Eliminate Poverty by Empowering the Poor

(with Surjit Bhalla)

Introduction

  For half a century, the Indian Welfare objective has been to Alleviate Poverty. This objective has changed over the past four five years to eliminate poverty. Both the authors of this article have separately and jointly argued for more than a decade that it is possible to do so even with current expenditure on the numerous separate welfare programs of the Union government into a single umbrella and conversion to Direct cash/benefit transfers. [i]  With issue of #UID to 99% of adult population in India, it is now completely feasible to implement these ideas. This note, reassess the numbers and suggests a practical path to poverty elimination.

Extreme Poverty and New Standard

  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 PPP conversion is easy because the World Bank, for close to 40 years, has never formally admitted it, but has defined its poverty line to be near identical to the official Indian poverty line. In 2011, Poverty rate based on either Tendulkar or World Bank poverty criteria in India 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 (68%) and keeping 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 observed in national accounts data, one can calculate the poverty rate by constructing a synthetic NSS distribution for 2017/18 by keeping the real distribution the same as in 2011/12. One then obtains the result that percentage poor in India (using PPP$3.2 poverty line) are 36 %, not 60 %. This contrasts with the percentage of poor of 5% in 2017/18, using the same method, but a  PPP$1.91 poverty line.

This last number 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, 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 close to 60 % - to Rs. 2100 per person per month, or Rs. 70 per day, in current prices.  With this poverty line, a third of the population is absolutely poor in India – and this we believe should be the target of a new welfare policy.

Welfare Transfer System

 The gains from a reformed welfare system (cash transfers) are enormous, and the expenditure involved 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; 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 – Total welfare subsidies (food, fertilizer, petroleum, interest rate subsidies etc.) in 2017/18 are estimated to have been 2.73 tr. In 2017/18.  The present leaky and diffuse welfare system reaches only a quarter of the poor and lower middle class; and involves an expenditure level of Rs. 2.73 trillion.

Existing welfare programs (e.g. Public Distribution System of food grains) have a targeting efficiency of less than 30%.  Use of UID/Aadhar and cash transfer programs can significantly reduce the leakage in welfare programs.  Targeting efficiency can increase to 80% from the 30% level at present.  With the target of 33% of the population, and leakage of only 20%, approximate expenditures involved will be Rs. 500 ppm (400 divided by 0.8).  For a third of the population – 430 million – this comes to a total income transfer (or subsidy level) of Rs. 2.6 trillion.

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. 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. Below we outline some of the reasons why we expect that a blueprint will be laid out for such reforms in the Budget to be presented on February 1^st.

Welfare Reform

  The Unique ID number (UID)/Aadhar provides the base for a comprehensive reform of the Welfare expenditure system of the Union government.[ii] Elements of this have already been put in place, through the conversion of LPG and 84 schemes across 17 departments using direct benefit transfers (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 is with an Aadhar number. The budget must make an allocation usable by all welfare departments and district collectors to ensure that this 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) or Welfare Entitlement Number (WEN), linked confidentially and within the firewalls of Government to Aadhar. The Welfare Entitlement Card (WEC) would be a smart card with separate slots for DBT, Food subsidy, Fertilizer subsidy & crop income insurance, health insurance, and health and education-training expenditures and NAREGA/job subsidies. This Welfare Entitlement Card  could also act as a photo ID card for all those entitled to receive Welfare payments.

   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 & brighter students), well regulated, modern competition and empowerment of the poor and marginalized, by putting the spending power into their hands to ensure accountability of public education institutions. Dissatisfaction has also been expressed at the effectiveness and quality of the public health system, particularly of  the primary & secondary health system on which Govt. spends Rs 500,000 crore (5 % of GDP) and households are forced to spend more than 6% of their budget (or 4 % of GDP). This too requires a combination of wide use of e-medicine, regulatory reforms, transfer of government health expenditure to the poor, which can be subsequently increased to conform to a modern and just health system.

