INDIA - SIRENS IN THE NIGHT
MAY 11, 2011 BY VICKRAM
The implications of the National Budget for the current fiscal year (April-March) are stark, in some respects. The Finance Minister, Mr Pranab Mukherjee, seems well pleased, but I can't say this feeling is universally echoed.
Notable this year is a remarkable proposal to rid the subsidies system of its rot and stanch the illicit outflow of funds, annually budgeted to support two massive social service programmes, the Public Distribution System (supply of essential goods) and the money-for-work assurance (100 days paid employment or equivalent money in lieu, under the Mahatma Gandhi National Rural Employment Guarantee Scheme, commonly known as NREGS (en'regz).
Could this be the much-awaited miracle at hand?
Well, it’s getting to be summer, and my alerts are jumping. The government proposes to bypass its existing system of State-operated logistics management of essential goods and services, enable a privately operated system to flourish in its place, and empower the ‘deserving’ poor to be given cash to buy whatever and whenever they want, from wherever they can. Several states are riding this bandwagon, eager to rid themselves of managing the logistics of getting physical goods to those who are entitled, by virtue of being less-than-dirt-poor, to receive them.
Just like the legendary tailor who slew seven with one stroke, bureaucratic log-jammed flows of goods and services will be freed. Local government-authorised merchants will not be able to fleece beneficiaries in terms of either quantity or quality, and undeserving people will not walk off with the supplies either.
Why are these things a problem in the first place? Partly, the government finds it hard to ensure that the benefits reach those they should. People, unfortunately, are a moving target, and the government, unsurprisingly, finds it hard to focus.
To get around this, it has come up with quite a cunning proposal, really. Instead of giving itself, as it were, a new set of spectacles, it asks citizens - all residents of India, in fact - to voluntarily ‘raise their hands’, in order to more easily spot those who need help. These ‘raised hands’ take the form of what is being widely advertised under the brand name Aadhaar, an unique identity number, proposed to be assigned to every resident, and what’s wrong with that?
Quite a lot, as it turns out.
The concept looks quite good, seductive, in fact. If we only knew who deserved assistance, we could make sure they got it. Right?
Not quite. Firstly, each state handles the question of ‘deserving’ slightly differently, and some have even decided not to bother about the distinction, and just give handouts to all comers, efficiently. That is as far as the Public Distribution System is concerned - the NREGS doesn’t differentiate, as it happens, and guarantees 100 days of paid employment a year, or the equivalent cash, if work can’t be found, to anyone who is willing to show up.
The key is in the word ‘efficiently’. Goods go astray, people have to grease the way to stay on the ‘deserving’ lists, moneys reserved for the desperately poor are leached off by middlemen, among other creative and innovative methods, and the net result is that the desperately poor have stayed that way since Independence (1947). Only, with an inflationary population, there are actually more people desperately poor today than lived in India less than 70 years back.
A couple of states have found efficient ways of distributing essential goods and services, ideas that have been put into practice over the past couple of years, that seem to work quite well. They focus on the leakage points, the transshipments between public storage facilities and the nodal distributions points, and innovatively plug the holes.
One way is to paint distribution vehicles in bright colours. The public is invited to report any vehicles found moving about in unexpected places, and this has worked. Vehicles may soon be equipped with GPS (global positioning systems) transponders, that will show logistics managers exactly where the vehicle is, during its duty hours, which has been found quite effective by logistic companies in the private sector (for both road and sea transport). Any diversion of goods can be swiftly dealt with, and the drivers/staffers incentivised to behave.
With NREGS, the problem is different. There aren’t any necessary prequalifications for work, so it is quite easy to concoct fictitious lists of beneficiaries, and create ghost payments on a large scale. An attempt has been made to stop this, by mandating bank accounts for all beneficiaries, but in what may be admiringly called the true Indian style, such bank accounts are often operated by persons other than the beneficiaries - occasionally, this is by arrangement between the beneficiary and some well-wisher, but far more often, the beneficiary simply may not exist at all.
