Relieving the cash constraints of the poor is a critical way forward in the light of the high dependence of the poor upon non-institutional lenders.
If cash transfers are to succeed in India, there are at least three requirements that should be fulfilled. First, correct identification of the poor; second, biometric identification of the beneficiaries; and third, bank accounts for beneficiaries.
Given that all three conditions for the successful implementation of conditional cash transfers (CCTs), which were not in place five years ago, are in place in early 2017, there is a clear case for the piloting of a targeted basic income (TBI) for the poor (plus a number of other CCTs), so that the design of the TBI can be tweaked before it is rolled out across the length and breadth of the country.
The government has the fiscal resources now to seriously consider a TBI as both direct and indirect tax revenues will have increased as a share of GDP as a result of demonetisation, and the rise in revenues is likely to be sustained. But as we argue later, most resources to finance a TBI can already be found by reducing unproductive subsidies; the finance ministry’s economic survey in 2015 had already argued that most subsidies in India are mainly benefiting the non-poor.
Meanwhile, India’s poor need to borrow to meet even basic consumption needs. Thus in 2013, NSS data from its Debt and Assets Survey reveals that 60% of rural debtor and 82% of urban debtor households had borrowed for “non-business” purposes. Relieving the cash constraints of the poor is a critical way forward in the light of the high dependence of the poor upon non-institutional lenders to borrow money at extortionate rates. TBI would be a guarantee of minimum income, which takes the form of an unconditional cash transfer.
The number of absolute poor fell sharply for the first time in India’s history from 406 million in 2004-5 to 268 million in 2011-12; but it still remains very large. It may have fallen since then, but given that real wages have been stagnant and job growth very slow in the last five years, the fall is likely to be small. Of the 90 million farmer households in India in 2003, 43.4 million (48.6%) were indebted according to All-India Debt and Investment Survey 2001-03; in 2013, 45% of cultivator households and 29% of non-cultivator households were indebted. Of the remainder who were not indebted, a large proportion of them were probably financially excluded. A RBI working group had noted that landless labourers, share croppers and small/marginal farmers are among the poorest in rural areas, and they receive very little credit. What prevents them from accessing credit is the lack of land documents or other documents verifying their identity.
Most of them were borrowing to meet consumption needs, rather than for productive purposes. Many borrow from money lenders. Thus, the share of non-institutional borrowing in total rural borrowing from all sources rose after 1991 (i.e. the beginning of structural economic reforms in the Indian economy) from 32% to 39% by 2002.
To make matters worse, 84% of farmer households in India hold only upto two hectares of land; their incidence of indebtedness is was high as 46% and as much as 50% of their debt is from non-institutional sources. Small and marginal farmer households accounted for 80% of indebted farmer households. For large farmers, one-third of their debt was from non-institutional agencies, but half of the debt of small and marginal farmers was from non-institutional agencies. In fact, 33% of total farmer households held only between 0.01 hectare to 0.40 hectare of land (“ultra-marginal farmers”), and 57% of their loans were from non-institutional agencies. An additional 32% of total households who hold 0.41 hectare to one hectare of land (“marginal farmers”) also depended on non-institutional sources of debt for (47%) of their total debt (according to Ministry of Finance data, 2007).
In the absence of sufficient credit giving institutions, informal money lenders thrive. The share of institutional sources in outstanding debt in rural areas is not rising; it was 35.1% in 1993-4, 35.7% in 1999-2000, 29% in 2004-5, but again rose to 36.6% in 2009-10.
The high interest rates money-lenders charge has been the source of rural distress. About 85% of the outstanding debt on cultivator households from institutional sources was on interest rates of 12-20% per annum. On the other hand, 36% of cultivator households’ outstanding debt from non-institutional agencies was at the interest rate of 20-25% and another 38% of outstanding debt at an even higher interest rate of 30% and above.
