Prime Minister Narendra Modi with Congress president Rahul Gandhi
File photo of Prime Minister Narendra Modi with former Congress president Rahul Gandhi | Sonu Mehta/Hindustan Times via Getty Images
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Rahul Gandhi has announced what would, if it is realised, likely become the largest single cash transfer programme in the world, in terms of beneficiaries and perhaps even in terms of resources delivered.

This initiative has a clear electoral logic in India but also reflects a discussion that has been emerging for some years in the corridors of power — those places in which policies are mooted and packaged, fuelled by the musings of official advisors, think tanks and a few well-connected academics – which has been focused on the idea of cash transfers to replace existing social programmes.

That idea, which has had adherents both under the previous UPA and the current NDA governments (where it was respectively promoted by Montek Singh Ahluwalia and Arvind Subramanian), has found its latest avatar in Prime Minister Narendra Modi’s Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) income support scheme for farmers, and in the plans of the Congress party, should it form a government, to provide a ‘minimum income guarantee’.

Although ‘conditional cash transfers’ that tie cash payments to individual choices (such as preventative health treatments or school attendance) — and which first gained prominence in Latin America — have been in vogue around the world for some years and promoted by international institutions, payments aimed at supporting a universal minimum income have not been tried on a substantial scale in any developing country. Even in developed countries, these don’t exist on a national level, although they have been discussed for many years (for instance, under the proposal of a ‘negative income tax’ popularised decades ago by Milton Friedman).

Rahul Gandhi’s proposed scheme is therefore without precedent. He has referred to the planned guarantee as providing a ‘final assault’ on poverty but this is surely hyperbolic. Although the electoral aims underlying both the BJP and the Congress cash transfers are transparent, that does not in itself invalidate the case for them: a policy can serve political and economic or social objectives at the same time.


Also read: Rahul Gandhi declares minimum income scheme for poor, calls it ‘final assault on poverty’


What does fatally undermine the case for cash transfers is that they are likely to be expensive, ineffective, and generally to provide a wrong-headed approach to creating a sustainably inclusive economy.

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First, the ‘minor’ objections to a ‘guaranteed minimum income’ in the present Indian context: For one thing, the administrative problems involved in implementing a national cash transfer scheme effectively (reaching intended beneficiaries and avoiding sizable leakages) are certain to be enormous. Determining the cost of such a programme is far from easy, but it is likely also to be sizable, and possibly so large as to force painful choices upon the government. If it is intended that incomes will be supplemented to the minimum level, then it is also presumed that it will be possible to identify what the incomes of individuals are. That is itself a forbidding exercise, for which the data and administrative systems at present simply do not exist.

Moreover, it is likely being assumed that incomes will not shift greatly as a result of behavioural responses due to the introduction of the programme (such as changes in the number of hours worked). The consequences of an income support programme on this scale, for example in terms of its effect on wages and employment, may be quite complex and could be either positive or negative, depending on how it affects both the supply and demand for labour, not to mention family and social structures, over the longer term. There is no indication that there has been even an attempt to evaluate these consequences, whatever famous international economists may be said to have been consulted.

The scope for graft in the administration of a programme of this nature is massive, precisely because the benefit is conditional on income falling beneath a specified threshold, necessarily giving great discretion to administrative authorities. Such discretion also creates the scope for invidious distinctions between beneficiaries and non-beneficiaries, and in the process adds to the power of the petty potentates who administer local government in much of India, ironically adding to the arbitrariness and pervasiveness of state power. A truly universal ‘basic income’, which the proposed minimum income is not, while likely more expensive, would remove this discretion.


Also read: Direct benefit transfers to income guarantee — 6 ways Modi govt could tackle farm distress


The choice of threshold is moreover not pegged to any conception of the requirements of people, nor is it clear how it would be updated over time. This lack of a principled basis is a reflection of the political character of the exercise.

It is also interesting to note that the premise of the programme is that those it intends to cover operate in a cash- and market-based economy. This may be very largely true in India today but it has not always been true. Insofar as marketisation and monetisation are not yet complete, the introduction of such a programme will hasten these processes. That may be to the benefit of some. The example of Brazil after the introduction of conditional cash transfers shows that they can provide a sizable boost, at least for a time, to aggregate demand and to business opportunities based on growing consumption at the lower end of the income distribution. However, there may be others, for example those still engaged in local barter arrangements, who may not experience these benefits and may even be adversely affected due to a shift in the demand pattern away from what it is that they have to offer. Cash-centred programmes show a lack of recognition of the diversity of India and of the complexity of the development process.

The BJP’s PM-KISAN programme, which is in some respects more modest, is subject to similar, although distinct, concerns. The economic feasibility of large-scale cash transfer programmes has increased with national income. The political impetus to transfer resources from growing sectors of the economy (such as the more dynamic parts of the service sector) to the stagnant or shrinking ones (notably agriculture) is enormous.