First Stage

  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 converted to an input subsidy per unit of cultivated land, along the lines Telengana input support scheme. The third major subsidy, for 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 incorporated in a Welfare card which incorporates smart card technology to incorporate all the welfare entitlements mentioned above. The Welfare ID or Entitlement number would be linked to the Aadhar data base behind the firewall, to ensure that each and every citizen in the lower half of the population, receives all the welfare benefits she/he is entitled to and that these benefits are not siphoned off by corrupt officials.

Second Stage

   In the second stage the new Cash transfer system would be linked to and integrated with, the Personal Income Tax system (with PAN) to create a Negative Income Tax/Net Income Transfer System (NIT) as proposed by us earlier as part of Personal Income Tax Reform. [iii]

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A version of this article appeared on the Op ed page of the Indian Express, under the title "Smart Policies for Redistribution." http://indianexpress.com/article/opinion/columns/smart-policies-for-redistribution-india-welfare-system-aadhaar-5040695/ .

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[i]  Arvind Virmani, "Poverty and Hunger in India: What is needed to Eliminate Them, The Pakistan Development Review, Volume 46, Number 2, Summer 2006.  http://pide.org.pk/pdr/index.php/pdr/article/view/2135.  Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006. http://planningcommission.nic.in/reports/wrkpapers/wk_pov106.pdf ,  http://planningcommission.nic.in/reports/wrkpapers/index.php?repts=wrkpap.

[ii] Unique ID Number (UID),  https://sites.google.com/site/chintan1997reg/institutional-reform/uid

[iii] Income Tax Reform II: Afeasible Negative Income Tax/Net Income Transfer System (NIT) http://dravirmani.blogspot.in/2017/01/income-tax-reform-ii-feasible-negative.html , http://dravirmani.blogspot.in/2017/01/income-taxt-reform-i-benchmark-flat-tax.html

Black Money & Corruption

Q1:. What is the largest source of black money?

A1: There are two broad (flow) sources of black money: Tax evasion & tax terrorism and politician-bureaucratic-police corruption from lowest to highest level, unrelated to taxation. In the 10 year period 2004 to 2014, the second has far exceeded the former.

Q2. The website, very eloquently, talks about 'privatization of government services by officials' and discretionary powers exercised by high-level officers as reasons for systemic corruption. The solution suggested is breaking up monopoly, privatization and boosting competition apart from institutional reforms. But would such reforms eliminate retail-corruption?

A2: e-governance & digitization of interaction at retail level is the only thing which will reduce retail corruption. Name of any1 interacting directly with govt must be put on digital record.

Q3. In your blog, Dialogue with Virmani, you have stated that it is a blow to corrupt politician-bureaucrat-police relations. But how has it done so? The beat cop is still collecting Rs.100 for jumping street lights, Rs.500 for allegedly not wearing seat from from cab drivers instead of challans.  Is there any report that you can guide me to that states that there has been a reduction in bribes and corruption because of demonetization?

A3: We have direct evidence of this (stock effect-asset losses) in the public complaint of leaders of parties whose screams against demonetization were heard well before reports of problems of public. Political-bureaucratic-police corruption (flows) will not be affected without institutional reform, that is political, legal, police, judicial, bureaucratic reforms

Q4. You've also spoken about previous reforms that have been enforced to curb corruption. How effective has the Lok Ayukta been in that process?

A4: My reference was to natural resource auctions, move from subsidy to direct benefit transfer (DBT), tax reform & other policy reforms. Much of the institutional reform has to take place at States level, though center has done some legal reform & tried judicial reform but been stymied by SC. 

Q5. Last but not the least the website elucidates to institutional reforms and simplifying norms to neutralize the its misuse in decision making by high-level officers. My question is will eliminating discretionary power by limiting over-regulation of procedures would be an effective measure to curb corruption?

A5: Reform is about changes that will reduce corruption & inefficiency, not about magical elimination of a problem/problems. All the reforms I have suggested in my writings (available on 3 different web sites) will reduce corruption and administrative inefficiency & these benefits will grow over time

Delhi State Election Results

The Delhi State election results, which swept the AAP to an unprecedented win in the Delhi State election are extremely interesting and can be interpreted at different levels:

(1) BJP's vote share was 32-33% around the same as in earlier State elections, but possibly on a mildly declining trajectory, while AAP jumped to an unprecedented 50-55%. This means that the vote bank of the Congress, BSP & other small parties switched en mass to it. Exit polls suggest that this switch was greatest among low income voters of the non-BJP parties.