Common sense has come to the rescue, here and there. One solution that works effectively at the village level is simply to put up a blackboard with the names of workers, and the pay earned, for all to see. It is not ideal, especially from an absolute privacy perspective - but it works.
Like the camel in the tent, Aadhaar, too, is beginning to muscle its way into every conceivable corner. With absolutely no empirical or scientific evidence to show that it can work, this is an attempt to foist a number on each and every Indian resident. Its dark antecedents (the 'need' to keep tabs on everyone, voiced first in 1999, in the wake of an armed cross-border intrusion that escalated into a brutal battle - Kargil) belie the soothing mumble of miraculous cures to all of India's social ailments.
Aside from deciding that benefits actually go to those who most deserve them - when the supply is limited, this hard choice could seem inevitable to some minds - the government has suggested a very major policy change, one that will see the dismantling of the public distribution system. Considering how inefficient and unresponsive it seems to be, it is really no surprise that some people would be overjoyed to see it go.
But what does it mean to a country, really, to drop such a system? Firstly, it heralds the move away from the state’s responsibility to succor the weakest. It will shift to ‘the market’ instead, which ought to, in theory and out of self-interest, work to ensure availability of goods and services, when and where needed.
And has this worked before, in other countries? Not necessarily. This paper by Handa and Davis, points out that in each of six Latin American countries where conditional cash transfers have been attempted, the funding (and therefore pressure) to do so has been external, financed by loans and grants. India is different, and we have no need to bow to such pressure or incentive. Does that make a difference? Certainly: we can apply our minds, based on our knowledge of our own situation. So is this what we are doing? Can we hope to succeed?
Some may argue that there is very little evidence of any such heart-warming results from other markets. In fact, it is a highly idealistic notion to imagine that it will happen in India either, without a very heavy regulatory government hand in place. The role of market operators during the unconscionable Bengal famine of the 1940s, that killed millions of poor people, during what amounted to a state of emergency (due to the Second World War, going on at the time) ought to be salutary, but then, learning from history may not be everyone’s cup of tea.
As far as cash transfers are concerned, we have a history. This article (pdf), in The Economic and Political Weekly, by Dutta, Howes and Murgai, analyses two targeted conditional transfers, in Karnataka and Rajasthan. Both deliver aid to widows and the elderly, although there are marginal differences in the way that each state defines households where the two categories of deserving persons reside. Neither target group is held in much regard among their fellows, despite the pious prescriptions of the ancient scriptures.
While both schemes are ostensibly doing quite well, they aren’t quite picture perfect. They target reaching out to half the potential population, but fall woefully short, not yet 10 percent of the most deserving. Bureaucracy is a major impediment to self-registration. Current schemes envisage reaching out to the entire potential population, but how? In supportive households (where the elderly and/or widows reside with others) the pensions, small though they are, appear to help lessen inequities, while the states are good at reaching out to independent households, where the need is dire, with no alternatives, not even bad ones.
Expanding the reach is likely to mess things up a bit, due to the inability to correctly identify beneficiaries or to persuade them to register. False payouts are the likely result. Even at this low level, most recipients reported ‘paying’ to receive their allotments, either to the postman or some other ‘inserted’ middleman (pensioners need to certify annually that they are still alive, deaths/moves need to be notified, etc etc; all such transactions cost money, effectively a leakage of benefits, as this is often the only income stream for beneficiaries). One effect of this is the consistent amount of payout to people who technically do not qualify: even among the poor, the poorest do not get the preferential treatment they most need.
The paper also compares the performance of these schemes with that of the PDS, finding that two factors, targeting and delivery of payouts in kind rather than cash, actually contribute to its effectiveness, since there is no money for the head of the household to take, without conveying its benefit to the pensioner. These pensions are relatively small, and are thus not ‘low-hanging fruit’ for the cheat (politely called the ‘rent-seeker’), to exploit on a large scale.
Targeted cash transfers could still work if the administration is tightened up. The experience in Latin America reveals some hope. Will relieving the bureaucracy of the need to administer the logistics of essential goods transshipments and delivery achieve this result? The paper does not speculate, but given the widespread evidence of massive corruption across all levels of the bureaucracy, one would have to be exceedingly blinkered to unilaterally dump subsidies in kind.
