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Surjit Bhalla: Why Ending Doles Will Help The Poor

The government’s fixation on bad subsidies is supporting corruption, not the poor

Published: Aug 19, 2013 06:33:41 AM IST
Updated: Aug 14, 2013 12:43:21 PM IST
Surjit Bhalla: Why Ending Doles Will Help The Poor
Image: Udit Kulshrestha for Forbes India

Surjit S Bhalla
Surjit Bhalla is the chairman and MD of Oxus Investments, a New Delhi-based economic research, asset management and emerging-markets advisory firm. He’s worked at the research and treasury departments of the World Bank, and also had stints with Goldman Sachs and Deutsche Bank.

India turns 66 this month. That it has transformed during this time is believed by most of its citizens. Consider that a majority of us were born after 1990, when India’s per capita GDP was $400 a year. Today, the figure is more than four times higher at over $1,600. Yet, most Indian policymakers behave as if, on an average, we are a very poor country and that nearly two-thirds of the total population needs attention in the form of transfers (doles) from the government. Most people, and almost all taxpayers, in India and across the world do not object to money spent in the uplift of the poor and in providing them with basic infrastructure and services. I have yet to meet anyone who protests the provision of roads, water, sanitation, education and health care to the poor.

Leaky, corrupt, ‘in the name of the poor’ subsidies are the problem and considered objectionable. They provide little income support to the poor and subtract from the subsidies that are desperately needed. This is particularly relevant in the sterile ‘growth versus redistribution’ debate that is currently raging in India. Prime Minister Manmohan Singh and Congress President Sonia Gandhi (the duo is hereafter referred to as Manmonia) along with their advisor, Nobel laureate Professor Amartya Sen, portray that India spends precious little on redistributing income. But the facts indicate otherwise.

There are at least two obvious reasons why India, like other countries, spends its fair share on redistribution. First, it has a very small income tax base, with the lowest taxpayer in the top 20 percent of the population. Thus the poor, the emerging middle class and half of the middle class do not pay any income taxes. Second, corporate taxes are paid by the wealthy. Therefore, a substantial proportion of money spent on redistribution is financed by the “rich” taxpayer.

Now, the poor and the taxpayer alike are concerned with the form taken by the subsidy or redistribution. Bad subsidies do not enhance productivity, good subsidies do. And the Congress-led UPA, both shades I and II, has been consistent in its advocacy of dole for the bottom half to two-thirds of the population.

Never in the history of India was two-thirds of the country considered poor—not even by the ‘garibi hatao’ queen Indira Gandhi. Indeed, there is no country in the world that sets its own poverty line to contain two-thirds of its population. The question, therefore, is: What prompts Manmonia to continue and substantially increase its dole expenditure over what had already prevailed before they arrived on the scene in 2004-05?

Surjit Bhalla: Why Ending Doles Will Help The Poor
Image: Tribhuvan Tiwari / Outlook
India persists with dole policies like the PDS despite huge evidence of corruption in it

Their policies have made India a welfare dole state before its time. The table notes the magnitude of Central government spending over the last decade and the nature of “redistributive” subsidies, both good and bad: That is, subsidies that enhance individual productivity (through roads, education, health) and dole that merely transfers income and reduces poverty (in the unlikely event that it reaches the poor on a consistent, targeted basis) only on a “maintenance” basis. In 2004-05, good subsidies constituted 0.9 percent of GDP, and bad subsidies 1.6 percent. In 2011-12, bad subsidies touched nearly 3 percent.

The dole comprises four broad categories of expenditure—fuel, fertiliser, food and employment. Even the Congress does not argue that the first two do much to help the poor. Less than 15 percent of dole regarding food and employment actually reaches the targeted poor. And the remaining 85 percent does not even accrue to the aam, but not poor, aadmi. A large fraction (about a quarter) of it is mostly unaccounted for.

