Challenges to Welfare State – India – a Case Study Ashok Kotwal (UBC) April 22, 2017 NYU
Outline Welfare State in the context of a poor country Welfare schemes as an essential part of development policy. Why? -- Course of Indian Development. Problems in Implementing Welfare Schemes (Food Subsidy and Rural Employment Guarantee) Political Economy of Implementation Technological Solutions Political Response to the Present Course of Development 2
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Non-Inclusive Growth (Narayan and Murgai (2016) The elasticity of poverty reduction to per capita GDP growth from 2005-12 period was -0.9 which puts India 75 th among 116 developing countries during this period. The per capita consumption growth of the bottom 40% grew at a much smaller rate than that for the whole population. 4
Structure of Indian Economy 85.8% of India’s labour force works in the informal sector (50 % in agriculture) (NSS-2011-12). Most of these are low productivity, low income jobs. Fast growth in India over the last two decades has been driven by high skilled service sectors (e.g., business services, software) but unaccompanied by significant employment growth.(Kotwal, Ramswami and Wadhwa (2011)). 5
Ex Extent ent of Ma Maln lnouri ourish shment ment 6
Why Income Transfers? Formal sector can create GDP growth but is not capable of creating enough jobs to significantly reduce labor in agriculture How do you improve productivity in the informal sector? By improving human capital in the informal sector by improving the functioning of institutions that deliver public education and healthcare and/or through income transfers. Income transfers are also important because public health and education have failed to improve. 7
% Children in Std VIII who can read basic text at Std II level (or higher) All India (rural): ASER 2006 to 2016 100 95 90 86.7 84.9 83.8 82.5 83.5 85 79.4 80 76.5 74.3 74.7 73.1 75 70 65 60 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 8
Decline of Standards 9
% Children enrolled in private schools (age 6-14) 40 35 30.8 30.5 30 28.3 23.7 25 22.6 18.7 20 15 10 5 0 2006 2008 2010 2012 2014 2016 10
Transfer Schemes Transfers justified as social insurance, poverty alleviation as well as helping to build human capital. Made into legal rights to make the government accountable Prominent among these schemes are: Food subsidy (0.9% of GDP , 6.8% of government budget), Rural employment guarantee (0.3% of GDP , 2.3% of government budget). Both enacted as legal rights through parliamentary acts. 11
Subsidizing Food G rains thru’ PDS Under NFSA of 2013, 5 kgs of food grains (rice, wheat or crude grain) per capita per month sold at subsidized prices through government ordained ration shops ( the in- kind transfers thru’ Public Distribution System (PDS)). This is an infra marginal subsidy and works like an income transfer amounting to about 15 % of the poverty level. Unwieldy system that requires Food Corporation of India (FCI) to procure, store and distribute grain distorting the grain market in the process. WTO concerns over stock piling. Built in incentives for shop owners to get grain at subsidized prices and sell it on the open market at market prices. Estimated leakage 46.7% nationally but huge variation across states (pilferage, diversion thru’ ghost cards, exclusion of beneficiaries). Targeting is a huge problem. 12
NREGS Largest workfare program in the world targeting 600 million rural residents that guarantees employment for 100 days for every rural household that cares to demand it. The work involves construction of rural infrastructure. Village governments have the task of providing work when demanded. If demand is not met, the government is legally bound to pay non-employment allowance. Problems: Low demand, enormous leakage, dubious quality of assets, delays in wage payments. 13
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Achile’s Heel of Indian Governance Panchayat Raj instituted in 1992 through a constitutional amendment. Power devolved down to local governments. Flawed grass root level institutions through which state machinery operates. Sub units at the state level – district and village level institutions are controlled by the local elite. This is a systemic problem that has plagued the government of every party. . 16
Clientelism in Indian Villages (1) Anderson et al (2015) is a study done in rural Maharashtra. 9000 hhs from 300 villages in Maharashtra surveyed. Village institutions are inclusive in the formal sense (elections are fair, voter turn out is good, rules of affirmative action are followed). Yet, the elected officials do not work in the interests of the poor who form the majority. Not just corruption. Allotted funds for poverty alleviation remain unused. Demand for NREGS projects suppressed. Why? 17
Clientilism (2) Well to do farmers belonging to the locally dominant caste (Maratha) keep local labor compliant through Patron-Client system by being their sole source of insurance, connections etc. In return for the patronage, the workers vote according to their patron’s preferences. Making a large enough fraction of the voters into clientele gives the dominant land owners a control of local governance. They do this in order to lower the bargaining position of the workers and hence the wages. Any government transfer scheme (including food subsidy through PDS) would have to overcome resistance by the local 18 elite.
Direct Benefits Transfers Bypass the local elite intervention by transferring benefits directly into bank accounts opened in the beneficiaries’ names Apart from its advantage in weakening clientelism, it would be simpler and would save on transaction costs. Economic Survey of 2016-17 reflects on the possibility of replacing the numerous poverty schemes with Minimum Basic Income accomplished through J-A-M (Jan Dhan Yojana – Aadhar – Mobile). Pros and cons of DBTs (Direct benefit Transfers)? 19
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One Argument for Cash Transfers 21
Financial Infrastructure Most rural residents do not use banks. Under Jan Dhan Yojana, a concerted effort to bring about financial inclusion. By March 2017, 270 million bank accounts (53% of adults) had been opened but 25% of them have zero balance and 43% are dormant. Banks do not find it lucrative to operate a large number of low deposit accounts in rural areas (Source: Survey of Bankers in Maharashtra by Ashwini Kulkarni). They are coerced into doing so. 22
Aadhar (Biometric Identification) 1 billion people have been enrolled. Biometric identification technology is as yet unreliable leading to a huge number (?) of exclusion errors. (Claims of 36% in Telanagana to official claim of 5%. But no hard data available on the extent of it. Many backward areas where Aadhar could have served some purpose have weak telecommunication networks. Privacy? Does it really bypass the local elite? 23
PDS vs Cash J-PAL Study in 3 urban townships: Chandigarh, Puducherry and Dadra - Nagar-Haveli by Muralidharan et al (work in progress). Survey of 5044 beneficiaries done in three phases over a year of process monitoring Over 75% used the cash to buy food and improve dietary diversity On average, it takes 135 mins to access and redeem DBT compared to 61 mins for PDS 22-33% not receiving the transferred cash Despite this, the preference for DBT over PDS moved up from 33% in the 1 st phase to 67% in the 3 rd phase, partly, due to superior quality of food grains compared to ration shops. Teething problems? But note that these are urban areas where beneficiaries are familiar with ATMs, most bank accounts per capita, greater literacy etc. 24
Smart Cards in Andhra NREGS Muralidharan et al (2016) Rollout of smart cards (treatment) vs payment thru’ Post Office (Control) over 157 sub-districts and 19 million people to improve the payment infrastructure in NREGS Leakage lower by 41% of the control mean (mostly thru’ a reduction of officials siphoning off payments from real beneficiaries) Payment delays lower by 17-29 % of the control mean Earnings by NREGS workers higher by 24% of the control mean However, ghost payments still non-trivial 11% 90% of beneficiaries prefer Smart Cards to the status quo. 25
Do Technological Solutions Work? Technological solutions are thought as antidotes to dysfunctional institutions but the weakness of those institutions also hinder technological solutions. They can potentially work but it takes time to incorporate them into the system. Pre-mature transformation of the delivery system could create chaos. 26
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