However (and this is the major objection), an ex-post transfer programme, let alone an ill-designed one, cannot substitute for mechanisms of inclusive growth and development that would provide real opportunities to people to participate in the production process on rewarding terms – as opposed to attempting to make up for the absence of such opportunities, which appears to be the entire thrust of cash transfer programmes.

The alternative must focus on widely distributing access to productive assets, credit, and skills, opening new market-based opportunities and protecting as well as making more remunerative existing livelihoods. It must also recognise and strengthen the cooperative basis for individual success (for instance, by creating shared production and marketing facilities for small producers, as in the remarkable success story of India’s dairy cooperatives).


Also read: Modi’s cash plan better than farm loan waivers for short-term relief, says Raghuram Rajan


Although both ex-ante and ex-post policies are needed to fight poverty, the debate on cash transfers (and the BJP and Congress’ planned economic steps that have followed it) are evidence that the imagination of the policy-making classes in India is focused rather exclusively on ways of making up for the absence of opportunities with after-the-fact transfers rather than on sustaining and creating opportunities through policies that bring people into the production process more meaningfully and remuneratively.

This is not surprising. The electoral benefit of providing immediately visible sops is not equalled by that of interventions that change the structure and dynamics of the economy, for example through distributed public investments in infrastructure and skill development. The required interventions are also harder to bring about, since they require the capacity to design and implement sensible public policies and functioning public institutions to execute them. The justifiable distrust of the state has become such that it is seen as incapable of doing very much in the area of development other than transferring resources. But the fact is that even this is hard to do. The paradox is that the proposed solution to lack of state capacity is an intervention which requires state capacity on a massive scale, albeit in a peculiarly narrow form.

The single-minded (or simple-minded) focus on cash transfers is both an admission of and a formula for the failure of genuine and durably inclusive growth and development. Today there is a poverty of imagination as to how to address poverty, and more generally for how to bring about an inclusive economy, which crosses party lines. No number of bank transfers can make up for the lack of a strategy.

The author is an Economist at the New School for Social Research, New York. Follow him on twitter @sanjaygreddy

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3 Comments Share Your Views

3 COMMENTS

  1. We can keep carping on the obvious ills of our political system , reservations, doles, money in elections etc; all to generate a lot of news items and hot air. Who and what dictates the need for political parties to vigourously pursueretrograde policies like reservations, doles, and many other populist measures? The unfortunate, but undeniable, part of our Indian reality is that We The People (at least large sections of us) demand it! This is the BOTTOMLINE; and all political parties will have to abide by this demand. Otherwise the political parties would no longer be in business in India. Our democratic system requires us to elect our govt.(political party), ans thei UNDERSCORES the survival need for political parties to WIN. To do this they have to do what the large section of the voting populace wants. To even attempt to change the system requires for a political poarty to win elections. To carry on with this pointless debate of Modi or Congress or anyone else indulging in populism is a waste of time. Can any party ban RESERVATIONS? They all have to go along with this narrative. Same story in respect of other populist measures. Why our populace is in such a beggarly state of thriving on freebies and doles etc. is a sad commentary on the governance of our nation,. In spite of 7 decades of independence we have ensured that a large section of our population remains deprived, uneducated, poor and unhealthy. This is the price India is payinfg for the 6 plus decades of missed opportunities, neglect and institutionalised corruption. That is another story.

  2. Dishing out doles do not carry any incentive neither for the recipient to innovate out of the bad situation nor for the government to provide the environment for people to prosper. The Sad part of indian democracy is that neither the politicians nor the news anchors want to delve into permanent solutions. We are not asking why after so many years and so much of growth in the economy there is still farm distress or non-farm despair. Gadkari has been proposing with pilot results for alternates to beating farm distress or waste management, decentralized renewable power generation, cottage industry based food processing , community based services providers etc etc … but unfortunately we are not discussing, nor parties are debating policies around them. Handing out my money to someone else is the easiest , lazy , escapist pretense of a solution that even a elementary school child can come up with , why do we need to elect legislators for that ?. Change in thoughts and discourse is needed.

  3. Investors – both domestic and foreign – will make their own assessments as well. Little prospect of a surge in private investment, colour coming back to the cheeks of the economy. Some people from the Left are making their back of the envelope calculations how NYAY can be financed. A little wealth tax on the ultra rich and we are through. The fact is that direct tax revenues continue to disappoint; officials are being transferred for failing to meet unattainable targets. Tax gouging will become the norm. More horrors like Vodafone, retrospective amendments of the law, the Angel tax which so riles the Congress President. Lasting damage to the economy, to somehow win this election. Which is why I felt so disappointed that Dr Rajan had not thrown a flowerpot at this idea. 2. With or without NYAY, the next economic team will have a painful morning after, once it is assembled. Foreign investors feeling let down, pulling 25 or even 50 billion dollars will create the sort of scare the taper tantrum did. One Asian giant will remain stuck in Low Earth Orbit, even as the other continues to soar closer to geostationary orbit.

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