(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 1st.
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.
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]
-----------------------
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/ .
[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.
[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
