WELFARE REFORM

The Problems

1. India’s social protection – or ‘welfare’ – schemes are too many in number, and too inefficient.

2. Because of design problems and corruption, these schemes typically fail to sufficiently assist the poor who are their intended beneficiaries.

3. There is no consensus among politicians and activists on whether cash transfers can effectively replace schemes such as the public distribution system, which distributes food rations.

4. While the government will struggle to find the resources to introduce better-designed schemes without ending the older ones, shutting down existing schemes will create political discontent – so how can a government escape this trap?

Social Protection

Maitreesh Ghatak

There are hundreds of social protection schemes in India, from housing to food, from maternity benefits and child welfare to old-age support. Many of them are funded at very low levels that limit their effectiveness. While their performances across the country vary, it is broadly true that many of these schemes are beset with problems that make them less impactful than they could be.

First, there is the problem of eligibility. Often, those who should not be getting a benefit get it (inclusion errors), while those who should be getting it don’t get it (exclusion errors).

Second, there is the problem of leakage, wastage and corruption in the delivery process.

Third, even if the implementation process were faultless – so that the first two problems were absent – administering these programmes uses up considerable manpower and resources.

Fourth, some of these schemes involve subsidies which distort the allocation of resources. For example, subsidies for water and electricity arguably cause environmental damage and supply-side problems (falling water tables and power blackouts). Moreover, they benefit the relatively better-off more than they do the poor – since the poor consume less of the relevant good or service.

Finally, leaving aside the problems on the delivery side listed above, there is also a basic problem that subsidies or in-kind transfers have – they do not leave the decision to the recipients as to what their specific needs are.

The core principles of reforming social safety net should be to:

· Reduce the number of schemes drastically to a manageable number, all of which are aimed at the most important risks. However, removing any scheme, however inefficient, will hurt some vulnerable group and so there has to be a concrete plan for compensation for losers in the process of reforming the social protection system, along the lines of the direct benefits transfer.

· Move beyond the cash vs kind debate in the context of some specific welfare programmes by focusing on beneficiary preferences and taking a choice-based approach. For example, in the context of food distribution through the PDS, we propose giving beneficiaries the choice of opting for a cash transfer, instead of policymakers deciding between the form of transfer (e.g., PDS and DBT). Muralidharan, et al. (2017) in their study on DBT in food found that preferences for it varied across beneficiaries depending on access to banking. For example, cash transfers work well if there is ready access to banking services as well as to markets, which is not true for remote rural areas. With mobile banking and the PDS being digitized with e-PoS machines to enable portability of benefits, such a choice-based approach has become feasible. This would also put pressure on PDS owners to stop diversion of their stock to the open market and to maintain the quality of the rations they supply. Also, as the study on DBT referred to above found, over time – as logistical problems are sorted out and people adapt to the new system – the acceptability of DBT to beneficiaries goes up. To minimize logistical problems, one should put in some reasonable restrictions on sticking to either the in-kind or cash transfer for a certain minimum period.

· In general, we favour moving to uniform and universal cash transfers as much as possible. Cash transfers reduce administrative costs, corruption and various distortions involved with in-kind transfers. Evidence from low- and middle-income countries suggests that, on average, cash transfers to the poor do not cause them to work less or spend their money on inessential consumption, which are the usual concerns that are raised about cash transfers (see Banerjee, et al. 2017; Evans and Popova 2014). However, with the possibility of choice, there may be some scope for corruption, and so transparency regarding the implementation of the scheme is essential.

· Given the fiscal realities, we are restricting ourselves mainly to the forms of delivery of existing welfare schemes as opposed to proposing new schemes, such as a fully-fledged universal basic income scheme. However, we are not opposed to a general means-tested cash transfer scheme (as opposed to a universal or non-means-tested one) or schemes aimed at specific demographic groups (e.g., old-age pensions or maternity benefits), so long as the amounts involved are not too small. A key part of making such schemes effective would be an automatic indexation to inflation to ensure that their value is not eroded over time. This is especially important as these schemes are aimed at the most vulnerable sections of society.

References

Abhijit V. Banerjee, Rema Hanna, Gabriel E. Kreindler, and Benjamin A. Olken, 2017, ‘Debunking the Stereotype of the Lazy Welfare Recipient: Evidence from Cash Transfer Programs’, The World Bank Research Observer, 32(2): 155–84.

David K. Evans and Anna Popova, 2017, ‘Cash Transfers and Temptation Goods’, Economic Development and Cultural Change, 65(2): 189–221.

Karthik Muralidharan, Paul Niehaus, and Sandip Sukhtankar, 2017, ‘Direct Benefits Transfer in Food: Results from One Year of Process Monitoring in Union Territories’, Working Paper, University of California, San Diego.

The Solutions

1. The government should focus on ensuring that citizens’ choice is at the centre of social protection schemes – for example, families should be allowed to choose for themselves whether they want their food ration in cash or in kind.

2. Any welfare reform that ends a particular social protection scheme should be accompanied by an attempt to directly compensate the ‘losers’ from the policy change.

3. Cash transfers in general give the recipients more control and are less prone to corruption.

4. Any new ‘basic income’ scheme, whether targeted at a specific group like farmers or more generally to the poor, must provide sufficient income – and the entitlement should be linked to inflation so that it goes up as prices increase.

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