(2) The common thread among AAP voters seemed to be disgust with conventional parties who were seen as part of an arrogant, corrupt, unresponsive local administrative system. Despite any other failings (that political/economic pundits often harped on) they hoped that a completely new party like the AAP would change the system, reducing corruption and force administration to serve the people instead of lording it over them.

(3) Though pundits focused on the negatives of the AAPs 49 day rule, the non-BJP voters focused on the signs of helpfulness that AAP workers had demonstrated at that time, on corruption related administrative problems. This impression may have been strengthened in low income areas if AAP workers continued to be helpful after it demitted office(as reported in the Hindu). The Delhi public is quite aware that all parties (including the AAP) promise all kinds of goodies and these promises have to be taken with a large pinch of salt. This applies to both the positive benefits and the negative side-effects of such "give-aways." Neither the potential beneficiaries nor the potential sufferers (higher cross tax-subsidies) gave this issue the importance that some analysts were giving  it (and continue to give it).

(4) Mr Kejriwal who turned from a very humble man to an arrogant one in nine months of 2013, when the pre (central) election pols projected 50-100 seats for AAP and the media crowned him a Prime Ministerial candidate, seemed to have learned his lesson from the CG election disaster. He appeared to have re-discovered his humility. This also helped restore his credibility with (temporarily) dis-illusioned potential voters. In my judgement (a high minded) arrogance also contributed in the rout of the Congress as it delayed corrective economic measures till it was too late and therefore provides a lesson to the leadership of all parties, including the BJP.

(5) Delhi voters have an idea of the difference between what the Central Govt. can do (macro economy, jobs opportunities across country etc.) and what State & local Govt. can do at the local level (public amenities, permissions and certificates). Thus the image of the Delhi BJP and its past performance (indifferent) was much more important than the performance or non-performance of the Central Govt., Though Shrimati Kiran Bedi was seen by some as an anti-corruption crusader, others saw her as a part of the high handed (rather than high minded) police fraternity of Delhi. So any potential advantage was negated.

(6) One interesting puzzle is what happened to 10-15% additional vote that Shri Narendra Modi added, during the General Election of 2014, to the core vote of the BJP in Delhi?  Though the point made at (5) above is part of the explanation, it is not sufficient. The second part has to be the unease created by what these swing voters believed to be disturbing manifestations of the (so called) "Sangh Parivars" social agenda. Many of these voters ("Right Liberals") support the economic program of the PM but not what they percieve to be the social agenda of the RSS/"Sangh Parivar". They are actively opposed to any use of violence and coercion to achieve social objectives and to an undermining of the economic agenda through divisive statements. The PM was unable to convey to these swing voters that he did not support such statements and actions. His credibility on this issue was therefore a factor that affected the swing voter, who had voted for him in the General election.

(7) The Delhi media helped greatly in conveying and magnifying these impressions and helped form firm judgment that brought people out to vote (when many may have been unsure and afraid to take a risky bet and stayed home). This included a general impression that the Congress was at least temporarily finished in the State and that the AAP could successfully challenge BJP in Delhi State to form a stable government. The prominence given to extremist voices in the Sangh Parivar and the violence of some fringe outfits under the Parivar umbrella played a role in helping consolidate the non-BJP vote behind AAP.  

          It is unclear whether the Delhi media (especially the English language media) has much influence outside the Delhi metropolitan region, even in parts of neighboring States like Haryana that lie beyond the Metro region.

(8) The above analysis throws up several lessons for the major political parties. How much of an effect is felt beyond Delhi will depend on how these parties learn the right or wrong lessons from it. For instance Delhi is a City State with the highest per capita income, low poverty, high average education & media exposure, and very high average growth rate (city of opportunity), but poor governance like every other City in India. Any implications drawn for the rural areas and for poor States and less educated regions are likely to be wrong. 

Crony Capitalism, Socialism or Corruption?

