In a social democracy, an important objective of government policy is distributive justice. Growth has to be inclusive, which provides the rationale for redistributive programmes. This redistribution can happen within the framework of capitalism and, by no means, amounts to socialism.
The emphasis on poverty reduction programmes is a natural outcome of electoral competition in a democracy. Around 20 percent of India’s population is below the poverty line, while 31 percent has a monthly household income below Rs 12,000, the threshold used in Congress’ proposed Nyuntam Aay Yojana (NYAY).
No political party in India’s democracy can hope to win an election by ignoring the welfare of this group representing almost a third of the population. Major parties compete for their votes, as these voters are too poor to have the luxury of being committed to any political ideology. They are, therefore, the most likely to be moved by policy platforms impacting their economic well-being.
Get to the Bottom
So, no economist providing policy prescriptions can ignore the political constraint of the inevitability of redistribution to the bottom 20-30 percent. Therefore, an important task before any policy economist is to suggest the most efficient form of this redistribution — one that hurts the rest of the society the least. Of course, it also has to be fiscally viable and responsible.
72 years since Independence, it’s crystal clear that India’s public sector is not competent at delivering goods and services to the poor. Important drivers of its inefficiency are leakages, corruption and lack of accountability of local government functionaries running the poverty programmes. One example is the public distribution system (PDS), where matters are made worse by the fiscal costs of procuring food grains at high prices from farmers and distributing them to fair-price shops to be sold to the poor at very low prices.
Large parts of PDS food grains are often siphoned off to the open market at a higher price. And, often, richer families obtain a below-poverty-line (BPL) card to buy food grains at low prices meant only for the poor. Many poor families, on the other hand, are not able to procure their BPL cards.
The Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme, however, has been successful in many respects, providing additional rural employment, including significantly to women and scheduled castes and tribes, along with a self-selection process due to the hard labor needed to participate in it.
However, there have been numerous complaints about delayed and partial payments to workers, money for material not spent, low quality of assets created, etc.
Replacing the above programmes with cash transfers (CTs) will considerably enhance the efficiency of redistribution, and place markets at the helm. Markets normally perform a much better job than bureaucrats in allocating resources and channeling goods and services where they are needed the most. While the government will provide CTs, the provision of goods and services (to be bought with that cash) will have to be by the private sector or a mix of mutually competing private and public sector providers.