Why Growth Matters (23 page)

Second, India must finally remove all restrictions on interstate movement of grain that prevent the country from functioning as a single market. This will require the repeal of the Essential Commodities Act of 1955, which gives states wide powers to impose restrictions on storage, transport, price, distribution, and processing of agricultural produce.

Third, the Food Corporation of India (FCI), which oversees the country's public distribution system, has turned into a white elephant with 400,000 employees and a highly inefficient storage and distribution
network. Rotting and washing off in rain of vast quantities of food grain and leakages through the distribution system are endemic. While we will consider the policy in this area in greater detail in
Part III
, we may note here that the FCI needs to be greatly downsized, with a large number of its activities transferred to the private sector through various policy initiatives.

Finally, various measures aimed at increasing agricultural productivity are required, including giving land titles to farmers and simplifying the laws relating to renting and selling land. Public investment in extension services to support investment in new seeds and methods of cultivation is required. Without such support, it will be impossible to obtain the productivity gains that genetically modified and BT seeds promise.

Much of the focus of economic reforms in the past decade has been on reducing the role of the government in controlling the Private Sector; controls that hampered entrepreneurial dynamism and often bred corruption. This was necessary. Yet there are many areas, critical areas, that directly affect the quality of life of every citizen, where the government has a role. These include provision of social and physical infrastructure for development, the provision of elementary education and public health, providing drinking water and sanitation.

—Prime Minister Manmohan Singh, address to the nation, New Delhi, June 24, 2004

I
n principle, growth through Track I reforms, appropriately improved and intensified in ways we just discussed in
Part II
, will reduce poverty. In turn, the reduction in poverty can also be confidently expected to result in improved clothing, shelter, and other expenditures that an improved standard of living implies. Whether this also translates into adequate improvements in nutrition and health outcomes is less plausible, however, since nothing guarantees that the added expenditures will be devoted to improved nutrition, health, and education.

For instance, nutrition may worsen rather than improve if higher incomes lead to fast food consumption with the result that malnourishment from underconsumption is replaced by malnourishment from the wrong kind of consumption. Thus, the illegal immigrants who come from across the Rio Grande in Mexico to the United States have children who are malnourished because they had sparse diets back home that consisted of a burrito with onions and chili to spice it up, and who now buy doughnuts, hamburgers, and french fries, which they can afford even at their low US wages (which greatly exceed the Mexican
wages they left behind), leading to obesity and associated nutritional damage. Poorly informed parents think, as in any poor community worldwide, that fatter children are better than thinner ones.

The answer to this problem is not just more income but also information and education. “Nudging” the poor to spend more virtuously is surely an important part of the overall policy framework if improvements in nutrition and health care are to be assured as poverty declines.
¹
Equally, from the outset Indian planners have supplemented poverty-reducing policies with a clear statement of improved nutrition, health care, and education as independent objectives.

Like Track I policies, Track II policies raise issues of design. We shall discuss them at length in the context of specific social objectives in the following chapters. But it is useful here to briefly touch on them in broad terms.

One way to use revenues to assist the poor is to boost their purchasing power. Here, there are two options from which to choose: direct transfers or employment in public works at above-market wages.
²
The difference between the two options is that in the former case the transfer is unilateral while in the latter case the beneficiary must work if he is to receive the subsidy implicit in the above-market wage.
³
There are issues of whether the transfer and wage should be paid in cash or in kind and whether they are offered exclusively to the poor or to the entire population, which we consider separately below. In addition, the employment option raises the complex issues of how the workers' labor is to be allocated to various activities and what implications this allocation has for the labor market.

While the purpose of employment schemes and some transfers is to merely transfer minimal purchasing power to the beneficiary, the government may sometimes want to use the transfers to influence the consumption pattern of the beneficiary. For example, it may want the
beneficiary to
exclude
certain socially undesirable goods and services, such as alcohol and prostitution, from his consumption basket. Alternatively, it may want him to
include
certain socially desirable goods and services, such as nutritious foods, education, and health services, in it.

In-kind transfers through free distribution or sales at below-market prices of specific commodities are often seen as the instrument of achieving this objective.
⁴
A moment's reflection should make clear, however, that as long as a private market exists for the commodity in which the transfer is made, the government would in general fail to alter the expenditure pattern of the recipient through the in-kind transfer. Thus, for example, suppose the government makes the transfer by selling a specified quantity of rice at below-market price to the beneficiaries. As long as the price of rice in the private market exceeds the subsidized price, such subsidy will fail to influence the beneficiary's consumption basket. He has the option to sell the subsidized rice at the higher market price and convert the transfer into cash. Cash and in-kind transfers are equivalent in this situation; indeed, cash transfers may have certain advantages over in-kind transfers in terms of administrative costs.
⁵

This objection is weakened when in-kind transfer involves a service. For example, if the transfer is available only through a school voucher that bears the name of a specific child, it cannot be readily turned into cash because by definition there is no private market for the purchase and sale of such vouchers. The same can be said of vouchers bearing the names of specific beneficiaries for health-care services.

