, in cash or as direct electronic transfers into bank or post-office accounts, can be unconditional - primarily to the almost destitute - or conditional, such as sending children to school or getting babies vaccinated. Direct payments bypass the host of grasping intermediaries who undermine India's vast, tottering welfare state.

From the Philippines to Peru, 40 countries use cash transfers. The literature on cash transfers is rich. I refer sceptics to a book released last year by three scholars in the field.

Just Give Money to the Poor: The Development Revolution from the Global South describes how cash transfers have empowered the poor, cut poverty, and boosted education and health.

The largest, most successful programmes are run by Brazil and Mexico. Until the 1990s, Brazil was one of the world's most unequal countries, part Jharkhand, part Sweden. Between 2003 and 2009, incomes of the poorest Brazilians grew seven times as much as the incomes of the richest. This is largely attributed to Bolsa Familia (family grant), now regarded as the world's biggest and most successful anti-poverty, cash-transfer programme. Bolsa unifies a set of programmes, from cooking gas to food, and pays R590 per month to poor families, on the condition that a child, 15 years or younger, attend school.

Bolsa, which now covers 39% of Brazil's population, supports up to three children. If at 16 a child is still in school, payments rise to Rs860. Families in extreme poverty get Rs 1,800, without conditions. In five years since 2003, Brazil's poverty rate has fallen from 22% to 7% and extreme poverty has all but vanished.

Poverty, malnutrition and child labour have similarly fallen in Mexico, where the programme, Oportunidades (Opportunities), covers a third of the population and pays - almost always - mothers Rs 5,570 per month to keep children healthy and in school.

India does run minor cash-transfer schemes. The most successful and widely publicised is the Rs 175 crore Bihar has given over four years to about a million girls to buy cycles to reach school. Enrolment is up more than three times and dropout rates are down by more than half.

A recent paper by World Bank economists measured leaks in pensions - 4% of India's social-security spending - handed directly to the elderly, widows and disabled. In Karnataka, the leaks are 17% (mostly because of missing beneficiaries or bribes paid to become a recipient). The authors compared the indirect public distribution system (PDS) in the same state. The leaks: 64%.

The PDS is, however, more complicated to substitute by cash. Harsh Mander, who heads the food security group at the influential National Advisory Council (NAC), says the PDS has three objectives: to procure grain, stabilise prices and subsidise food. "So, how do the first two happen if the PDS is replaced with cash?" he asks.

This question will be particularly relevant when the food subsidy balloons from its budgeted figure of Rs 60,570 crore after the Food Security Act is passed this year. With the architects of the Bill, the NAC, feuding with those who will implement it, the government, implementation is dangerously unclear.

Regardless of whether this subsidy is converted to cash, the PDS cannot be immediately removed, agrees Santosh Mehrotra, director general of the Institute of Applied Manpower Research, primarily because it will take "considerable" time to change the PDS supply chain, emanating primarily from India's breadbaskets, Haryana and Punjab. Mehrotra suggests, in a recent paper, that India convert some of its massive subsidies into five conditional cash transfers aimed at poor families, mothers, children and youth. But, he says, this cannot be done without vigorously implementing a new methodology (already drawn up) to re-identify the poor, currently estimated at 450 million people. This is vital: about half of India's subsidies reach those whom it should not.

Cash transfers are not magic bullets. In Brazil, they have not worked in urban areas quite as well as in rural areas. Brazilian officials talk of 'old' and 'new' poverty. Hunger, the lack of basic health and education constitute 'old' poverty, while breakdown of families, abysmal living conditions and violence are 'new'. With growing urbanisation, poverty in India straddles both these worlds, and one size obviously cannot fit all.

Cash transfers require certain prerequisites that India does not have - development infrastructure and good governance. Brazil has put in place an elaborate, robust governance system, the invisible hand of Basu's book. Payments are made through a debit card, every transaction is recorded in a sprawling electronic database and schemes are frequently evaluated. India's unique identification (UID) system is not yet in place, nor is the national information infrastructure that must give its databases real-time life. Yet, the government talks of moving to cash by the next budget.

India must see cash transfers as development grants that invest in youth and stimulate growth instead of only being safety nets. For that to happen, the government must first set in place the infrastructure of development. That means spending more: social-sector outlays have fallen from 2.06% of GDP in 2010-11 to 1.96% in 2011-12. If you pay the poor to buy food, educate children and improve their health, you must build more warehouses, schools and clinics than the present budget allows. As for the quality of governance, the government is worryingly silent. Before it hands over cash, India needs that invisible hand.

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