Evidence, from the FAO’s Neville Edrisinghe, backs up this prediction, with specific reference to nutrition. The FAO reports, “where improvement of nutrition among poor households is a major objective of assistance programmes, the food factor helps achieve this more effectively than when a cash amount of equal value is given to such households.” Few people are stupid enough to think that nutritional levels in poverty-stricken India are adequate (worse, they have been dropping over the years).
Aside from the empirical studies mentioned above, this study by Thomas Ross, adds to the various views, both positive and negative. “Subsidies may be more effective than cash grants at raising the welfare of all members of a family when parents put insufficient (in society's view) weight on their children's welfare in household decision making,” is the conclusion drawn from research backed by detailed econometric analysis.
It is unfortunately true that in the USA, where a lot of data is available, poor households consistently make exceedingly poor nutritional choices, given subsidy allotments in the form of either cash or food stamps. In short, the head of a household is not always the best judge of disposal of overall household income, especially low income. Of course, nobody likes the state to continue an excessively paternalistic role, and that lies at the root of the current dissatisfaction with the manner in which subsidies are deployed in India. Ross points out that “subsidies of goods with specific properties may be more efficient at raising household welfare than cash grants.”
In conclusion, this argues for a very nuanced approach to subsidy management, but that’s exactly what is missing from most Indian subsidy programmes. At the end of the day, the eligibility of individuals for different subsidy programmes is determined by the same bureaucracy, and there is no alternative suggestion on offer to deal with this situation.
Then how does the government propose to manage targeted cash subsidy deliveries? According to Mukherjee, it will be quite straightforward, “through direct cash transfers on a pilot basis using the expertise of the Unique Identification Authority, before the end of the current year”, according to this report in the Financial Express.
What is starkly missing from this breezy statement is the ‘expertise’.
As should have been obvious by the poor showing of such systems in advanced countries, the UIDAI has failed so far to establish expertise in its own mandated area, as evidenced by the only published report. With over 2,66,000 people tested, only 52,000 odd numbers could be generated, a failure rate of over 80%. Hilariously, the report goes on to say “the software responded well for both categories of people”, as though this is relevant, when the sensing devices have failed so miserably (as expected, for one does not make silk purses from sow’s ears, as the expression goes) to deliver the necessary identifiers.
However, using Aadhaar has other ‘advantages’. For instance, bank enrollment in rural India, a miserable failure since the advent of bank nationalisation in the 60s, whose objective was to increase the penetration of rural banking, will become virtually compulsory. Amazingly, this will take place at almost no cost to the banks themselves.
They do not need to set up bank branches, or offer credit. At most the penetration of ATMs (cash dispensers) may increase, although these machines also will need the banks to issue swipeable bank cards, so far not found cost-effective for low-volume accounts. In reality, cash dispensing will take place through human extension counters, as currently managed by the (mostly private) rural banking institutions. However, the latter could only support their operations by advancing loans at high rates, and defaults led to serious problems towards the end of the previous year. With the banks, the specter of such ‘agents’ also transforming into ‘rent-seekers’ is very real, thus replacing one corrupt system with another, except the new system will look very good on paper, unlike the old one, which looks a bit smudged.
Abolishing ration shops will also give a fillip to the organised retail sector, as large volumes of materials, previously supplied through ration shops, now get channelised through the private sector. In theory, efficiencies of scale will ensure prices remain stable while the cost of acquisition of foodgrains and other agricultural commodities will also be more remunerative to farmers.
India is an ‘emerging superpower’, and the cry for ‘the market’ to replace the creaky and occasionally bumbling paternalistic role of a wannabe welfare state is loud. However, there is little evidence of India’s organised sector to deliver efficiency with maturity, especially as India’s ‘black’ economy still hovers at an estimated scale equal to that of the formal economy, the one from where Mr Mukherjee draws his figures, and presumably, his conclusions. It might be a laudable goal, but the manner in which it is being pursued remarkably resembles a long-legged lady in a whistling wind.
