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Economist moots conditional direct cash transfers to poor

V.S. Sambandan

It will lead to a more efficient and rational pricing policy, he says

— Photo: K. Pichumani

Economist Arvind Subramanian at The Hindu office in Chennai on Saturday.

Chennai: A system of conditional direct cash transfers to the poor is the “first best option” to address poverty in India, and would also lead to a “more efficient and rational pricing policy,” economist Arvind Subramanian said here on Saturday.

Attributing India’s “abysmal” record in poverty eradication programmes to “minimal state capacity,” Dr. Subramanian said the country’s well-placed equity concerns could be addressed better by direct cash transfer schemes, as they would “attain the [equity] objectives by minimising the demands made on state capacity.” Citing examples from Mexico and Brazil, he suggested linking cash transfer schemes to conditions such as children going to school, or receiving basic immunisation shots. A start could be made by introducing “experimental projects” in some States.

“It would be radical. The status quo is so problematic,” he said in an interaction at The Hindu.

Dr. Subramanian, a Senior Fellow at the Washington D.C.-based Peterson Institute for International Economics, was in Chennai to launch his book, “India’s Turn: Understanding the Economic Transformation,” published by Oxford University Press. The book is scheduled to be launched in the city on Sunday.

The National Rural Employment Guarantee Scheme (NREG), he said, should be “viewed as a stepping stone toward a system of transfers,” as it was self-targeting. “Only the poorest of the poor who really need it, who shop for work,” benefit from it. The advantage of a direct transfer scheme, relative to existing poverty programmes, was that “you could collapse everything and still you could eliminate poverty, and you get plenty left over to transfer and get most of the people who are below the poverty line, or indeed all of them, above the poverty line.”

Such direct cash transfer programmes, he admitted, should be time-bound. “The way I see this is that they should be time-bound, and eventually become part of the fiscal system.” For instance, people could get transfers for, say five-to-10 years, “but they cannot be open-ended.”

Conceding that there were several implementation issues, he advocated a system where transfers could be made effectively by using technological advances such as biometrics to better target beneficiaries. In this context, Dr. Subramanian said the farm-loan waiver scheme illustrated the problems related to India’s inability to make “transfers efficiently and directly,” and it remained unknown as to who were the beneficiaries, and what the costs were in terms of efficiency of the finance system. “We do pay a price by implementing these schemes. I can understand the inclination of politicians to resort to this because we have no other way of achieving our equity objectives,” he said. However, he was quick to add that such solutions were “second, third, fourth-best options that politicians resort to because we don’t have better ways of addressing our equity objectives.”

In addition to addressing poverty issues, a direct transfer system would lead to a “more efficient and rational pricing policy.” The reason why India could not effectively address issues related to fuel or fertilizer subsidies, he said, was because “we can’t have direct targeting and direct transfers.” In the case oil price increases, for instance, if a mechanism could identify “very vulnerable” sections and compensate them by “increasing the direct transfer,” it would lead to “a more efficient and rational pricing policy.”

However, he pointed out that “we are constrained, unable to implement that because we don’t have a system of being able to address the needs of the poorest and the most-disadvantaged in an efficient and effective and credible manner.”

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