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India need not live with poverty



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Please help make the Manifesto better, or accept it, and propagate it!
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Friends,

I am in Delhi at the moment and what a difference in connectivity! Only 15
attempts to log on, and a relatively stable and fast connection. I have
taken advantage of this to upload the draft entitled "INDIA NEED NOT LIVE
WITH POVERTY" which deals with almost all aspects of poverty alleviation,
elimination, negative income tax, etc. I have dealt with the comments of
Umesh and Praveen Hombaiah. I believe that the time to implement NIT has
come.
Reg Navaneethakrishnan Kandasamy's objection, that is dealt with under
broadly under 'leakages' (annexure ii). I assure Navaneethakrishnan that NIT
is going to save the country well over a lakh crores in mis-spent funds, AND
eliminate poverty DESPITE a certain amount of leakages. We can use
information technology to minimize leakages drastically - I assure you that
is possible.

But let us discuss further. Kindly download and read theWord version
containing over 10 footnotes from
http://www.indiapolicy.org/debate/notes.html

I am giving the text version of a portion of it below for others who can't
read Word documents or can't download.

From: Navaneethakrishnan Kandasamy <nkandasamy@hotmail.com>:
> NIT is fine. How are you going to deal with massive tax evasion by
> non-salaried class to begin with?. I am sure that Income tax paid by the
> businesses are a fraction of what they should be paying.  Salaried class
is
> the victim here and that is partly a reason for corruption among the Govt.
> employees

=========================
INDIA NEED NOT LIVE WITH POVERTY

Dr. Sanjeev Sabhlok (7th June 20000:  draft for discussion)

1. Introduction
Rarely is an attempt made to understand the constitutional role of
Government in terms of poverty alleviation and the large number of
programmes which are currently in place, allegedly to minimize poverty. To
cover a wider area, I also take a look at the theoretical role of government
in poverty alleviation. I then compare the constitutional commitments and
theoretical implications with the actual position on the ground and show its
short-comings. Finally, I discuss the far more elegant and efficient
alternative - negative income tax (NIT), and show that with the NIT,
government can do much more, more fairly, and with far less expenditure,
releasing a huge 'efficiency dividend' which can propel the country to a
dramatically higher growth path, with vastly enhanced equity.

2. Role of Government

2.1 Equality under the Constitution
 Our Constitution guarantees equality of opportunity under the Preamble. In
addition, Article 39(c) specifies that the State shall attempt to secure
"that the operation of the economic system does not result in the
concentration of wealth and means of production to the common detriment".
Apart from this, Article 39 talks about providing adequate means of
livelihood for all, economic justice, and the promotion of fraternity
assuring the dignity of the individual.

2.2 Speeches of Leaders
 In the speech made by Nehru on the eve of the departure of the British, on
14th August, 1947, he talked about the task of ending poverty and removing
of inequality of opportunity. Later, Mrs Indira Gandhi coined the slogan
Garibi Hatao, emphasizing the need to eliminate poverty.

2.3 Theory of equality of opportunity and status
 This has been briefly covered in Annexure I. No matter how many differences
exist amongst competing ideologies with regard to the action to be taken to
reduce inequality, nobody would deny that elimination of poverty is the
first definitive step towards achieving this goal. Both status and
opportunity are significantly curbed when there is chronic hunger in the
household. When even one family is hungry in India whereas others are not,
that constitutes an untenable level of inequality. All else is secondary
when hunger forces adverse economic action such as the sale of wives and
children. Bonded labour, child labour, oppression of the weaker sections,
etc., arise essentially from this complete lack of control over economic
resources by those below the poverty line. Indeed, my research also shows
that poorer parents are less likely to want to educate their children, thus
setting up the famous "vicious cycle of poverty".