A majority of the countries that undertake transfers (dole) endeavour to ensure that the deserving are properly targeted. The world has had considerable experience with various forms of transfers— cash, conditional cash, food stamps, etc—and the record appears to be broadly favourable for the cash kind. But not in a country like India: We are still debating the merits of such schemes of redistribution. Why? Because of opposition from powerful interest groups as cash transfers substantially decrease (but do not eliminate) the opportunities for big-time corruption. We continue to persist with inefficient and corrupt dole policies for food (PDS) and employment (NREGA). In fact, we want to expand such leaky schemes. This is despite the huge evidence of corruption. The reason: My best guess is an outdated ideology heavily related to old age, that of our policymakers in the Congress and the BJP. Many of them were born in pre-independence dirty, poor India, and their ideology has been shaped by that experience. India has changed, much like the world, but that does not seem to influence their view of the country. Their motto is ‘the government is the saviour’. What confirms this hypothesis is that there was only one 40-plus ‘youngster’ who dared to challenge the public distribution system, and that too when it was a decade old. That ‘youngster’ was Rajiv Gandhi who as PM famously stated that less than 15 percent of the dole meant for the poor actually reached them. To my knowledge, no other leader has dared to question the PDS again. Sonia Gandhi has gone out of her way to reject the wisdom and courage of her late husband. Her view, and the Congress’s, seems to be that the system has failed, and the best way to improve it is by expanding it.

(This story appears in the 23 August, 2013 issue of Forbes India. To visit our Archives, click here.)

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  • Dr.a.jagadeesh

    Excellent Article. In India in most cases the subsidies hardly reach poor in full as it flows some of it is drained. Dr.A.Jagadeesh Nellore(AP),India

    on Aug 21, 2013
  • Ms Vk

    Surprisingly, this wealthy man wants subsidies to provide fuel and fertiliser (two things destroying the world\'s resources and environment) not food which oddly enough poor people need to survive. This article quotes: Even the Congress does not argue that the first two do much to help the poor. Can you actually provide actual evidence rather than blanket statements which we are expected to accept as gospel truth. The world\'s richest are the greatest polluters of the land often leaders of companies which pay little tax but complain about the burden of taxes. It is the constant parasitic never-ending accumulation of wealth which often involves the exploitation and expense of the earth and poor people which is the problem. This man and his ideas are the problem.

    on Aug 20, 2013
  • Srikanth

    Lovely article. This brings to front the very question of over dependence on Gvts. This very aspect of getting subsidized materials have taken the juice out of hard work. People are comfortable sitting at home and expecting gvt to bail out than putting their neck on line and start working. Sad state of Indian politics.

    on Aug 19, 2013
  • Rahul Dravid

    Great article. Such articles during these times will open people\'s mind and awareness about failing PDS and Manmonia. I was recently talking to the maid servant in my house. There are several times when she has been rejected of her rice quota on account of stock outs. There are several times when she is convinced to sell her quota to the PDS store keeper at a Re.1-2 higher. However, now shes says, she can afford and can get better rice from the market but can no more afford buying vegetables. Someone is definitely benefiting, if not down the line, certainly up the line and the subsidies instead of flowing down stream is flowing upstream all the way to Manmonia. Government instead of loosing money on PDS, instead invest that money in better infrastructure, roads, markets, cheap and continuous electricity to farmers, excess to mandis, it will help reduce the over all price of the agriculture produce and improve affordability and consumption. Something radically different needs to be done.... Regards, Rahul Dravid

    on Aug 19, 2013
    • Sandesh

      Hi, Not to mention a good storage space for agriculture produce and also a very reliable supply chain management in our PDS. That is enough to keep control on them. Everything will be streamlined right from the farm to the consumer. Another matter is the egoistic mindset of our leaders. For them these kinds of suggestion will be just like pouring water on stone which will not have any affect on them. Thanks, Sandesh.

      on Aug 19, 2013
      • Ms Vk

        Sustainable agriculture is the way people have survived from the beginning not through the more modern destructive pesticides and fertilisers which now line the pockets of rich agricultural industrialists and do nothing but harm.Furthermore, the evidence is that there is already and always has been enough food in the world, the problem is distribution. Oddly, the suggestions by all the people in this forum are to cut off food. It seems reasonable to question these ideas to cut off food but you consider any questioning to be abuse? Perhaps this is because your views are unjustifiable if questioned and evidence is asked to be produced. It is no good adding a Dr to your opinions, provide proof not right wing declarations of what you think the poor need - please provide proof. Thankfully it is clear that your dead ideas are way past their sell-by-date similar to the destructive products you wish to continue imposing on the world and the poor.

        on Sep 28, 2013