Over the period between census 2001 and 2011, the occupation structure in rural India has been changing, and the poorest need a TBI. The share of cultivators in the rural workforce fell from 31.7 to 24.7% while the share of agricultural labourers (who don’t own cultivable land) rose from 26.5 to 30%. Of the 65.7 million rural households that are rural labour households 34% were indebted and the remaining 66% not indebted. A study by S. Chandrashekhar (2014) estimates that those in the bottom four deciles of the monthly per capita consumption expenditure distribution are involuntarily excluded, which means 23.3 million households (or 40%) of the rural labour households are involuntarily excluded. They are also likely to be the Scheduled Castes/Tribes.
There is a very strong case for such households to be targeted for the TBI. Moreover, there is a high degree of overlap between poverty, malnutrition and indebtedness, especially indebtedness to non-institutional sources of lending. In fact, 122 million persons in the marginal farmer households category, and an additional 29 million persons in small farmer households category are estimated to be under-nourished. Similarly, in 2009-10, 51% of landless agricultural labour were poor, while the head count ratio of poverty for the self-employed in agriculture was 26% (and 29% for self-employed in non-agriculture). Clearly, a very important reason for rural distress is due to this vicious cycle of poverty, indebtedness (often for consumption loans, like a daughter’s wedding, a funeral or drought/flood) and malnutrition.
Given this situation, a TBI would address these several problems simultaneously. The low income levels of small and marginal farmers and agricultural labourers ensure that the poor rarely accumulate assets and if they happen to do so, those assets are lost to droughts, floods, displacement by projects and so on. The small and marginal farmers and landless agricultural labourers need cash debts to meet their consumption as well as contingency needs. This implies that their wage income goes to servicing their debt, rather than building assets. This is an underlying reason why many micro-credit customers are able to maintain high repayment rates but are rarely able to climb out of poverty even after multiple cycles of loans.
What we are proposing is a TBI directed at the rural SCs, STs and those households that are landless, marginal farmers, and any others automatically included in a BPL list (such as a disabled head of household) according to the Socio-Economic and Caste Census. Those automatically counted among the poorest – landless labourers, primitive tribal groups, single women who have been deserted, households with disabled persons and households in which any member is a bonded labourer – will need to receive cash transfers for a minimum of five years to enable them not only to overcome their indebtedness but also to build up a minimum level of savings. Those households just above to those automatically included is the marginal farmers (with less than one acre of owned land) category, in terms of ranking, who may need to be given a TBI for a minimum of three years.
There is a fiscal argument for a TBI. India has had a long history of untargeted or poorly targeted subsidies, which are in need of modification in their design, especially because the fiscal burden of these subsidies has become increasingly unbearable after the multiple fiscal stimuli post-2008 economic crisis. Official estimates of subsidies given for food, fertilisers, petroleum and other subsidies in 2006-07 amounted to Rs 53,495 crore (actual). Total subsidies amounted to 2.5% of GDP in 2012-13. The most important of these subsidies are for food, fertiliser and fuel. It is well-known that a significant proportion of the subsidies do not reach the targeted population. The LPG subsidy has been addressed, but fertiliser and kerosene has not.
Meanwhile, former finance minister P. Chidambram has been rightly dismissive of a ‘universal basic income’ on account of its cost; economist Surjit Bhalla has been overly sanguine about the ability of the government of India to finance it by eliminating MGNREGA and PDS (which he wants scrapped). These are two extreme views. India is a complete outlier among middle-income countries in having almost no cash transfers in the form of social assistance (having relied upon in-kind transfers, despite the leakages that characterise them), in spite of having the largest number of poor people in the world. What I am suggesting is something that is doable and financially feasible, since all the preconditions for an effective cash transfer have now been met.
Santosh Mehrotra is a professor of economics at Jawaharlal Nehru University and the author of Seizing the Demographic Dividend. Policies to Achieve Inclusive Growth in India, Cambridge University Press, 2016.