3. The actual role played by Government in India.

In policy circles, we speak less of elimination of poverty than income
redistribution including asset redistribution. Equality leads us to
progressive income tax system, land reforms, rural development programmes,
etc., and stops there. Unfortunately, a closer look at these programmes
shows how poorly we have performed with regard to achieving the basic
principles of constitutional equality.
We find that for various reasons there has been a mushroom growth of
subsidies for the middle class, amounting to over Rs.1.5 lakh crores per
year. In addition there are a large number of social welfare programmes
which are either mis-directed or inequitous, often selecting a few of the
poor, rather than covering the entire poor population. We now take a look at
some of the existing programmes and evaluate their shortcomings.

3.1 Rural Development Programmes
 The fundamental weakness of programmes like IRDP is that these distinguish
or select amongst the poor. Too few people are selected each year for the
subsidies provided under IRDP, and even under ideal conditions (of no
leakage of funds and complete success in achieving productive income by the
poor), it would take well over a few hundred years to eliminate poverty in
India. In reality, given the high administrative cost, enormous leakages and
corruption, the poor are frequently made further indebted, exacerbating
their poverty.

 On comparing with the Constitutional provisions on equality, one
fundamental implication is that the State cannot distinguish amongst the
poor. The poor cannot wait for two hundred years for the benevolence of the
Rural Development Department or others to reach them. Every year, without
fail, it is the obligation of Government to eliminate poverty, irrespective
of caste, tribe, sex or age.

In fact, it is extremely unjust, even atrocious, for the Government to
subsidize the well-being of the middle-classes, who are today given the
benefits of subsidy in power, transportation, PDS, etc., while poverty
continues across the country.

 The utilitarian principle makes the welfare implications of current
policies
even more clear. The marginal utility of one rupee to the very poor is much
higher than to those above the poverty line. In other words, each rupee
spent directly on the poor provides the greatest total utility and welfare
to the country than spending it on those richer. Accordingly, the negative
income tax scheme (NIT), as per Annexure II, is the most justifiable, based
on all definitions of equality, whether neo-classical, utilitarian, Marxist,
or any other .

Subsidies to any one above the poverty line can only be envisaged after all
the poor are lifted above poverty line. None, even entrepreneurs of IT, can
be subsidized until poverty is eliminated.

3.2 Land Reforms
Before we proceed to advocate the negative income tax scheme as the
principle method of poverty elimination, we must find out why direct asset
re-distribution through land reforms has failed in India and whether direct
asset distribution might possibly fulfil the constitutional obligation. Land
reform in India has been beset with the moral hazard problem whereby
transfer was more likely to be of low yielding assets (poor quality land).
Despite this, most of these assets were relatively of higher value than the
assets possessed by the poor to whom these were to be transferred. Given our
political-administrative structure, rent-seeking behaviour found its way
into this area. In the end, land reforms remained primarily on paper. I
believe that land reform would have still fallen far short of the massive
requirement of asset transfer for the final elimination of poverty even
under ideal conditions. Finally, and more importantly this strategy suffers
from the defect of violation of property rights and thus liberty, and
therefore should be abandoned.

Negative income tax faces none of these problems, for it transfers national
wealth from all sources, without discrimination, to all the poor, every
year. Given the small size of the individual transfers, rent seeking is also
not likely to enter in this area.

3.3 Micro-credit
Negative Income Tax (NIT) is not related to the continuance of commercial
micro-credit and micro-insurance programmes. Once negative income tax comes
into force, micro-credit can continue as before, perhaps on a much more
commercial basis, where each project is evaluated strictly on merit since
there will be no subsidies to credit.

3.4 Human Capital Formation
It is likely that the application of the negative income tax scheme would
give a major boost to human capital formation as poor parents would be able
to invest more in the education of their children, and need their services
slightly less than before, in managing their productive assets such as land
and cattle.

3.5 Welfare Schemes
 In addition to the above, there are a large number of schemes being
implemented in the state in order to provide certain basic minimum services
to the people. For example, in Meghalaya, the Rural Housing Scheme provides
for CGI sheets worth Rs.10,000 each to about 4,000 families each year, in
order to help upgrade the thatched roof of their house. This has the
following defects: (a) It helps a few of the poor, not all, and (b) It
provides assistance much in excess to that needed to lift the concerned
family above poverty line; i.e. it provides excessive assistance to too few.
Such schemes have to be completely abolished. Once a family is lifted above
poverty line through the NIT, the constitutional obligations of Government
come to an end.

