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Last Updated : Apr 16, 2019 02:28 PM IST | Source:

Opinion | The economics of cash transfers

The problem is that India has failed to create adequate jobs, which puts the onus on the government to support the poor.

Moneycontrol Contributor @moneycontrolcom

Madan Sabnavis

The government announced a cash transfer scheme for farmers in the Union Budget of Rs 6,000 per annum per household. The Bharatiya Janata Party's manifesto has promised to increase the coverage. The Congress party has multiplied the same by 12 and arrived at a number of Rs 72,000 per annum per poor family. Both the set of promises have economists (including a former RBI Governor) supporting the cost in terms of budgeting. The thing about such schemes is that it is hard to withdraw them once introduced and at best can be capped. These transfers are meant for the poor. While it is hard to identify the poor, it is even more difficult to find out, over time, if the same family is no longer poor. Keeping these practical constraints in mind, what does the economics of such transfers look like?

The economics is interesting as it involves a lot of game theory. Everyone would like to qualify for such a dole, hence, identification of beneficiaries becomes a challenge, given that there are no records of income especially in the unorganized sector. Second, there is a strong reason to remain unemployed because as long as one has no or low income, the funds will come in. Hence the classic case of voluntary unemployment will be high, which also means that when we calculate the unemployment rate, an adjustment has to be made for this section which can be large if we are talking of 5 crore families. This, in turn, affects the labour force which would prefer to remain uneducated and unemployable just like how a loan waiver gives incentive not to repay loans. This is not good for the economy in the medium term because of the demographic advantage we have will become a disaster if the youth choose to stay unemployed. The same scheme with a condition attached would have been sensible but less popular.


The problem is that India has failed to create adequate jobs, which puts the onus on the government to support the poor. The trickle-down theory has not worked, as modern society uses less manpower and more technology. Companies prefer not to employ labour as the laws are stringent. A programme like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) is a virtual dole as the work does not lead to asset creation and no perceptible output is generated while giving the illusion of creating work. When the government has social schemes like food for work, education, subsidy, health etc., there are leakages with low quality of service which has always been criticised.

Further, the government is not able to provide jobs as there is limited capex being undertaken and will generate jobs only in the long run. The private sector is ideally suited for this task and as it has not been up to the challenge, the result has been limited growth in employment. The only intervention that can work is direct cash transfers to the Jan Dhan account, which has been opened already to ensure there are no leakages.

Can we afford such a programme? The 2019-20 Budget involves an increase of Rs 3.2 lakh crore in overall expenditure and an increase of 10-12 percent appears to be the norm every year. In this, the government has accommodated Rs 75,000 crore. Therefore, increasing the amount of, say, another Rs 2.8 lakh crore (Rs 3.5-3.75 lakh crore) in a phased manner over a period of about three years will actually be possible as the Budget size expands along with GDP. The Congress party has spoken about a phased induction of this programme which will spread over three years. This will also mean that other expenses can get truncated in the normal course. Therefore, the fiscal arithmetic may not really be affected as the Budget is a statistical statement where different components can be changed to suit the 3 percent fiscal deficit number. While this will never be overtly done one can see the lower outlays on certain programmes in subsequent years.

But is this good economics? The answer is no, as it does not support the theory of 'value'. Keynesian sense of giving money for digging up holes to fill them up (MGNREGA) was acceptable albeit only in times of depression.  Such spending will help to boost demand and given its size can spike inflation of specific products. MGNREGA wages have been held responsible for pushing up overall wages above productivity levels and being inflationary. When there is no corresponding increase in productivity, the result of such schemes can be only inflation. We should be prepared for it and the monetary policy committee might have to review its target at some point in time.

(Madan Sabnavis is chief economist at CARE Ratings. Views are personal)

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First Published on Apr 16, 2019 02:28 pm
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