Introduction

George Santayana said, "Those who cannot remember the past are condemned to repeat it" Having forgotten the “Crony Socialism” of the “License Permit Quota (LPQ) Raj” that enveloped us from 1950 to 1980, many Intellectuals, Media and Politicians[i]  have apparently discovered a ‘new’ phenomenon called  “Crony Capitalism.” The LPQ raj consisted of stifling controls imposed on prices, production, capacity, investment, imports and exports, capital markets, banking and finance, land labor and natural resources.  This provided ample opportunities for collusion between corrupt government (politicians and bureaucrats, which was initially used to generate money to run parties and fight elections, but gradually and progressively became a means of generating personal income and wealth. Controls on pricing, production, investment and foreign trade in manufactured goods were reduced in the 1980s and lifted in 1990s. There was also a reduction in controls on banking and finance and some simplification of taxes.  This reduced the scope for corruption in the reformed areas.

Controls still remain in other sectors, of which the most important from the current perspective are government ownership of and/or control of land (land use), minerals, energy (coal & oil) and infrastructure. With acceleration in the growth of demand for natural resources, generated by the faster growth of the economy, rents inhering in these “natural resources” have risen, providing greater incentive for corruption.  This is particularly so for natural resources in which global prices have shot up (oil, coal, iron ore) and for non-tradable goods & services (urban land, electricity, transport networks) in which the demand- supply gap has widened.  Rising growth rates have similarly raised the rents implicit in public monopolies and the returns to and incentive for corruption by those who control these monopolies. 

History: Socialism

As documented by Thakurta(2003), “Long before Dhirubhai entered the industrial scene, Indian politicians were known to curry favour with businessmen – licences and permits would be farmed out in return for handsome donations during election campaigns. Indira Gandhi returned to power in the 1980 general elections and Dhirubhai shared a platform with the then PM at a victory rally. He had also become very close to the then finance minister Pranab Mukherjee, not to mention the PM’s principal aide R.K. Dhawan”.  “In 1981 the Indian Express exposed Maharashtra Chief Minister, Abdul Rehman Antulay, for allegedly extorting millions of dollars from businesses dependent on state resources and put the money in a private trust named after Indira Gandhi. The story led to his resignation (Wikipedia).[ii]  ‘The Indian Express detailed a host of ways in which the government had gone out of its way to assist the Ambanis (Thakurta).[iii]  ‘In 1987 a customs show-cause notice issued to Reliance Industries concluded that: "Reliance appears to have unauthorizedly imported four additional spinning machines...in a clandestine manner and without payment of customs duty on these machines." The four machines are valued at Rs.53.02 crore and the total customs duty demand is for Rs.119.64 crore” (Ninan).[iv]  No industrialist in India could dare to undertake such activity in the heydays of Indian socialism, without making ‘campaign contributions’ to cronies in the self labelled “socialist” Government.

Corruption

                A paper presented at the RGICS, New Delhi, in 2002, argued that the, “Government’s power to do harm has increased, while its power to do good has reduced.” It detailed through examples and experiences how pervasive and systemic corruption had become at all levels of the India’s Governments.[v]   Systemic corruption has been on a worsening trend over four decades. The CWG scam was exceptional only in that so much money was spent in such a short time to produce such shoddy work under the nose of, and visible to, the National media. It was merely a tip of the corruption iceberg that imposes a cut of 1/5^th to ½ on all payments for goods & services purchased by Central & State Govts, DPEs and PSUs from suppliers.[vi] The 2G scam was in contrast an example of the use of government policy controls over resources to create and extract rents.   A 2002 EPW paper on telecom policyr had argued that the only way to determine the correct market price for the spectrum over any geographical area was through competitive auctions.[vii]  Such auctions would allow any “natural resource rents” inhering in the spectrum to be captured by government. This argument was subsequently made in the TRAI (2005-6).  The 2G scam would have been much more difficult if these policy recommendations had been adopted / approved by the Government. “Coalgate” is similarly facilitated by legal monopoly over coal mines coupled with failure to auction this natural resource to determine the market price of coal blocks given to private parties.  The manipulation of policy, rules or procedures by the political masters to extract rents, obviously requires business partners (cronies) who will share the “resource rents” with the minister. But this has nothing to do with, ”crony capitalism” and everything to do with “corruption”- Individual and Systemic.