3.6 Minimum wage
 Highly distortive and increase inequality.

4. The role the Government should play.
 The NIT is possible only after some hard decisions are taken by Government.
Putting into place a programme of NIT while subsidies and loss making public
sector undertaking, etc., continue, would be extremely costly for the
country. The Government would have to be ready to raise the power tariff,
prices of kerosene and food, privatize loss making undertaking run by
Government, retrench the excess staff and take other tough decisions.

5. The long-term cure of poverty
Under no circumstance do I argue for the direct income transfer approach as
the permanent solution to the poverty problem. It is only with reference to
the existing subsidy route that I feel direct transfers are more efficient.
Most of the poverty we continue to see in India is system induced. We
therefore need to compensate the perennial losers generated by our system.

In the medium and long run there is clearly no better mechanism than good
governance and sound economic policies, which have been enumerated elsewhere
on the IPI forum. System reform will help bring down absolute poverty
successively through the years. At that stage, the transfer to losers will
become a successively smaller burden on the Government. In particular,
market reform will eliminate barriers to trade in agriculture, generate
demand for skilled labour and absorb surplus labour, and enable basic goods
to reach at the doorsteps of the poor who will then be able to purchase the
same. Simplistically speaking, growth will break the backbone of poverty.
Strategies to promote growth are in no way less important than the direct
transfers envisaged here. What direct transfers will ensure is that we do no
have to carry the needless burden of acute poverty on our shoulders, and go
around the world, begging bowl in hand.

6. Conclusion
Objections received so far to the Negative Income Tax scheme have been
disposed of to some extent in Annexure II. Further debate and analysis on
this note will be much appreciated. If benefits are fully evaluated and
objections disposed of, NIT could then be adopted as the only
Constitutionally valid scheme of income re-distribution. It will save us
many thousands crores, and make equality, quaranteed under the Constitution,
a reality. Since Meghalaya is a small and relatively well-administered
State, it is suggested that Rs. 40-50 crores can be allotted for this State
to launch a Pilot Project for direct elimination of poverty, after due
preparation. Alternatively, the ten poorest districts in the country could
be chosen for this programme. It may be mentioned here that the middle
classes in Meghalaya are hugely pampered. Public sector undertakings in
fields such as electricity, hotels, buses, housing finance, etc., are making
losses which exceed by far the amount required to eliminate poverty in
Meghalaya. If we add the other forms of pampering of the rich and middle
classes in the name of the poor, and the wastage of funds allegedly spent on
poverty alleviation (I am not counting the leakages to the wealthy through
contractors), the amount spent on pampering of the rich and powerful is much
greater.


ANNEXURE I
EQUALITY: THE THEORY

Introduction
Equality has many meanings and various implications. I list a few below,
through quotations and comments, and examine the justification for the
involvement of government in the removal of abject poverty. Jean-Jacques
Rousseau was among the first to study, inequality (Discourse On The Origin
And Foundations Of Inequality, 1755). We first note his definition of
equality:

"With regard to equality, this word must not be understood to mean that
degrees of power and wealth should be exactly the same, but rather that with
regard to power, it should be incapable of all violence and never exerted
except by virtue of status and the laws; and with regard to wealth, no
citizen should be so opulent that he can buy another, and none so poor that
he is constrained to sell himself." (Rousseau, cited in Carnoy, 1984, p.22).

(a)  Natural Equality / Equality based on liberty
 "......... because men are equally free, they claim to be absolutely
 equal" (Aristotle, in Politics, 343 B.C).

 "The foundation on which all our constitutions are built is the natural
equality of man" (Thomas Jefferson, in letter to George Washington, April
16, 1784).

 "Democracy and socialism have nothing in common but one word: equality.
But notice the difference: while democracy seeks equality in liberty,
socialism seeks equality in restraint and servitude" (Alexis Comte de
Tocqueville, speech in the Constituent Assembly, September 12, 1848).