But even this argument works only if the government has the ability to transparently enforce the use of the vouchers by the beneficiaries. Absent such ability, beneficiaries may still be able to turn the in-kind benefit into cash. For instance, in the case of the education voucher, the parent of a child may make a deal with a school whereby he provides the voucher in return for, say, half of its face value in cash without taking advantage of the school benefit. The school may in turn get full value of the voucher from the government without having to incur the cost of educating the child. Similar deals may be struck between patients and doctors with regard to health-care vouchers.

One way the government can successfully alter the consumption pattern at least in the case of services is through their direct provision at subsidized prices, possibly even free of charge. Offering free education in public schools and low-price health care in public hospitals, dispensaries, and primary health-care centers are ways to ensure that the beneficiaries consume what the government deems socially desirable.

This is clearly a viable alternative but often runs into the difficulty that governments are unduly inefficient at providing services. As we shall see, this has clearly been the case in education and health sectors in India with the result that potential beneficiaries have chosen to seek private sources of supply even though they may charge a higher price.

The issue of government provision, of course, also arises in the context of goods. The most notable example of this in India is the public distribution system of food grains whereby the government procures large volumes of grain each year that it in turn sells at subsidized prices to the poor. As we will see, this public provision has been highly inefficient with massive leakages, rampant corruption, and very limited delivery of the subsidy to the intended beneficiaries.

An alternative route to influencing the spending patterns of the beneficiaries while still making transfers in cash is to ask the beneficiaries to produce proof of having consumed certain goods and services. This approach is not much different from in-kind transfers and is subject to the same abuse as the latter. If enforcement is weak and corruption endemic, as is the case in India, fake invoices can be obtained inexpensively as proof of having met the conditionality. Like in-kind transfers, conditional transfers are also likely to succeed in altering the beneficiary expenditure pattern only if the government is substantially able to enforce the laws.

A final choice one must make with respect to Track II reforms is whether the intended transfers are targeted to the poor and socially disadvantaged or made universal. The main argument advocates of universal transfers make is that this is the only way to ensure that the poor and disadvantaged groups are not shortchanged and receive the benefits. The human rights groups who strongly favor the rights approach to every social goal also join these advocates.

We have seen no empirical evidence showing that universal transfers are either necessary or sufficient to ensure that all those in need receive the intended benefits. For a long time, the public distribution system for food grains in India was universal. But dissatisfaction with its reach to the poor led to a switch to the current, more targeted system. It is simply not clear why reverting to a universal system will now work better. More important, if the objective is to bring food security, health, and education to the poor, at the current state of economic development, revenues are grossly inadequate to run universal programs that could then make substantial contribution per individual. We could either bring marginal benefits to all or substantial benefits to the bottom 30 percent or 40 percent of the population. The argument that the poor are not easily identified is also no longer valid. For example, the National Rural Employment Guarantee Scheme has surely identified the rural poor.

There is general agreement on the objectives of social policy. All analysts favor speedy delivery of basic needs with respect to food, clothing, shelter, education, and health care to the poor and socially disadvantaged. Any differences relate to the approach to be taken to achieve this goal.

Our preferred policy mix consists of unconditional cash transfers for most needs, vouchers for elementary education, and insurance for major illnesses with government covering the premiums. We also favor targeted rather than universal coverage. Finally, the provision may be a
mixture of private and public, with the beneficiary having the sole decision-making power to choose between them. Let us briefly explain why.

In principle, an approach that assigns a prominent role to the government could deliver on the desired goal. The government could offer employment in the public works programs at a prespecified wage to combat poverty and provide socially desirable goods, such as food, health care, education, and even shelter, free of charge or at subsidized prices to the beneficiaries. It could bear not only the financial burden associated with the employment program and provision of food, education, and health but also take on the responsibility of their delivery.

But the success of this approach is predicated on the government's ability to run public works programs efficiently and to deliver the goods and services efficiently. In our discussions in the following chapters, we will repeatedly see that at least the Indian government has had an extremely poor track record in delivery. The task is especially compounded by the existence of endemic corruption at all levels. Therefore, we will repeatedly lean in favor of an approach that minimizes the role of the government or at least requires it to compete with private-sector providers on equal terms. In turn, this choice translates into a reliance on cash transfers for most needs, education vouchers in the case of elementary education, and insurance for major illnesses, with the government paying the premium. An extremely important benefit is that this approach empowers the beneficiary rather than the provider. Armed with the cash, voucher, and insurance, the beneficiary decides whether he or she would choose a private or public provider and which one from within the two groups. Government provision does exactly the opposite: it leaves the beneficiary at the mercy of the provider, who wields all the power.

We also favor targeted instead of universal programs. The concern that targeting may exclude many among the poor and disadvantaged from accessing the benefits is readily addressed by applying exclusion rather than inclusion criteria to identify the beneficiaries. That is to say, unless identified as ineligible according to certain criteria, each individual may be considered eligible for the benefits. Exclusion criteria may include the ownership of a motorcycle, a scooter, a car, a specified
amount of land, or other similar assets. Because all these vehicles require registration in India and revenue records identify land ownership, these are verifiable criteria. This approach would naturally result in a larger proportion of beneficiaries than what would be suggested by a reasonable set of inclusion criteria but would ensure that all the poor and disadvantaged are included. At the same time, a substantial exclusion will prevent the social expenditures from being spread too thinly and thus being diluted.