India can, and must, reform its welfare system for a transforming India – more efficient redistribution is desirable for both ethical, and political, reasons.
If the latest World Economic Forum (WEF) report is to be believed, 60 % of the Indian population was poor according to the World Bank poverty line of 3.2 PPP dollars per person per day. For Indians, the interpretation of a PPP poverty line is easy because although the World Bank (WB) has never formally admitted it, it has always defined the poverty line to be near identical to the official Indian poverty line. In other words, the WB poverty line is the official (Tendulkar) poverty line! In 2011, the poverty line based on either Tendulkar or World Bank poverty line was equivalent to PPP$ 1.91 and the poverty rate was 14 % (based on NSS survey data with 7 day recall period for perishable food items like fruits & vegetables).
The WEF result of 60 % poor in 2017 is obtained by raising the poverty line from PPP$ 1.91 to PPP$3.2 and keeping nominal consumption levels identical to those observed in 2011/12. Correcting this mistake (by allowing consumption to increase by the actual nominal compound growth of 10% in per capita consumption as observed in national accounts data), one obtains the result that in 2017/18, the poverty rate was 36 %, and not 60 % as per the WEF. Further, the percent poor according to the Tendulkar poverty line ((PPP$ 1.91) in 2017/18 is under 5 %.
It is critical to appreciate the transformation that has happened in India over the last two decades. Absolute poverty, from close to 50 % in 1993/94, is now less than 5 %. India is now close to a middle economy, not a poor economy. Which means its own Tendulkar poverty line needs to be raised, in real terms, by 61 % – to Rs. 2000 per person per month in 2017/18 prices. Our suggested poverty line implies 33 % poor (the higher Rs. 2100 WEF poverty line yields 36 % poor).
This bottom third of the population, we believe, should be targeted via a reformed welfare system, a system which emphasizes redistribution through direct benefit transfers (DBT). The gains from such a reformed welfare system are enormous, and the extra expenditure involved is minimal. A central message, for politicians and policy makers alike, is that India is no longer a “poor” country in the traditional World Bank $ a day poor sense. That concept was there in the early 1990s. India is today a lower middle income economy, and should be thought of as such. It is the lower middle class that should be the prime focus of policy, for both moral and political reasons; and the lower middle class (the emerging middle class) is about a third of the population.
That a new welfare policy is needed is also made clear by the following calculation. Existing welfare subsidies (food, fertilizer, petroleum, interest rate subsidies etc.) in 2017/18 are estimated to have been 2.73 trillion. The average consumption level of the bottom third of the population, with a Rs. 2000 a month poverty line, is Rs. 1600. In other words, to make the poor non-poor, and perfect targeting, the government will have to spend Rs. 4800 (400 for 12 months) per person per year. For a third of the population (390 million), this will mean an expenditure level of Rs. 1.9 trillion. With a 20 % leakage (contrast that with an average 70 % leakage in the present system), the expenditure needed, with smart card, to have a minimum expenditure level of Rs. 2000 per month for all, is Rs. 2.4 trillion – less than the existing level of Rs. 2.73 trillion!
There is therefore a distinct possibility of replacing leaky welfare expenditures with targeted cash transfers. More money to the bottom third and not much additional expenditures (the phase out from the old welfare system should not take more than three years). In addition, in fiscal space, tax revenues for both corporate and personal income tax are buoyant – both up approximately 19 % in 2017/18, despite nominal GDP growth, at 9.5 %, being the fifth lowest since 1980. GST will stop being a new policy in another six months, and enhanced indirect tax buoyancy obtained.
This tax buoyancy opens doors for a reformist fiscal policy – doors that can lead to greater tax collection, lower tax rates, and greater, and more efficient, tax redistribution. Doors that can lead to a golden era of fiscal policy. We expect that a blueprint will be laid out for such reforms in the Budget to be presented on February 1st.
The Unique ID number (UID)/Aadhar provides the base for a comprehensive reform of India’s welfare expenditure system. Elements of this have already been put in place, through the conversion of LPG and 84 schemes across 17 departments using DBT. A comprehensive reform, will ensure that every deserving person is identified and gets his/her welfare entitlement, with leakages minimized.
Latest available data shows that 88.5% of the total population and ~99% of the adult population over 18 years of age, has an Aadhar number. The budget must make an allocation usable by all welfare departments and district collectors to ensure that the residual 1% gets an Aadhar number, using photo ID if there are finger print problems. This provides the basis for a comprehensive Tax-Transfer system, which can be layered (for ID protection and Privacy reasons) by providing a separate Welfare Identification Number (WIN) and a Welfare card with this number, linked confidentially and within the firewalls of Government to Aadhar.
We propose that all subsidies be linked to Aadhar and be paid as DBT. This means that all petroleum product linked subsidies (kerosene, diesel, petrol) must be integrated with the LPG subsidy & renamed petro-product subsidy. Though a large part of the fertilizer subsidy is a petroleum linked urea subsidy it also has other mineral linked components. As it’s directed at farmers undertaking crop agriculture, it can be kept separate for the time being. The third major subsidy of Food/PDS should either be converted to DBT or a monetary entitlement for purchase of food from any registered food shop, including currently licensed PDS outlets. Similar entitlements must be defined for health insurance and health expenditures and on basic education, job training. All these would be incorporated into a smart welfare card – all the benefits (transfers) mentioned above linked to the Aadhar data base behind the firewall. The goal is to ensure that each and every citizen in the lower third of the population, receives all the welfare benefits she is entitled to.
The recent ASER study shows that ~50% of 14-18 year olds, despite having been schooled, cannot read write or do basic arithmetic. Worse the actual learning seems to have deteriorated over the years. This despite the fact that government likely spent 5 % of GDP and households 3.5 % of GDP on education (NSS data 2011/12). The solution must be a combination of public education reforms by increased use of e-learning (for teachers & students), well regulated, modern competition and empowerment of the poor and marginalized. Spending power into the hands of the people should ensure accountability of public education institutions.
Dissatisfaction has also been expressed at the effectiveness and quality of the public health system, particularly the primary & secondary health system on which Govt. spends Rs 500 thousand crore (3 % of GDP) and households are forced to spend more than 6% of their budget (or 4 % of GDP). Increased public expenditures on health must be forthcoming, and the normal refrain “where will the money come from” is not applicable post the era of tax buoyancy.
Is India ready for a modern welfare system? We think, yes. The future should be clearer starting February 1st, 2018.
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