 "They [the authors of the Declaration of Independence] defined with
tolerable distinctness in what respects they did consider all men equal -
equal with 'certain inalienable rights, among which are life, liberty, and
the pursuit of happiness" (Abraham Lincoln, speech in Springfield, Illinois,
June 27, 1857).

(b)  Equality of regard/Equal opportunity to develop talent.
 " Our aim [is to]... insist that there should be an equality of
self-respect and of mutual respect, an equality of rights before the law,
and at least an approximate equality in the conditions under which each man
obtains the chance to show the stuff that is in him when compared to his
fellows." (Theodore Roosevelt, seventh annual message to Congress, December
3, 1907).

 (c) Equality before the law
 "Equal laws protecting equal rights ..." (James Madison, letter to Jacob
De La Motta, August, 1820)
 Equal rights are essentially limited to property rights, as per Nozik.
Among the major theorists, only he claims that the society has nothing to do
with the distribution of wealth (see Caporaso, Levine, page 205).

(d)  Equal pay for equal work
Unfortunately, it is very difficult to distinguish equal work and hence
economists allow for the concept of marginal product taking care of issues
of quality of output.

Theoretical consensus
 We agree in the end with Hegel who stated in 1821 : "Not only caprice,
however, but also contingencies, and factors grounded in external
circumstances may reduce men to poverty" (cited in Caporaso, Levine, page
211). It is this necessity of providing the basic equality of opportunity to
those whose circumstances may have been unfortunate, that paves the way for
public economic intervention.

 Rawls takes this role much further through his "difference principle",
which emerges from behind the veil of ignorance. I do not agree with this
principle, though, according to which inequalities are just if they benefit
the worst off. There is no way known to us to quantify such a principle, and
we would enter a maze of confusion if we adopted it.

Empirical findings
 We must also keep in mind two pieces of empirical evidence:
(a) Economic equality beyond a point hinders creativity and growth (Becker,
Gary, p. 66-67)
(b) There is evidence (Roderik) that a reasonable level of equality and
growth go together.

Conclusion
 In the end, the only thing that makes sense is the following: Equality of
opportunity, whereby persons are accorded an underlying equal platform to
display their talents, is best served by a full-blown market system
(capitalism) in which there is no poverty or serious deprivation. Attempts
to rob the rich to feed those below the poverty line are therefore justified
if properly focused. On the other hand, attempts to spend a rich man's money
on a person not below the poverty line would amount to pure robbery, of a
kind which governments in India have long indulged in.

References:

Becker, Gary

Caporaso, Levine

Carnoy

Robertson.

Roderik


ANNEXURE II
THE NEGATIVE INCOME TAX (NIT) SCHEME

1. The proposal

Preliminary analysis of poverty elimination in India through direct
(negative) income tax is available at
http://www.indiapolicy.org/debate/Notes/poverty-tax.xls (excel document)
linked at http://www.indiapolicy.org/debate/notes.html. Analysis shows that
ALL poverty in India can be eliminated by targetting payments to the poor at
a cost is approximately Rs. 26,000 crores annually,  @ Rs.650 per capita
average annual payout to those below poverty line [this cost is subject to
further verification and is likely to be lower].  Currently, subsidies
exceed this requirement by a wide margin and ought to go immediately.  It is
important to point out here that this estimate is not strictly based on the
concept of Negative Income Tax expounded by Friedman. Further fine-tuning
would be necessary to make it truly a NIT proposal.

2. Methodology of implementation

If it is conceded that direct elimination of poverty is at least
theoretically a more economical option than giving subsidies to various
activities which frequently are vulnerable to leakages,  then the first
question before us becomes: what practical methodology can be used for the
direct elimination of poverty in India? There can be more than one
alternative strategy for implementing the desired direct transfer. One such
is proposed below.