    Further, corruption is not just financial. It is also about law makers and law enforcers knowingly violating the law, protecting those who have broken the law and even rewarding them for serving political or personal objectives.[viii]  In 2003, RBI revoked the license of the Pratibha Mahila Sahakari Bank, on the basis of an inspection report that stated, “Pratibha Patil is the founder member of the bank, who is a politically influential personality. She has made all her relatives as directors of the bank and the bank is being run as good as a family business. Because of the influence of respondent no 8 (Prathiba Patil) the bank has given various loans to the relatives and to a sugar factory of which she is a director.”   “Her relatives have not paid back the loans. Most of the loans were given without security. Most of the loans are closed”[ix] Mrs Patil, a lifelong congress women, whose brother G N Patil was accused in a murder case, was alleged by journalist A Shourie to have obstructed justice in this murder case.[x] In 2007 she was nominated by the UPA for the post of President of India.

New Issues

A new type of opportunity for financial corruption in public contracting has arisen because of the introduction of PPP contracts.  Given the limited experience (both Indian and International) in Public Private Partnerships(PPP) in ‘natural monopoly’ segments of infrastructure, initial PPP contracts had flaws that could have created subsequent opportunities for collusion with corrupt government ministers and bureaucrats.  There is now sufficient experience of PPP in infrastructure, to modify these contracts and to build corrective mechanisms into them. Another known failure is the absence of strong, independent professional regulatory systems.  Ministers who treat regulatory appointments as sinecures for favored officials need to be exposed as (non-monetary) corruption.

Conclusion

Words like “Crony Capitalism” are ideological labels that hide more than they reveal. They are likely to lead the debate into esoteric discussions of capitalism and socialism and detract from finding and addressing the real problems.  The real problem is the unprecedented and incomparable system of government controls built under the Indian version of Socialism. This has resulted in pervasive and deep rooted corruption. We need policy reforms that reduce the incentive for corruption and institutional reforms that catch, try and punish the corrupt.[xi]

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A version of this article appeared in The Hindu, on April 9^th , 2014, under the title “Crony Capitalism or Plain Corruption,” http://m.thehindu.com/opinion/op-ed/crony-capitalism-or-plain-corruption/article5888056.ece/?secid=3010

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[i] Much of our intelligentsia consists of left intellectuals educated in Humanities and “soft” social sciences, who espouse Marxian economic (which is mostly sociology disguised as economics) and leftist economics devoid of quantitative/empirical elements.

[ii] http://en.wikipedia.org/wiki/Arun_Shourie

[iii] Paranjoy Guha Thakurta, http://www.india-seminar.com/2003/521/521%20paranjoy%20guha%20thakurta.htm

[iv] T N Ninan, http://indiatoday.intoday.in/story/custom-duty-evasion-by-reliance-may-land-ambanis-in-trouble/1/336798.html

[v] Arvind Virmani, “A New Development Paradigm: Employment, Entitlement and Empowerment,” Economic and Political Weekly, Vol. XXXVII No. 22, June 1-7, 2002, pp. 2145-2154. This paper was simultaneously published in a global journal and reproduced in four different books (compendium of articles).

[vi] Chintan®: https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption

[vii] Arvind Virmani, “A Communication Policy for the 21st Century”, Economic and Political Weekly, Volume XXXV, No. 23, June 3-9, 2000, pp. 1907-1910. See also, “Competitive Access to Telecom: Spectrum Policy and M&A”, Economic and Political Weekly, Vol. XXXIX No. 7, February 14-20, 2004.

[viii] Receiving free private medical, legal or HR services, absenting oneself from work on a regular/organized basis (eg govt schools, health centers) or not doing the job one is hired for are also forms of corruption, now barely considered as corruption.

[ix]  Wikepedia: : http://en.wikipedia.org/wiki/Pratibha_Mahila_Sahakari_Bank

[x] Wikepedia: http://en.wikipedia.org/wiki/Arun_Shourie

[xi] https://sites.google.com/site/chintan1997reg/institutional-reform/governance-corruption Chintan®