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Op-ed

A Grand Bargain for Better Policies in India

by Arvind Subramanian, Peterson Institute for International Economics
and Devesh Kapur, University of Pennsylvania

Op-ed in the Business Standard, New Delhi
May 23, 2009

© Business Standard


In the wake of the Indian Congress' resounding success and the substantially greater role that Rahul Gandhi will play, the question has arisen: What role should this be? One answer is for Rahul Gandhi to assume a lead role in the government's future poverty eradication efforts. Here's why.

The Nehru dynasty's most famous slogan, the marketing master-stroke of Indira Gandhi, was Garibi hatao (eliminate poverty), which was used to telling electoral effect in 1971 in the aftermath of Bangladesh's creation. That slogan was, of course, honored more in the preaching than in the observance. This government can, within its lifetime, translate slogan into reality, and Rahul Gandhi should embrace that task to national and party advantage.

Inclusive growth, this election suggests, is a vote-winning proposition. Psephologists will parse this election ad nauseam but favorable economic conditions in rural India, whether due to luck (favorable monsoons) or design (the National Rural Employment Guarantee Scheme (NREGS) and loan forgiveness program), did make a contribution. Lifting people above poverty must lie at the core of the inclusiveness agenda. And one way to do it would be to abolish or eliminate most of the existing centrally sponsored antipoverty schemes and replace them with a single cash transfer scheme targeted at families below the poverty line (BPL), an idea contained in the manifestos of both Congress and the BJP. Some details relating to the financial implications and implementation of such a scheme can be found in an article [pdf] we wrote in the Economic and Political Weekly. Here we focus on its economic and political benefits.

What are India's biggest economic challenges? Improving the fiscal situation for the medium term, delivering much better public services (especially for the poor), and maintaining high rates of economic growth. The impediments to carrying out these tasks are not technical but political. Generous doses of preelection populism, some masquerading as crisis response, are threatening the long-term fiscal situation (if there is one lesson that India or indeed any country must draw from this crisis, it is that, as China has shown, a sound public-sector balance sheet is the only crisis adaptation mechanism available). Our political economy is such that legislation on fiscal responsibility notwithstanding, public finances will not come under control unless the various fiscal handouts—for kerosene, fertilizer, power, water, etc.—can be eliminated or drastically reduced.

But few politicians have dared to touch these sacred cows, despite their doubtful benefits in practice, for fear of being perceived as anti-poor. The only conceivable bargain that would allow reduction of these subsidies is if the alternative is a clear, simple program that delivers greater benefits in the hands of the poor (instead of the current focus on budgetary commitments). Directed cash transfers to BPL families are one such program that could be the quid for the quo of attacking costly and inefficient subsidies.

A similar argument applies to other areas. Quasi-fiscal handouts ostensibly aimed at equity objectives have distorted the price mechanism in various sectors of the economy. Loan waivers and directed credit, which have taken a toll on the financial sector and made them inefficient, were instituted for the sake of targeting particular, supposedly poor, beneficiaries. And large losses in the power sector have been countenanced, even encouraged, for the sake of providing poor households with free power.

The sad saga of Indian economic policymaking has been that policies pursued on behalf of the poor were not just macroeconomically ruinous and microeconomically inefficient, they also ended up being more anti- than pro-poor. The “Grand Bargain” that would change this tale would be a credible pro-poor program that could serve as the political basis for pursuing fiscal prudence and economic efficiency. With such a program in place, this government can have its cake and eat it too: confidently pursue the growth and stability agenda without its aam aadmi credentials being questioned. A cash transfer program will be so visible as to make it easy for voters to see the link between government action and economic outcome. This will prove attractive for the government in establishing these credentials and claiming credit for being demonstrably pro-poor.

Another political benefit of pursuing a cash transfer program for the ruling party would be to rejuvenate its grassroots organization, which is critical to its long-term success. As the NREGS shows, implementation of any targeted program is very difficult and the cash transfer will also have to address complex issues of identifying beneficiaries, selecting thresholds, transferring money, and creating financial arrangements.

Why then do we believe that a country-wide cash transfer program can both reduce the deficit and promote inclusion at the same time? The key reason is that it will be financed by abandoning or substantially reducing the current system of poorly targeted subsidies—PDS, loan waivers, power subsidies, oil subsidies, etc.—and shifting a large fraction of those resources to cash transfers. This will allow the administrative machinery to focus on one program, both reducing the burden on itself, and making monitoring much easier. Quite simply, it is much better to do one thing very well than 20 things poorly, especially if that one thing is a fungible good like cash, which can buy those twenty things. And the savings from the reduction in administrative expenses and leakages in the myriad numbers of programs that have been built up will go a long way toward reducing the fiscal deficit.

A major obstacle in minimizing leakages in a cash-transfer program, the lack of a universal ID system in the country, is being addressed after the security concerns following the Mumbai attacks. By ensuring that the recipient in each household should be the oldest female in that household, it not only ensures more sensible spending in the household but also strengthens the bonds between the Congress and female voters. And, as the experience of the Communist parties in West Bengal has shown, any party that has sustained interaction with rural voters builds up valuable organizational capital in the process. A direct cash transfer scheme will also require sustained interaction with panchayati raj institutions if it is to be successful, which is another opportunity for organizational rejuvenation.

As he orchestrates the direct cash transfer scheme in pursuit of Garibi hatao, Rahul Gandhi could emerge as a politician and leader with deep grassroots support. And, in this case, what is good for the party will also be good for the country.


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