2.1 Underlying Mechanism

Underlying this mechanism of direct transfer is the filing of income tax
returns by all households across the country. It may be pointed out that
another positive spin-off of this methodology is that income tax collections
in the country will increase as the wealthier farmers begin to pay tax, too,
thus reducing the net cost of poverty elimination. Since the income tax
department is currently ill-equipped to handle such a large scale operation,
the task can be delegated through an MOU to the State governments, which
usually command a vast army of civil officials at the village level.

2.2 Identification of the Poor

State Governments possesses a considerable complement of "field" staff, such
as village level workers belonging to the Education, Land Revenue,
Agriculture, Food and Civil Supplies, Rural Development, and other
departments. On a similar pattern to the Census Operation, an Income Tax
operation can be organized each year by the State Governments. It is
suggested that the voters list be used as the basis of the identification
process, as was done in Dhubri District in 1986-87 and beyond by me, as
Project Director, DRDA (details are in the book, "Dhubri Advanced
Information System", published by D.R.D.A. Dhubri in 1988). Suitable, easy
to fill forms can be designed to capture the required information. A
specialized training programme will have to be organized thereafter. It is
necessary to bear in mind that perfection cannot be expected in the
estimation of household income, and suitable proxies may have to be used.
Also a crosscheck in the field would have to be made by senior officers. The
data so collected can be transferred into computers at the Block level
(where computers are now being made available through the Ministry of I.T.)
or at the Sub-Divisional/District level, or given to private data entry
operators for entry, if necessary, in a prescribed software.

2.3 Payments to the poor
The computerized data and forms can then be sent to the Income Tax Office at
the State Capital where it will be a matter of a few hours or days to
process the data and identify not only the poor but to "net out" transfers
needed at the household level, and issue a printed statement to the banks at
the State headquarters, with authorization to credit the accounts of such
persons in the amount necessary to bring the concerned family just above the
poverty line.

Note that Nationalized banks today have tens of thousand of branches
operating widely across the nation. Virtually all branches have the
experience of dealing with the illiterate poor. Many of them operate old-age
pensions, rural development loans, and other accounts. There is also no
difficulty in principle in banks and field functionaries of the State
Government helping all the poor in the country open accounts with designated
Bank branches. Further, discussions with Bankers indicate that there is no
leakage/ corruption at the Teller's window, i.e.,  the Banks are not likely
to cheat at the time of disbursing this money to the account holders.

3. Addressing various concerns

The matter has been discussed with various persons, including Dr. Pronab
Sen, Advisor, Planning Commission, and S.S.A. Aiyar, Consulting Editor,
Economic Times. Dealt with below are a few of the issues raised, along with
a possible response.

3.1 Recalculation of Poverty Lines:

Dr. P. Sen feels that "all direct transfers will have to be netted out,
preferably at the individual or household level, and the poverty lines will
have to be recalculated to correct for all forms of commodity subsidies,
particularly food subsidies." Thus poverty lines will have to be
recalculated to correct for all forms of commodity subsidies. Depending in
the methodology used to calculate the poverty line, this should be done, but
in no way does it detract from the basic argument in favour of direct
transfer. The poor, howsoever defined, must be lifted by specific
targetting, above the poverty line.

3.2 Estimation of the change in production and hence in resources available
for consumption at the field level:

Dr. P. Sen also feels: "the short run effects of removal of other subsidies,
ie. those on production goods, would need to be estimated as far as
production is concerned, and then on consumption expenditure. This is not a
trivial exercise at all."  The major production subsidy relevant to the poor
is fertilizer subsidy. It is quite likely that the bulk of this subsidy is
availed by those above poverty line. The marginal reduction in income of
these people can have two adverse effects: (a) A few villagers might
directly fall below the poverty line and (b) less money would circulate
within the village, thus marginally reducing the price of goods and services
offered by those below the poverty line, thus enhancing their poverty. The
overall impact on the incomes of the poor 40% of the population is likely to
be very small, though.