Mr Mukherjee’s slip is showing.
MAY 11, 2011 BY VICKRAM
The implications of the National Budget for the current fiscal year (April-March) are stark, in some respects. The Finance Minister, Mr Pranab Mukherjee, seems well pleased, but I can't say this feeling is universally echoed.
Notable this year is a remarkable proposal to rid the subsidies system of its rot and stanch the illicit outflow of funds, annually budgeted to support two massive social service programmes, the Public Distribution System (supply of essential goods) and the money-for-work assurance (100 days paid employment or equivalent money in lieu, under the Mahatma Gandhi National Rural Employment Guarantee Scheme, commonly known as NREGS (en'regz).
Could this be the much-awaited miracle at hand?
Well, it’s getting to be summer, and my alerts are jumping. The government proposes to bypass its existing system of State-operated logistics management of essential goods and services, enable a privately operated system to flourish in its place, and empower the ‘deserving’ poor to be given cash to buy whatever and whenever they want, from wherever they can. Several states are riding this bandwagon, eager to rid themselves of managing the logistics of getting physical goods to those who are entitled, by virtue of being less-than-dirt-poor, to receive them.
Just like the legendary tailor who slew seven with one stroke, bureaucratic log-jammed flows of goods and services will be freed. Local government-authorised merchants will not be able to fleece beneficiaries in terms of either quantity or quality, and undeserving people will not walk off with the supplies either.
Why are these things a problem in the first place? Partly, the government finds it hard to ensure that the benefits reach those they should. People, unfortunately, are a moving target, and the government, unsurprisingly, finds it hard to focus.
To get around this, it has come up with quite a cunning proposal, really. Instead of giving itself, as it were, a new set of spectacles, it asks citizens - all residents of India, in fact - to voluntarily ‘raise their hands’, in order to more easily spot those who need help. These ‘raised hands’ take the form of what is being widely advertised under the brand name Aadhaar, an unique identity number, proposed to be assigned to every resident, and what’s wrong with that?
Quite a lot, as it turns out.
The concept looks quite good, seductive, in fact. If we only knew who deserved assistance, we could make sure they got it. Right?
Not quite. Firstly, each state handles the question of ‘deserving’ slightly differently, and some have even decided not to bother about the distinction, and just give handouts to all comers, efficiently. That is as far as the Public Distribution System is concerned - the NREGS doesn’t differentiate, as it happens, and guarantees 100 days of paid employment a year, or the equivalent cash, if work can’t be found, to anyone who is willing to show up.
The key is in the word ‘efficiently’. Goods go astray, people have to grease the way to stay on the ‘deserving’ lists, moneys reserved for the desperately poor are leached off by middlemen, among other creative and innovative methods, and the net result is that the desperately poor have stayed that way since Independence (1947). Only, with an inflationary population, there are actually more people desperately poor today than lived in India less than 70 years back.
A couple of states have found efficient ways of distributing essential goods and services, ideas that have been put into practice over the past couple of years, that seem to work quite well. They focus on the leakage points, the transshipments between public storage facilities and the nodal distributions points, and innovatively plug the holes.
One way is to paint distribution vehicles in bright colours. The public is invited to report any vehicles found moving about in unexpected places, and this has worked. Vehicles may soon be equipped with GPS (global positioning systems) transponders, that will show logistics managers exactly where the vehicle is, during its duty hours, which has been found quite effective by logistic companies in the private sector (for both road and sea transport). Any diversion of goods can be swiftly dealt with, and the drivers/staffers incentivised to behave.
With NREGS, the problem is different. There aren’t any necessary prequalifications for work, so it is quite easy to concoct fictitious lists of beneficiaries, and create ghost payments on a large scale. An attempt has been made to stop this, by mandating bank accounts for all beneficiaries, but in what may be admiringly called the true Indian style, such bank accounts are often operated by persons other than the beneficiaries - occasionally, this is by arrangement between the beneficiary and some well-wisher, but far more often, the beneficiary simply may not exist at all.
Common sense has come to the rescue, here and there. One solution that works effectively at the village level is simply to put up a blackboard with the names of workers, and the pay earned, for all to see. It is not ideal, especially from an absolute privacy perspective - but it works.
