Cash transfers can work better than subsidies

Providing people with a modest basic income instead of subsidies would save public revenue

Updated - June 12, 2016 09:20 pm IST

Published - December 06, 2014 01:52 am IST

NECESSARY? “The Public Distribution System acts as a deterrent to local food production.” Picture shows a woman showing her ration card to purchase subsidised rice in Rayagada, Odisha.

NECESSARY? “The Public Distribution System acts as a deterrent to local food production.” Picture shows a woman showing her ration card to purchase subsidised rice in Rayagada, Odisha.

With oil prices falling, it was perhaps a good time to fade out fuel subsidies. All subsidies are inefficient and distortionary, and most are regressive. The same could be said of costly public works schemes as well.

By contrast, the debate on direct benefit transfers has moved into a more sensible phase, with the posturing criticism of a couple of years ago rather muted. In that context, perhaps it is time for a more dispassionate discussion.

This month my colleagues and I are publishing a book based on two pilot schemes conducted in Madhya Pradesh, in which thousands of men, women and children in nine villages received a modest basic income, paid each month, in cash, unconditionally, for 18 months.

The effects were evaluated by a series of surveys, comparing what happened to the recipients with what was happening to thousands of non-recipients in 13 other villages. The amount of money provided was modest, about a third of subsistence. But what we wanted to find out was whether, as scornful sceptics had claimed, people would waste the money or by contrast be able to use it rationally to improve their lives.

We made sure to issue no guidance as to how to spend the money. The only insistence was that recipients should open bank or cooperative accounts within three months of starting to receive the monthly payment. This showed that financial intermediation can be achieved effectively when there are incentives to do so. No less than 96 per cent of all recipients had opened accounts by the end of three months.

Surveys conducted among people in Madhya Pradesh's villages, who received a modest basic income as cash transfers, showed that beneficiaries were quite capable of making rational decisions that improved their lives

As for the claim that villagers would waste the money, the evidence gathered through three rounds of detailed surveys showed that people were quite capable of making rational decisions that improved their lives and their communities.

Some critics claim India could not afford to provide all its citizens with a basic income. That conveniently overlooks the fact that a vast amount is spent on schemes that never reach the intended beneficiaries. Every informed policymaker and social scientist knows that.

Providing people with a modest basic income instead of subsidies would actually save public revenue. We know that most of the money spent on the Public Distribution System is wasted, leaving villagers to rely on stale wheat or rice. The system also acts as a deterrent to local food production. Of course, if the state throws vast amounts at even a chronically inefficient scheme, some of it will get through. But it is dumb.

Be that as it may. What the pilots have shown is something we had not fully anticipated. Unlike subsidies or public works, the basic income transfers have the potential to be transformative. If the government is setting up a Policy Commission in which one of the four pillars is to focus on Direct Benefit Transfers, it should start by considering this point.

Effects of basic income The point is that the basic income has three types of effect. First, it improves personal and community welfare. The evidence from the pilots showed improvements in child nutrition, schooling attendance and performance, health and healthcare, sanitation and housing. It also has desirable equity outcomes, since it benefitted women more than men, the disabled more than others, the least secure and lowest income groups more than others.

However, what should please my fellow economists is that it also stimulates growth. While discussing economic growth, there is a tendency to concentrate on corporations and big industrial sectors, and to see villages as zones of stagnation. However, in the villages receiving the basic incomes, economic activity increased, new small-scale businesses sprung up, work and labour increased — contrary to critics who claim that giving people cash would induce idleness — and more equipment and livestock were bought.

Although child wage labour declined, the overall increase in work and labour was shown by way of a shift from casual wage labour to more secondary activities. Other studies have tended to concentrate on people’s main activity. Had we done that, we would not have picked up the phenomenon that, in a rational risk-reducing way, households tended to diversify into more secondary activities.

The key point here, however, is that the cash transfers should not be depicted simply as welfare expenditure. That is bad economics and poor accounting.

Yet it is the third dimension that really makes the policy transformative. One way of putting it is to say that the emancipatory value of the basic income is greater than the monetary value. Money itself is a scarce commodity in Indian villages, and, as with any scarce commodity, this drives up the price. Moneylenders and landlords can easily put villagers into debt bondage and charge exorbitant rates of interest that families cannot hope to pay off.

What we found is that many recipients used the cash to make savings, putting themselves in a better position to avoid highly costly short-term borrowing in emergencies. In effect, the liquidity lowered their cost of living and reduced the monopoly power of the moneylenders. Indeed, in a survey of impressions after the pilot had ended, several respondents told us that the only people who were unhappy about the experiment had been the moneylenders. How tragic.

The emancipatory effect helped make the welfare and growth effects more sustainable. So, the scheme had a combination of positive effects, not just one.

Now, government should be encouraged to make haste slowly. Launch several pilots in a few low-income areas in which the design could vary. There are good reasons for believing that making cash transfers universal within communities would save money in administrative and other costs, and induces more positive economic and social outcomes than selective or targeted schemes. Among other reasons is that they induce collective action for community benefits.

It is also important to consider the potential role of intermediary non-government bodies. They can play a strong role in encouraging beneficial outcomes and help overcome the tendency for vulnerable people to remain vulnerable.

Above all, however, policymakers should learn to trust people whom they claim to serve. A growing danger in social policy is that it will veer towards social engineering, through sophistry and tighter conditionalities. Freedom matters, and so does the challenge of transformation.

(Guy Standing is professor of Development Studies, School of Oriental and African Studies, University of London. The book on which this article is based is Basic Income – A Transformative Policy for India. )

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