But note carefully that direct transfer being made at the end of the year,
the actual income in the preceding year is to be considered, rather than the
prospective income. This leads us to the following strategy. Let all
subsidies continue as usual in Year 1. The possible ill-effects of
elimination of subsidy would not be observed during Year 1. Let the survey
of Year 1 income be done at the beginning of Year 2. Subsidy is eliminated
in Year 2. By June-July of Year 2 the direct transfers would have all taken
place. While the vast majority is lifted above the poverty at the beginning
of Year 2, some new poor might emerge in Year 2. These poor would be at the
upper fringe of those below poverty line. In Year 3, all would be finally
and completely lifted out of poverty, on a regular basis. Even if subsidy is
removed in Year 1, when we have not succeeded in eliminating poverty for 50
years, one more year of a slightly higher poverty will not matter so long as
all poverty is subsequently eliminated.
Since the adverse impact of removal of subsidies can be made to be minimal,
and the positive effect of direct transfer is enormous, the concern against
direct transfer is not sustainable. Now I discuss the methodology of direct
transfer.

3.3 Magnitude of administrative effort:

Shri Aiyar rightly  points out that "Ideally, every Indian should have a
personal identification number (like the social security number in the USA)
which has to be mentioned for all important purposes like voter
registration, driving and other licences, taxes, bank accounts and the like.
That creates a  system that can  keep track of the poor and discover
leakages and fraud. It is an enormous administrative undertaking, and fraud
is rampant even in the US. Of course, the leakages are surely higher in
various subsidy schemes in India, where the non-poor probably get 80 per
cent of all benefits."

This is essentially correct. If we are to introduce and maintain a negative
income tax programme, a large administrative effort is needed. However, as
already pointed out in the methodology above, State Governments are
perfectly capable of providing the necessary administrative infrastructure
for the purposes of identification of the poor. Even after subsidies are
eliminated and departments such as Food and Civil Supplies, Agriculture,
Rural Development, etc., partially disbanded, there would still be more than
adequate man power to carry out the operation at minimal expense. There is
therefore no need, in my view, to contemplate the creation of another
organization on the pattern of the Social Security Administration of USA.

The Income Tax Department can independently verify about 1% of the total
cases, to ensure cross checking and to impose penalties on those who have
filed excessively incorrect returns. As far as assigning an ID No. is
concerned, that can also be delegated to the State Governments, and a Smart
Card suitable for Indian conditions created which would serve the
multifarious purposes mentioned by Mr. Aiyar (Dr. Seshagiri, retd. DG, NIC
had worked on its conceptualization 10 years ago).

3.4  This scheme will leak/ will lead to large scale corruption:

Praveen Hombaiah feels that "No matter what methodology is used to identify
the poor, I have no doubt this will lead to large scale corruption and the
scheme will leak.  Especially in a system where corruption is already
institutionalised."
This will not necessarily be so. Public vigilance, transparent procedures
and strict action against those who do a bad identification will prevent
such corruption. In any case, a pilot project will show whether this system
leads to corruption or not.

3.5 Crowding out of private transfers:

Sh. Aiyar feels that "The second non-trivial issue is that poor people get
money today from relatives and extended social groups (like the biradari).
Once the centre steps in, these private transfers to the poor will dry up.
Some research suggests that private transfers can be quite appreciable. I
would hate to destroy private forms of distress alleviation and substitute
it by a leaky bureaucratic effort."

While not  directly commenting on the research which apparently exists in
the area of private transfers to the poor, I suspect that many of these
transfers create unequal relationships, more on the pattern of bonded
labour, and in any case these transfers are possibly contingent on the
expectation of realization of future services (as in the jajmani system). My
suspicion is also that these private transfers vary across communities.
There could be some, such as the Sikhs where these transfers help alleviate
poverty considerably, as also in certain tribal areas. However, on average,
given the magnitude of the problem of poverty in India, I suspect that such
transfers have played a minimal role in alleviation of poverty. Had it been
otherwise, the percentage of the population below poverty line would not
have remained practically static for so many decades. On the issue of drying
up of these transfers, on commencement of direct disbursal of transfers from
Government, the case is much less strong. The indirect transfers allegedly
made to the poor, through various subsidies, exceed by far the direct
transfers which are being now envisaged. Therefore there is (possibly an
absurd) counter-argument that private transfers might actually increase.
While not discounting Mr. Aiyar's argument entirely, I believe that the
negative effects, if any, of the possible drying up of such private
transfers can be easily mitigated, as in the case of the negative effects of
withdrawal of fertilizers subsidy, etc.