Like the camel in the tent, Aadhaar, too, is beginning to muscle its way into every conceivable corner. With absolutely no empirical or scientific evidence to show that it can work, this is an attempt to foist a number on each and every Indian resident. Its dark antecedents (the 'need' to keep tabs on everyone, voiced first in 1999, in the wake of an armed cross-border intrusion that escalated into a brutal battle - Kargil) belie the soothing mumble of miraculous cures to all of India's social ailments.
Aside from deciding that benefits actually go to those who most deserve them - when the supply is limited, this hard choice could seem inevitable to some minds - the government has suggested a very major policy change, one that will see the dismantling of the public distribution system. Considering how inefficient and unresponsive it seems to be, it is really no surprise that some people would be overjoyed to see it go.
But what does it mean to a country, really, to drop such a system? Firstly, it heralds the move away from the state’s responsibility to succor the weakest. It will shift to ‘the market’ instead, which ought to, in theory and out of self-interest, work to ensure availability of goods and services, when and where needed.
And has this worked before, in other countries? Not necessarily. This paper by Handa and Davis, points out that in each of six Latin American countries where conditional cash transfers have been attempted, the funding (and therefore pressure) to do so has been external, financed by loans and grants. India is different, and we have no need to bow to such pressure or incentive. Does that make a difference? Certainly: we can apply our minds, based on our knowledge of our own situation. So is this what we are doing? Can we hope to succeed?
Some may argue that there is very little evidence of any such heart-warming results from other markets. In fact, it is a highly idealistic notion to imagine that it will happen in India either, without a very heavy regulatory government hand in place. The role of market operators during the unconscionable Bengal famine of the 1940s, that killed millions of poor people, during what amounted to a state of emergency (due to the Second World War, going on at the time) ought to be salutary, but then, learning from history may not be everyone’s cup of tea.
As far as cash transfers are concerned, we have a history. This article (pdf), in The Economic and Political Weekly, by Dutta, Howes and Murgai, analyses two targeted conditional transfers, in Karnataka and Rajasthan. Both deliver aid to widows and the elderly, although there are marginal differences in the way that each state defines households where the two categories of deserving persons reside. Neither target group is held in much regard among their fellows, despite the pious prescriptions of the ancient scriptures.
While both schemes are ostensibly doing quite well, they aren’t quite picture perfect. They target reaching out to half the potential population, but fall woefully short, not yet 10 percent of the most deserving. Bureaucracy is a major impediment to self-registration. Current schemes envisage reaching out to the entire potential population, but how? In supportive households (where the elderly and/or widows reside with others) the pensions, small though they are, appear to help lessen inequities, while the states are good at reaching out to independent households, where the need is dire, with no alternatives, not even bad ones.
Expanding the reach is likely to mess things up a bit, due to the inability to correctly identify beneficiaries or to persuade them to register. False payouts are the likely result. Even at this low level, most recipients reported ‘paying’ to receive their allotments, either to the postman or some other ‘inserted’ middleman (pensioners need to certify annually that they are still alive, deaths/moves need to be notified, etc etc; all such transactions cost money, effectively a leakage of benefits, as this is often the only income stream for beneficiaries). One effect of this is the consistent amount of payout to people who technically do not qualify: even among the poor, the poorest do not get the preferential treatment they most need.
The paper also compares the performance of these schemes with that of the PDS, finding that two factors, targeting and delivery of payouts in kind rather than cash, actually contribute to its effectiveness, since there is no money for the head of the household to take, without conveying its benefit to the pensioner. These pensions are relatively small, and are thus not ‘low-hanging fruit’ for the cheat (politely called the ‘rent-seeker’), to exploit on a large scale.
Targeted cash transfers could still work if the administration is tightened up. The experience in Latin America reveals some hope. Will relieving the bureaucracy of the need to administer the logistics of essential goods transshipments and delivery achieve this result? The paper does not speculate, but given the widespread evidence of massive corruption across all levels of the bureaucracy, one would have to be exceedingly blinkered to unilaterally dump subsidies in kind.
