Challenges to Welfare State India a Case Study Ashok Kotwal (UBC) - - PowerPoint PPT Presentation

Ashok Kotwal (UBC) April 22, 2017 NYU

Challenges to Welfare State – India – a Case Study

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

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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 75th 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.

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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)).

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Ex Extent ent of Ma Maln lnouri

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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.

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83.8 86.7 84.9 82.5 83.5 79.4 76.5 74.3 74.7 73.1 60 65 70 75 80 85 90 95 100 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016

% Children in Std VIII who can read basic text at Std II level (or higher) All India (rural): ASER 2006 to 2016

Decline of Standards

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18.7 22.6 23.7 28.3 30.8 30.5

5 10 15 20 25 30 35 40 2006 2008 2010 2012 2014 2016

% Children enrolled in private schools (age 6-14)

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.

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Subsidizing Food Grains 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.

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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

• f assets, delays in wage payments.

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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. .

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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?

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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 elite.

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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)?

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One Argument for Cash Transfers

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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.

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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?

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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 1st phase to 67% in the 3rd 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.

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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.

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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.

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Expression of Discontent?

 India is the fastest growing country with low elasticity of poverty

reduction

 Is this fomenting unrest or discontent?  Top 1% own 58% of the total wealth. Compare this to between 33

and 42% for the U.S. But no Wall Street type movement against the top 1%.

 Indian society is inured to inequality and misery due to the age

• ld caste hierarchies

 Paradoxically, the manifestation of political discontent is among

some dominant rural communities (castes) – Jats in Haryana, Patidars in Gujarat and Marathas in Maharashtra.

 In 2016-17, civic unrest, massive rallies (over 2 million people in a

single rally) and protest marches

 They are all dominant farmer castes and demand affirmative action

for their caste members

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What are Marathas marching for?

 The trigger was an alleged rape of a Maratha girl by some

Dalit youths and the ostensible demand was the cancelation

• f Dalit Protection Act.

 By all accounts, Marathas across the entire income spectrum

participated.

 However, these were silent marches with no explicit set of

• demands. Individual marchers only expressed lament over

the hopelessness perceived by the youth in their community.

 Demands came out almost as after thoughts. Pre-dominant

among them was to include their caste in the list of backward castes under affirmative action for college admissions and government jobs.

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Distress in Marathaland

 Anderson et al (2017) uses primary data collected in

Maharashtra in 2007-08 to reflect on what may have led to such massive public mobilization of Marathas.

 Marathas are the most numerous as well as politically most

dominant farmer caste in Maharashtra.

 They rule the countryside and have had the most MLAs, most

Cabinet ministers and most Chief Ministers in Maharashtra.

 Yet, their educational achievements have been lackluster and

the relative gap (social and economic) between them and OBCs and also SCs has narrowed.

 How do we understand their angst in the context of the

present course of Indian development?

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Maratha Dominance Only in Agriculture

 Marathas have more land  Better irrigated  Better yields  Better connections  But Marathas are not better educated  Agricultural incomes have not kept pace with the rest of the

economy.

 But not enough jobs being created in the fast growing

sectors.

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Average Weekly Earnings for Males for Cohort 34-42 Graduates

Middle School

2011-12 (i=2) 2011-12 (i=2) Sectors w2i p2i p2i w2i p2i w2i /W2 w2i p2i p2i w2i p2i w2i /W2 Agriculture 385.80 0.05 19.41 0.02 265.87 0.20 52.43 0.05 Mining 1632.04 0.01 14.85 0.01 792.96 0.02 15.38 0.01 Manufacturi ng 990.16 0.19 187.73 0.18 441.41 0.21 91.90 0.09 Construction 666.76 0.06 37.54 0.04 355.20 0.23 80.98 0.08 Trade & Hotels 656.21 0.08 53.81 0.05 395.30 0.11 41.67 0.04 Communicat ions & Transport 1091.01 0.08 87.83 0.08 496.22 0.12 59.35 0.06 Finance and Real Estate 1464.48 0.15 216.60 0.20 518.34 0.03 13.58 0.01 Public Administrati

• n &

Services 1169.70 0.38 449.75 0.42 611.86 0.10 58.74 0.06 Expected wage of a worker (W2, W1, W0)

1067.51 414.03

Educational Premia Computed from NSS Data

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Explaining Maratha Discontent

 Agricultural incomes have been stagnated  Higher income and status jobs require education beyond

secondary

 More of those jobs are in government and public sector  OBCs and SCs are gaining on Marathas in education as well

as public sector jobs partly due to affirmative action

 Dominant social status of Marathas has been eroding  This affects caste pride across the income spectrum  Caste networks facilitate political mobilization  Hence, resentment expressed through caste mobilization

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Aspirations Hypothesis

 Debraj’s ideas ((Ray (2016), Genicot and Ray (2017), Mitra

and Ray (2014)) can be applied one of two ways:

 (i) In 1992-93, there was 31% probability of landing a

government job with only middle school education but in 2011-12, it came down to 10%. But with secondary and higher secondary education, it was 38% in 2011-12. We can perhaps interpret this as an increase in the aspiration level that is too high resulting in frustartation.

 (ii) Or, perhaps, the aspiration level is defined in terms of the

relative status with respect to other castes. As per Mitra and Ray (2014) aspirations marked by the achievements of a rival group can lead to inter group conflicts. Hence, the demand for the repeal of Dalit Protection act and affirmative action for Marathas.

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Similarity with Developed Countries

 In developed countries where manufacturing jobs have

disappeared through technological change and globalization, the once dominant white blue-collar working class rises in protest against the present course.

 In India, as the growth spikes up in skill intensive but low

employment sectors, the once dominant rural class rises in protest.

 In a way, both phenomena are resulting from frustrated

aspirations.

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