Direct cash transfer and the controversy over definition of poverty line….

There is a lot of excitement about the switch the Government is making from a physical dole out of products and services to a model where cash is transferred directly into the accounts of the beneficiaries. The identification of the eligible beneficiaries is sought to be done on the basis of Aadhar cards, the revolutionary identification system which is supposedly more than 99% fool proof and hence cannot be corrupted.

There is no doubt that this is a game changer: it will reduce subsidies drastically as experiments in Karnataka and Rajasthan have shown with kerosene and LPG subsidies. Apparently, the leakage in the existing system was found to be of the order of 40-80% in the two states. This means that this much was being diverted to illegal recipients. With such thieves identified and removed, the Government’s subsidies bill could come down by a huge amount. Given the size of the subsidies outlay (some Rs 3-3.5 lac crores per annum), the savings potential could be as much as Rs 1 lac crores or more. Now this saving could be used in many ways. The Government could cut its borrowing, reducing debt over a period of time. The reduction in debt would lead to less interest payouts and hence more resources being available for productive welfare programs. By reducing its borrowings, the Government would leave a lot more money for the private sector to borrow at cheaper rates, thus kick-starting the growth cycle. The lower fiscal deficit as a result of reduced spending would lead to the inflation coming down and start off a virtuous cycle of low-inflation and high growth that we saw in the “noughties” decade (2000-2010). The benefits of this experiment for the country are enormous.

But the benefits to the real beneficiaries – the really poor – are even more. The first step in becoming a part of this program is for the beneficiaries to open bank accounts. Even this simple necessity of life is denied to a majority of our people, for want of address proof and identity documents. The Aadhar card will now be considered to be legally acceptable for both of these. The next thing is for the money to reach the accounts on a month on month basis. That’s a huge high for someone who has been living in abject poverty and hasn’t seen anything coming into his hands except for the pittance that the rich throw at them from their car windows at road junctions. Then again, this will bring some dignity into the lives of the really poor, now that they won’t have to stand in mile-long queues outside ration shops waiting for a nasty shopkeeper to grudgingly give out some trashy products to them (the show owner would in all likelihood have swindled the superior quality products the government sent). The poor will now be able to shop for what they want, when they want and from wherever they want. Of course there are dangers in this. One social risk is if the recipients start diverting the monies towards liquor, lotteries and the like. A watch will have to be kept; and maybe, like in Latin American countries where direct transfers have been successful, the dole will have to be linked to fulfillment of specific social goals like school enrollment, birth control etc. All in all, its risk worth taking.

But all this is old hat. I have myself written about the UID initiative several times. What I want to really focus on is the clear proof now of how illinformed the debate some time back was on the definition of poverty in India. Politics, compounded by immature and politicized journalism, as usual had overtaken the debate. The Planning Commission, and Montek Singh Ahluwalia, its Deputy Chairman had drawn ire from the intellectuals (?) in the country as well as the opposition for defining the urban poverty at “a low” Rs 32 a day and rural at Rs 26 a day. Now, these numbers look and feel really small. But in reality, they are not. Why? Because firstly, these are numbers on a per person per day basis. Most goods are bought on this basis. Translated to an average family size of 5 people in the urban areas, and 5.5 in rural, this amounts to Rs 4800 per month or Rs 55,200 per annum in urban areas and Rs 4,300 per month or Rs 51,500 per annum (approx) in rural areas. These suddenly don’t look so small!

But the second and more important reason why these numbers are not as bad as they first look is that the poor have traditionally enjoyed a lot of subsidized items that covers a large part of their lives. The opposition taunted Montek and challenged him to try living with Rs 32 a day in his pocket, failing to understand that the Rs 32 was worth a lot more because of the subsidies. Here’s what I had written in my post of Oct 2^nd, 2011 titled “Rs 32 a day too low a definition of poverty?”: Let’s not forget that much of the spends that a poor family incurs in India are on items that are significantly subsidized by the government. Whether it’s the LPG or kerosene for cooking; the school for the children; the food grains from the PDS system; the health facilities; all are hugely subsidized. Rice is sold at some Rs 11 per kg, wheat at some Rs 8.5 per kg, Palmolein oil at Rs 26 a litre and daal at some Rs 26 a kg. Kerosene is sold at some Rs 9.5 per litre. School education is totally free as is medical treatment at a government health center.

Well, we now have an estimate of just how much the subsidies are. By the Government’s calculations, the subsidies which will now be given in the form of cash amount to Rs 35000 per family per annum. Uptil now, the poor were getting this in a non-cash form and hence this was not getting counted. In reality, the poor were being defined as someone earning approx Rs 50,000 per annum and getting subsidies of Rs 35000 per annum – a total of a healthy Rs 85,000 per annum or Rs 7000 per month. Now, by any yardstick, that’s a decent sum to use to define the poverty level. I thought its relevant to do this maths here so that people understand that ours is not an unfair definition of poverty. Even the UN has defined poverty at a level of $1.25 per person per day measured in PPP terms (the $ adjusted for price differences between countries). That translates to just Rs 23 per day or Rs 42,000 per annum. We’re way above that UN definition.

The real truth is that the impact of the direct transfer program will be immediate and enormous. Hundreds of millions of people will be elevated out of the depths of poverty in a very short period of time. Of course, the middlemen (now whose core constituency is that?!) will feel the pinch – the blood sucking pests will lose their bite. The cash in the hands of the poor will spur demand for FMCG products and more in the years to come. Of course there are challenges. The social impact needs to be assessed and the program calibrated. What happens to the Government’s food-purchase program (for which the Government pays MSP to farmers) will have to be thought through. But overall, it’s a big step forward. Economically and politically!