Evidence, from the FAO’s Neville Edrisinghe, backs up this prediction, with specific reference to nutrition. The FAO reports, “where improvement of nutrition among poor households is a major objective of assistance programmes, the food factor helps achieve this more effectively than when a cash amount of equal value is given to such households.” Few people are stupid enough to think that nutritional levels in poverty-stricken India are adequate (worse, they have been dropping over the years).
Aside from the empirical studies mentioned above, this study by Thomas Ross, adds to the various views, both positive and negative. “Subsidies may be more effective than cash grants at raising the welfare of all members of a family when parents put insufficient (in society's view) weight on their children's welfare in household decision making,” is the conclusion drawn from research backed by detailed econometric analysis.
It is unfortunately true that in the USA, where a lot of data is available, poor households consistently make exceedingly poor nutritional choices, given subsidy allotments in the form of either cash or food stamps. In short, the head of a household is not always the best judge of disposal of overall household income, especially low income. Of course, nobody likes the state to continue an excessively paternalistic role, and that lies at the root of the current dissatisfaction with the manner in which subsidies are deployed in India. Ross points out that “subsidies of goods with specific properties may be more efficient at raising household welfare than cash grants.”
In conclusion, this argues for a very nuanced approach to subsidy management, but that’s exactly what is missing from most Indian subsidy programmes. At the end of the day, the eligibility of individuals for different subsidy programmes is determined by the same bureaucracy, and there is no alternative suggestion on offer to deal with this situation.
Then how does the government propose to manage targeted cash subsidy deliveries? According to Mukherjee, it will be quite straightforward, “through direct cash transfers on a pilot basis using the expertise of the Unique Identification Authority, before the end of the current year”, according to this report in the Financial Express.
What is starkly missing from this breezy statement is the ‘expertise’.
As should have been obvious by the poor showing of such systems in advanced countries, the UIDAI has failed so far to establish expertise in its own mandated area, as evidenced by the only published report. With over 2,66,000 people tested, only 52,000 odd numbers could be generated, a failure rate of over 80%. Hilariously, the report goes on to say “the software responded well for both categories of people”, as though this is relevant, when the sensing devices have failed so miserably (as expected, for one does not make silk purses from sow’s ears, as the expression goes) to deliver the necessary identifiers.
However, using Aadhaar has other ‘advantages’. For instance, bank enrollment in rural India, a miserable failure since the advent of bank nationalisation in the 60s, whose objective was to increase the penetration of rural banking, will become virtually compulsory. Amazingly, this will take place at almost no cost to the banks themselves.
They do not need to set up bank branches, or offer credit. At most the penetration of ATMs (cash dispensers) may increase, although these machines also will need the banks to issue swipeable bank cards, so far not found cost-effective for low-volume accounts. In reality, cash dispensing will take place through human extension counters, as currently managed by the (mostly private) rural banking institutions. However, the latter could only support their operations by advancing loans at high rates, and defaults led to serious problems towards the end of the previous year. With the banks, the specter of such ‘agents’ also transforming into ‘rent-seekers’ is very real, thus replacing one corrupt system with another, except the new system will look very good on paper, unlike the old one, which looks a bit smudged.
Abolishing ration shops will also give a fillip to the organised retail sector, as large volumes of materials, previously supplied through ration shops, now get channelised through the private sector. In theory, efficiencies of scale will ensure prices remain stable while the cost of acquisition of foodgrains and other agricultural commodities will also be more remunerative to farmers.
India is an ‘emerging superpower’, and the cry for ‘the market’ to replace the creaky and occasionally bumbling paternalistic role of a wannabe welfare state is loud. However, there is little evidence of India’s organised sector to deliver efficiency with maturity, especially as India’s ‘black’ economy still hovers at an estimated scale equal to that of the formal economy, the one from where Mr Mukherjee draws his figures, and presumably, his conclusions. It might be a laudable goal, but the manner in which it is being pursued remarkably resembles a long-legged lady in a whistling wind.
Mr Mukherjee’s slip is showing.
