The debate on the issue of ‘revdi’ or freebies has raised questions on whether government welfare spending constitutes a freebie and if such spending is justified. The popular narrative in India assumes that the provision of healthcare, education, food, and other subsidies is a fundamental responsibility of the government, partly because we see such provisions in richer OECD — Organisation for Economic Co-operation and Development — economies. However, what welfare to provide and how to carry them out are questions that each society has to address from first principles and arrive at a social contract that fits its conditions best.
The role of the State
Before we get to the question of government spending on welfare, it is useful to reflect on the role of the State. Its fundamental role is the provision of public goods: Those that are non-rival and non-excludable. That is, my consumption of the good does not mean there is any less for you, and once the good is supplied, one cannot be stopped from consuming it. This implies that there is no incentive for anyone else to provide the good, and therefore, justifies the government collecting tax from citizens to finance expenditures on such public goods.
Very few goods classify as ‘public goods’, but one can imagine defence, clean air, and safety as core elements of what constitute public good. It is useful to remember that what we think is good for the public is not necessarily a ‘public good’. Healthcare and education do not classify as public goods. They are rival and excludable, and there exist private markets that are able to provide these services at a cost.
However, when there are externalities, private parties do not internalise the social cost of their actions and some government intervention may be justified. Take the example of vaccines. I may not want to incur the expenditure of taking a vaccine, but my call to not take it has implications for the rest of society. Or think of education. I may not want to incur the cost of getting a higher education, especially if the returns are not that high, but a more educated population may have significant benefits for society as a whole.
In Europe, the idea of State-provided social insurance got firmly established after the devastation caused by the Second World War. Different countries have chosen different forms of welfare models. Nordic countries such as Denmark, Finland, Sweden, and Norway provide universal provision of services throughout the State. In the UK, many welfare services are dependent on conditions such as age, poverty status, and employment status. The conventional wisdom today is that the government should provide some degree of welfare. This is not because welfare is a right of a citizen, but because a social contract mediated through the State is seen to have benefits over and above the perverse incentives that any welfare scheme may create.
The challenges of welfare delivery
In India, we often look at the European welfare State with envy and wish to replicate the same model here. But we must be careful before we agree on both the role of the State and the channel through which it fulfils that role.
Government provision, or financing of welfare services, is not free. It requires a high tax rate and high State capacity to deliver on its promises. In a country with a low tax to GDP (Gross Domestic Product) ratio, financing ‘large-scale’ welfare expenditures may hit budget constraints. We need to remember that it is economic growth that brings in the tax revenues that finance welfare. In a country where State capacity is inadequate, the production of the service by the government may lead to dilution in quality as well as quantity. If school teachers often don’t show up, government schools may squander precious resources, especially when research suggests that there is no large-scale difference in learning outcomes between students in public and private schools.
Government provision of welfare also opens up individual lives to surveillance by the State — the more the State promises welfare services, the more it demands a window into the lives of its citizens. For example, State-controlled education and schools become more politicised and can more easily become a propaganda machine for the government of the day. A State that provides cash transfers can more credibly demand an Aadhaar-like ID system. Where the rule of law is weak, the links between welfare provision and State surveillance become more perilous.
How do we provide welfare?
There is an argument that improving welfare will take many of our fellow Indians out of misery and put them on the path to prosperity. This view ignores the impact that a weak rule of law and pervasive State control on almost all economic activity has on the very people who welfare seeks to rescue. We may provide all manner of health and education, but if we can’t protect the poor from the vagaries of a corrupt policeman, enforce contracts and create infinite hurdles that effectively increase the ‘cost of engaging in economic activity’, we will not make much progress on improving the lives of our people.
In our development journey, we have prioritised welfare over the rule of law and have probably ended up with a poor score on both. The State’s primary responsibility should be to fix the foundation of the rule of law and build well-functioning police and courts before getting into the production of health and education. This does not mean that there should be no welfare. Cash transfers or ‘vouchers’ can be provided to citizens to choose services produced by the private sector. Government financing of institutions can be conditional on certain parameters that will drive their behaviour towards social objectives. This can free up government resources from running the complex machinery of procurement, logistics, and staffing required to actually provide ‘in-kind’ transfers. The government will still have a role in regulating the private sector, and while regulation can be challenging too, it may be more effective than providing the services itself. This should not be seen as a cynical retreat of the State but as its re-orientation towards core public goods.
The author is an associate professor at the National Institute of Public Finance and Policy (NIPFP). She tweets @resanering. Views are personal.
(Edited by Humra Laeeq)