3.6  Crowding out of investible funds:

Praveen Hombaiah feels that "Such a huge scheme will definitely lead to
reduction in the money
available to private enterprises.  Private enterprises, which time and again
have proved better at poverty reduction, than any govt. scheme."

Private enterprise (private charity) has only limited effect on poverty,
particularly in a large country like India. There is no possibility of
reduction in money available to private enterprise since the subsidies will
now reduce and the direct transfer would be put to use in the purchase of
goods and services by the poor.

3.7 Local bodies:

Sh. Aiyar feels: "There is a simpler alternative. Every gram panchayat can
be give given a cash allowance for relief to the five poorest families.
There will have to be open discussion at a gram sabha on who are the most
worthy beneficiaries. This was indeed tried in the old Antodaya scheme. It's
less ambitous than you negative income tax scheme but much easier to
implement. It will reach people who cannot participate in rural employment
programs (the aged, very young, sick and crippled). I suspect this might
alleviate half the existing poverty without totally destroying private
transfer mechanisms."

There is no dispute whatsoever in involving Gram Panchayats in the process
of identification of the poor. However, to give relief to only a few is not
satisfactory solution. Poverty has to go. Period.

3.8 Politics and bureaucracy:

Sh. Aiyar commented, "The real problem in focusing subsidies on the poor in
democracy. Democracies are majoritarian, not egalitarian. A subsidy that
reaches only the bottom 30per cent will have less popular appeal than a
subsidy which reaches 70 per cent of a targeted section of the population
like farmers or urban dwellers.. What economists call "leakage to the
non-poor" is not leakage at all from the politician's viewpoint,  but
accurate targeting!"

Far greater problems would arise from the bureaucracy which dislikes giving
up its empires in the fields of fertilizer, PDS, power, transportation,
etc., than from the politicians. For 50 years, the Planning Commission,
representing the vested interests of a grossly inflated bureaucracy, has not
once advised politicians about the implications of such direct transfers.
When the so-called experts are busy defending the current system, our
attempt to blame politicians for possible resistance to a programme which
was never proposed to them, would be grossly unfair. I believe that the
politician who first comes out with this scheme of direct transfers would
gain longevity and popularity. I am convinced that resistance would
primarily come from senior bureaucrats and not from Ministers.

3.9 Effect on work incentives:

There is another area of concern which could arise consequent to direct :
that of reduction in the work incentives of the poor due to NIT. There is
surely a small percentage of the poor who are not poor because of natural
causes  or our socialistic policies, but because of their own vices and bad
habits. I do not deny that a small segment of the country's population would
perennially remain poor, much on the pattern of drug addicts of USA. To
minimize the possibility of adding to this 'natural' population of the poor,
the Income Tax Department should phase out the negative income tax over the
years. Thus Mr. X receives 100% of the transfer needed to bring him above
poverty line in Year 1, but would receive successively smaller percentages
over the subsequent years.

3.10 Rationality and Misuse of cash grants:

One of the objections to the NIT could be that the very poor are unable to
decide for themselves what is good for them - Additionally, due to the power
differentials within households, at least some of the cash could be
transfered into purchase of alcohol, thus increasing poverty.

The reply is two fold. Except for difference in knowledge, i.e., a
difference in the utility function, there is no difference in the maximising
behaviour between the rich and the poor. The poor have managed to survive
for decades in free India at levels of support from government which can at
best be described as minimal. To doubt their rationality will be extremely
unfair to them.

Secondly, the analysis of food-stamps in USA1 shows that the program in no
way benefits everyone equally. There is a roaring market for food-stamps in
USA in which the "excess" food-stamps are sold at 80 of their value to
others. Except in the rarest of cases, direct cash grant is far more
beneficial.

I hope this reinforces the substantive thesis that direct transfers must
substitute subsidies.




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